WSJ Article says "Home Prices are Rising" How can this be?

Question

Why do you think this is happening and do you think this is a short term holdout before a crash?  Here is the article.  https://www.wsj.com/articles/w...

I have been predicting a steep drop in home prices on my Saturday morning BP shows. I'll be discussing this on my show at 11am ET/8am PT again this Saturday.  I would love to hear from you on this.

Brian Burke · Answer

I don't know, Paul.  I've been trying to figure out what might cause a significant drop and I'm not seeing it.  Not yet, anyway.

The steep drop in 2005-2009 was the result of a flood of inventory coming to market from foreclosures.  And the foreclosures were caused by crazy lending standards.  Without that flood, the supply side remains relatively constrained and construction hasn't been keeping up.  There will probably be an increase in foreclosures over the next 18-24 months, but this increase is off of deep lows and is unlikely to be anything like the GFC.

That leaves the demand side.  Certainly recent events will do something to demand.  Some people who lost jobs won't be able to afford to buy now.  But does this simply return balance to a market which was previously a seller's market?  Or does demand drop low enough that sellers are forced to drop prices to get a buyer?  My sense of it is this happens to an extent, but not a large extent.  Maybe prices level for a couple of years.  Maybe they drop 5% or so.  Maybe even 10%.  But further than that?  I really don't think so.

Impacts will likely vary from market to market.  Maybe people want to avoid density so they move out of city centers into the suburbs again, reversing a recent trend the other way.  Maybe people move from "hot zones" like New York and go to less populated states.  I'm not sure yet--but I do think that some areas will see a greater impact than others, some not at all, and some markets will continue to (or start to) increase.  Time will tell...

Tim Swierczek · Answer

@Paul Moore I think home values will be area and price range dependant.  For close to a decade the Fed thought that we would see inflation because based on old economic models we should have.  This was Greenspan's main concern.  It never happened, and most people think it was because of efficiencies created by technology and the internet.There are certain pressures that will test our housing prices, mainly incomes, but there are many pressures that will keep prices high.  I think it's too hard to know what will happen but I can see low appreciation as a very likely outcome in most of the population centers of the US, and depressed sales in pockets of high unemployment and low population.  The main reasons I see that will fight to keep prices high.  First, I think everyone in the US does not realize we no longer have enough housing to meet demand.  We stopped building in mass during the last crash and we never got back to the pace we were building.  In the meantime, the pollution continued to grow, and the cost to build and building codes created a situation that prevents the mass building of affordable properties.  I believe this single point will forever change the old models that most are using to predict massive pricing drops.  Our supply and demand balance for housing has been forever changed.  Another positive factor for housing values is the Federal government.  Since the last crash was caused by housing the government did not need to immediately step in to solve it and it took time for them to come up with the formula.  While this problem was not directly caused by the government our national and local government can see how their policies have created job losses and they have proven they will in fact intervene quickly.   Politicians are not stupid and they rallied around housing with a massive injection by the Fed that was far-reaching and swift.Some say the government intervention will only fuel hyperinflation if that is the case, then real estate is one of the few places you will want to be invested so as an investment I don't see that argument as a negative.

I think the last major reason that any drop will be much more modest than people expect is that I have been talking to investors for 4-5 years that have been waiting for a crash.  Many people decided a long time ago that they were going to make a fortune the next time the real estate market crashed.  What this tells me is that buying will be much more frantic this time around and low prices simply will not last.We've met before and if your ever interested in talking or being a guest on your podcast I'd love to connect.

Dan Bryskin · Answer

@Paul Moore, Data in the article is based on Jan & Feb and the year started very strong. Here is what I see in my local market, Minneapolis & surrounding areas, Minnesota:

1. We went from having 15 buyers for every house to having 2-3 buyers.

2. Buyers who are out, are bottom of the barrel, 3% down FHA. Last year people would not consider their offers, today it's their chance.

3. Buyers are on the hunt for deals and jittery. We have to sell each house 2-3 times ...

4. Higher the price bracket, higher the decline in property value. Some affordable housing still sells in multiple offers and some more expansive houses get no showings.

5. Percentage of empty vs occupied houses have shifted. Now I see a lot more occupied houses. People are afraid to let people in, but still list. New listing coming out are mainly rich who want to sell and everybody else who has to sell. Whoever doesn't have to sell is staying a hell out of this market.

6. I see a lot less price reductions and a lot of new listings are very close to the mortgage amounts

7. I think a lot of listing coming out today will become short sales in coming months, exerting a downward pressure on the market. Lost income will further depress prices, so will delayed foreclosures.

8. In my market I think it's still a good time to sell, expecting buying opportunities to appear in the winter.

Bruce Runn · Answer

@Dan Bryskin

I close on a sale (duplex) tomorrow- got top dollar and it appraised for more than I sold it so appraisers/banks and not skiddish.  Bought a property on a MPLS lake and got a steal as some people are just getting out a places, close in 2 weeks.  Putting feelers out to sell my current owner occupy duplex which next to high end lake - neighborhood in MPLS that has 3 SFH's within a block for sale or pending for between $1.6-$2.0 so my $899,900 ask should look like a steal- It's all in the eye of the beholder.

John Bucci · Answer

In my market....Low inventory heading into the pandemic with very little new inventory hitting the market this spring. Typically 100s of houses should be coming on the market at this time. Simple supply and demand. Low inventory = higher prices.

Also, no incentive to drop your listing price IF no buyers can come see the house anyways.

Bill B. · Answer

If the number of sellers is reduced by the same % as the number of buyers, the price stays the same. If more people pull their listings, since they don’t have to move and suddenly want to stay in the place they know, but other buyers with new jobs or expiring leases have to buy, you actually have a bigger drop in sellers than buyers.

Everyone talks about the unemployed having to sell. But with the national cash payment and the bonus unemployment, only the well off are making less than they were when employed. So why would they sell? But, If you lost your job, even temporarily, you can’t get a loan for a new place so you stay put. Unemployment may actually lower supply more than it lowers demand. Especially if everyone is telling sellers they’ll get less if they sell now than 6 months or a year from now.

Paul Moore · Answer

Great thoughts, fellow BPers!  So it sounds like a common theme is dropping inventory.  Partially due to the lack of being able to easily show homes.  That makes sense.

Jingru Sui · Answer

From what I read in GA, in April, inventory decreased 24% and transaction only decreased 24%. With decreased inventory hit the market and people who need housing are still going to need a house, I think that's why I don't see much price drop yet. It's hart to predict what's going to happen with this pandemic. I do see investors pull back and sit on sideline but houses under 200K in Atlanta are still very hot. However, I recently had a binding contract on a house that's ordinally listed at 310K in great school district in the surbs. I toured the property, inspected it, great condition. submitted an offer 20K less and get accepted. Later we found out the seller is trying to sell this one to close on another house they are already under contract. So.... What I want to say it, you might find a good deal in the 300K range that rent above 2000. Good school will help hold it's value during long term. in this price range it filter out a lot of cash buyer...Whoever already listed their house might have a reason they must sell so you might be able to take advantage of that and get a lower price.....

Joel Owens · Answer

I stay on the commercial side BUT from the last few downturns what I see is the typical vulture type investor buyers try to spot trends way in advance. So they look at all this data constantly.

The general public doesn't look at things usually that way. Most live in a bubble circle of what is 10 feet around them in a  circle at all times and how that affects them INSTANTLY in their daily lives. It's the herd effect.

So the vulture investor sits back and say (Boy I am scratching my head prices should be going down but nothing is happening yet?) It's because we are in the pre-stage and the tipping point hasn't happened yet.

Last downturn banks were not well capitalized and many did not even know what a short sale is .They didn't have much systems and processes for loan workouts. These days they have it more down to a science. Also borrowers are not the same as before. Lot's of them have been through a loan workout before and then repurchased a home years later so know what to do. Additionally the government has been offering more assistance and so have lenders realizing that when properties go back the losses tend to be much bigger.

So I think eventually there will be some carnage just HOW MUCH remains to be seen. Often I see investors hopeful for massive carnage when they have capital to deploy but often is a lot of vultures chasing few carcasses. I think there are just too many processes in place learning from last time to have that same level of defaults but nobody knows for sure. Apartment rents are much higher now so some homeowners that thought they could get short sale money, downsize, and save money that option might not be that great now. That mortgage payment might not be much different than the apartment payments except you are in a much smaller space stuck around a bunch of noisy people.

I love where I live it's almost like Disneyland anything I want almost in a 5 minute drive. There might be a few discounted properties in my subdivision but they are on the main road, have a crappy lot on a hill, etc. The majority of homes are actually increasing more and more in value.

There might be some value in small time house builders that get over extended and flipper type investors buy the pipe farms for cheap and finish out.

One of my friends owns lots of retail centers and they have about 1,700  leases on the books. They are calculating about 6 months of workouts to get close to pre-covid operating levels. The REIT's and funds are waiting about 6 months to bring product to market to sell. Lenders want to know what retailers survive post-covid before giving great loan terms on retail centers. Some will do loans now but want reserves.

I can see areas for houses that were never meant to go up and are crap hole areas to crater pretty hard in about 3 to 6 months. The nice areas you will have some who can't hold on but lot's of those home owners have substantial assets and can hold on for years with a recovery and still be okay.

Ronald Rohde · Answer

we're seeing more a lack of inventory causing prices to go up here in DFW. People don't want trades in their house doing repairs, don't want movers touching and coughing over everything. So fewer houses for sale, more demand in an already supply constrained market.

WSJ Article says "Home Prices are Rising" How can this be?

Most Popular Reply