Different Perspectives but Ringing the Same Alarm Bells

Different Perspectives but Ringing the Same Alarm Bells

By Strategic Passive Investments 

On the 4th of July this year, Moody’s chief economist Mark Zandi had an “exciting” holiday message for America. In a video that morning, he warned the housing correction is “dead ahead” – although he stopped short of predicting a full-on housing crash.

Nearly a month later, analysts all over the country were echoing Zandi’s predictions, with some like Fortune contributor Lance Lambert warning, “Homebuyers have had enough” and predicting year-over-year price declines in 2023 in some regional housing markets. Others, like Fitch Ratings managing director Kevin Kendra, predicted housing price drops of more than 20 percent but said there likely would not be a full-fledged crash simply because homeowners have so much equity in their homes this time around.

Even the ever-optimistic National Association of Realtors (NAR) had some words of caution about the market, although these words were tempered with positive thinking, as anyone would expect. In testimony in front of the Senate Committee on Banking, Housing, and Urban Affairs NAR chief economist Lawrence Yun said of the housing market situation, “In the near term, I do not expect the situation to change appreciably. Historic undersupply in the market, combined with continued demand, will likely drive ongoing issues with affordability for many Americans. Any short-term price adjustments, if they occur, will be less consequential compared to the immense, longer-term housing affordability challenges we face as a country.”

What to Look for in a Housing Slowdown

If the housing market is not going to crash and any downturn will be “less consequential” than other issues like housing affordability, what does that really mean for the market in the coming months?

Investors in markets around the country have been waiting for a change in the real estate status quo, which has been a highly competitive and arguably overpriced market for years now, with bated breath. After all, many of today’s investors have never seen a housing downturn, much less a housing crash. Either option feels rife with new opportunities to “buy low and sell high,” the mantra of most investors even if they are currently “buying high and holding for cash flow.”

At this point, it is indisputable that there will be some type of housing slowdown in the near future, and many markets are already well on their way. Goldman Sachs economists wrote in June of this year that “rapid deterioration in affordability and large drops in home sales” were solid signs that a housing market could be in for a “hard landing.” Bloomberg analysts agreed, warning that rising borrowing costs paired with aggressive central-bank policies could “sow the seeds of the next crisis.

For the most part, markets facing a pending cooldown in the housing market are likely to show:

  • Diminishing (although at present, not declining) home price appreciation rates
  • Increasing shares of past-due mortgages
  • Significant shifts in job growth that create either a marked drop in population or a marked increase in competition for available housing (the latter can create an overvalued situation in the market)
  • Tepid job growth
  • Return of residents to on-site work elsewhere
  • Increasing number of properties falling out of contract
  • Increased time on market

Investors should note that diminishing appreciation at the present time can look like low-double-digit appreciation but is still important because it affects homebuyer and home-seller sentiment. A market where buyers are feeling choosier and sellers are feeling more pressure to sell is a market where an investor has room to negotiate with both parties. That is good for the investor, but not always a good sign for the overall housing market in a region.

The 'Premium' Buyers are Paying That Signals a Change is Coming

Another alarm bell that is ringing all over the country is that of the “overvalued” housing market. At a not-so-distant point in the past, housing markets experiencing accelerated appreciation were referred to simply as “hot” markets. However, even prior to the pandemic, people had begun to feel as if the current “run” in housing had lasted a little too long. They were beginning to have misgivings over the constant increases in home prices and the seemingly endless housing boom. As a result, analysts began referring to formerly hot markets as “overvalued” to indicate that it appeared these markets were experiencing growth that exceeded rationality. Of course, as with everything else, the pandemic exacerbated this issue.

Today, overvalued markets are likely to be the first to show signs of weakness in a housing correction. The greater the “premium” on properties in a market, the more overt the change is likely to be. For example, in Boise, Idaho, where the cooldown is already in full effect, researchers estimated that the premium on housing purchases in June was likely more than 70 percent. The premium value is determined by comparing historical housing data and trends in an area to current market conditions. Of course, this type of analysis is an imprecise science since the current market conditions are largely unprecedented in the United States. In fact, it requires analysts to go back more than a century to find something vaguely comparable, and the housing market during the 1918 Spanish flu pandemic was a very different animal from the market today.

In Boise, the market boomed early as newly remote workers headed into the Great Outdoors. However, by June of this year, Boise homeowners trying to sell their homes were slashing prices, with more than 60 percent of them dropping the price tag on their homes.

In May, in Provo, Utah, where the estimated housing premium is about 57 percent, nearly half of all home sellers dropped their prices.

“Home sellers are contending with a rapidly changing market – especially in places where they are used to their neighbors’ homes getting multiple offers and selling for more than asking price,” explained Sheharyar Bokhari, a Redfin senior economist. She added that higher mortgage rates, concerns about a potential recession, and stock portfolio owners who rely on the value of their portfolio for down payments and financing are all making it harder to sell a house in today’s market.

Top 10 Overvalued Markets

According to research teams at Florida Atlantic University and Florida International University, the most overvalued markets in the country are:

  1. Boise, Idaho (73% premium)
  2. Austin, Texas (68% premium)
  3. Ogden, Utah (65% premium)
  4. Las Vegas, Nevada (61% premium)
  5. Atlanta, Georgia (58% premium)
  6. Phoenix, Arizona (58% premium)
  7. Provo, Utah (57% premium)
  8. Fort Meyers, Florida (56% premium)
  9. Spokane, Washington (56% premium)
  10. Salt Lake City, Utah (56% premium)

Incidentally, the same study indicated Baltimore, Maryland; Honolulu, Hawaii; and New York, New York, are the least overvalued markets by 2.6 percent, on average.

What to Do When Alarms Start Ringing

For today’s real estate investors, the key to success in the coming months and years will lie in being able to clearly identify opportunities for growth and returns in your portfolio and being able to turn away from transactions that do not meet your requirements.

Alarm bells are about to start ringing all over the country; be sure that you have clarity about what will make a deal work for you so that you do not get carried away (along with your investment capital) in the excitement.