What will the next housing downturn look like?

[Bob B.]

The entire country has just spent the past decade enjoying one of the longest bull markets of our time.

Financing has been readily available, there have been an abundance of Buyers available for just about any asset type, and supply of assets for sale on the open market has been relatively low!

After years of bidding wars and properties going like hot-cakes over asking price, it’s easy to forget what the market COULD look like if circumstances changed and the market dove into a BUYER’S market.

Let’s look at the two side by side just for some “mental push-ups.”

Situation #1

Seller’s Market (Where we have spent the last 5 - 10 years)

1. Very low inventory (real estate assets available for purchase on the open market)
2. Low cost and easy to obtain
3. Lots of buyers ready to buy

THE RESULT: BUYERS COMPETE against one another in an effort to win the deal and they drive ASSET VALUES UP in the process.

Situation #2

Buyer’s Market (Where I believe we could be headed)

1. Very high inventory
2. High cost and more difficult to obtain financing
3. Very few buyers ready to buy

THE RESULT: SELLERS COMPETE against each other in an effort to win the BUYER. The main way they can compete is to either compromise and LOWER PRICE (price reductions) or TERMS (Seller Financing when possible) or both.

You see, in Situation #1, SELLING is easy but buying is hard. And you’re competing against many, many buyers.

In Situation #2, BUYING is easy but SELLING is hard. You’re competing against many, many sellers.

YOUR MISSION, should you choose to accept it, is to be a BUYER in a BUYER’S Market.

By this point you may be asking yourself, “if buying is easy in a Buyer’s market, why aren’t there more buyers?!”

That is the RIGHT question we should all be asking ourselves. I’m not going to claim I know the exact correct answer to that question, but I will share some thoughts based on the bit of sales and human interactions I’ve seen in my life.

The reality of a Buyer’s Market is that more than likely, we will all be faced with some very big challenges that will be bearing down on us all every single day. It’s our job to “engineer out” as many of those challenges as possible to be sure that we’re one of those buyers standing when it’s time to roll out.

What kind of challenges? I’m just guessing but think things like:

• Falling Real Estate Prices — People don’t want to catch a falling knife... so even thought there may be good buys around them, they may sit and wait.
• People underwater on the assets they already own — This is especially troublesome if these are assets that they HAVE to sell because they either can no longer afford them or their loans/debts/partners require them to sell at a certain time. This is a big one because if people must sell, they’ll be further adding to the inventory and price dropping war goin on in the marketplace causing more downward pressure on asset prices.
• Unemployment rising — Many people will lose their steady employment due to economic challenges during a down market. Without income, they won’t be able to even consider buying a piece of real estate.
• Rising Vacancies - More time and reserves will be sucked up refilling vacancies of resi and commercial spaces than in the bull market. This could become a big distraction, and drain, for many.
• Fear — A general sense of fear may overcome people and when people are afraid, they won’t transact. They will sit and wait.

These are just a few factors among thousands of other influences that I’m sure will impact peoples’ investing and home buying behavior.

We can visualize and see the situation that could potentially come together before us. When? No one exactly knows. The only thing that matters is, will you be able to make certain that YOU are one of those few BUYERS that are out there actively buying when the time comes?

Let me know what you’ll be doing now to make sure you are set up to be one of them in the comments below.

[James Hamling]

Quote from @Henry Clark:

There won’t be a buyers market for the next 10 years.

Interest rates up- people less likely to sell since they would need to finance a new house.  Less houses on the market

Contractor capacity- far behind demand curve

STR- two units at 50% occupancy takes one house equivalent off the market. Will STR investors stop buying or start to sell? Only if there is a stock crash and they need cash or their loans aren't refinanced.

Cost-  lumber, steel, copper, oil has gone down.   This has not translated to the building products market yet due to upward price inertia and supply chain issues.  There should be a whiplash timing event in the near future where material backs up   So there will be a window where material cost go down   Then back up again  

Labor-  shortage of building trades

Government has spent so much money that investors are competing against the government for resources. This wave of spending will take another 3 to 4 years to work through the economy. Causing labor and material upward price inertia. 

Oil- which affects all costs is artificially low due to the release of the strategic oil reserves.  When this goes up all other costs will go up further.  Less houses as costs go up. Continued sellers market. Oil is the wildcard depending on if the government revitalizes it. Also the Russian issue will keep worldwide costs up until their oil/gas products start to flow. 

How are things in Portland?  Is there a buyers market there?  

 Be careful Henry, the countless masses are going to come and say how we are idiots, that homes prices will fall by 30%. No mention of why anyone would do such sale, because that's an inconvenient item of fact, but just how dumb we are to consider such and that without doubt it's a housing collapse, without doubt. 

Notice in the analysis for the descending market price it's stated as mass glut of inventory, with no mention of how. We are in shortage, where does the excess come from? Last analysis from NAHB was that if building could continue, unimpeded, and growing at continued rate of growth, parity would be reached with demand in 10 years. 10!.    

High rates make people sit, and stay, not sell. Most who own a home do not want to regress to being a renter. Again, how do we get a mass of people happy to sell at descending prices? Either there buying, which provides a bit of an offset in the whole argument and contradicts the descending price argument from no buyers, but more over who would sell to buy at double there current rate? Ok, so only way the argument holds any water is people selling are either dying, leaving the U.S., or becoming renters. Or homeless I suppose, and multi-gen living but I think it's safe to say these are micro % of any whole and can be ignored. 

The doom-preaching of a R.E. market collapse simple makes 0 sense. It's not supported by reality. A 30% price decline is not in the cards. To justify any such argument for removes any consideration of where these people will live, why they would sell, of the equity position they are currently in, there existing payments being below rent rates for corresponding unit, the inflated costs to sell in a swap of housing unit....... Basicly the argument for housing collapse of 30% only works if one removes people, as a whole, and every facet of the last several years. 

Again, I know, many will say no no no it "must" happen. Why? Why "must" John and Jane Doe sell there home they have at a 4.2% lock, with $150k equity? With servicing payment 40% below what market rents for a similar home are. Why "must" they sell at descending prices? 

Fluctuations, variations, but "crash", it's just wishful thinking of those hoping to get a lower bar of entry.