Housing Market Crash?

[Alexander Roeschmann]

Possible Housing Market Crash based on Pending Home Sales

Up to this day the US housing market has not been affected by Covid19, but now a lot of potential buyers decide against buying new houses as they a re afraid of a re- or even depression. This leads to a drop of Pending Home Sales of 14.5% (year on year) reaching new lower lows, that are only slightly better than in 2010.

(Graphic 1)

Currently we are at the weakest level since May 2011. (See Graphic 2)

(Graphic 2)

Overall those numbers are alarming and since there are fewer buyers in the market and a lot more sellers the market might plummet into new lower low territory. We are currently headed into a clear Buyers market, pressing prices even more, as AirBnb super hosts, that over-leveraged themselves, are forced to now sell quick.

My prediction is that prices will stagnate and slightly decrease if the economy opens up by May 15th. If this is not the case we are definitely seeing price decreases and if the lock down lasts as long as July we will have another Housing Market Crash, eventually even worse that in '08.

What are your thoughts?

[Ian Walsh]

We need to see how this stuff looks post lock down and if actual demand goes away.  Right now it is an artificial slow down in the market because even if there is demand, people can't buy.

[Walter Key]

Originally posted by @Russell Brazil:

Inventory... 

I'll echo Russell's comments. I'm a Realtor in Central VA and I'm seeing the same thing. Inventory is still short and the homes I'm selling (yes, I'm still actively buying and selling in Central VA) are selling fast because the buyers are serious buyers and the homes for sell aren't enough to keep up with the need.

[Alexander Roeschmann]

@Walter Key I agree with you, but in my opinion this demand will only be there temporarily if the economy doesn't open up by June. Who is your main buyers group? Investors, blue or white collar workers? All that will influence how it turns out for you. But with rising inflation and a possible cut, interest rates will skyrocket and in this weak state of our economy people won't be able to afford the higher down payments nor qualify with a 700+ credit score. Furthermore all the forbearance's are going to be due sooner or later and a lot of people won't be able to pay it, which puts them in foreclosure, increasing supply, while decreasing demand and that is what will drive the prices down. Or a second wave will.

I think it all comes down to how long our economy is going to be on lock down and how quick we can reopen and go back to a somewhat normal state. 

Alexander Roeschmann

[Michael K Gallagher]

I'm personally curious to see what happens in the next 3-5 years with commercial spaces.  Is this forced "remote" workforce going to finally show companies that they don't need to hold or lease huge amounts of office space to keep their teams productive.  Will but curious to watch what happens when leases in the next year or so come due.  

[Bill F.]

Originally posted by @Russell Brazil:

Inventory. Inventory is simply too low for prices to drop on a national scale. Inventory has dropped sharply. Demand has dropped, but the supply side has dropped tremendously.  

Why do prices typically rise during recessions even though demand drops? It is because the supply side also drops, typically more with the lowering of consumer confidence.  It is simple supply and demand economics.  Weve had a national inventory shortage for several years that has been getting worse. The nature of this crisis exasperates that crisis. 

Russ, 

Do you have any thoughts on what will happen to supply once things open up? I was listening to a podcast with a NYC appraiser and he had the thought that the spring selling season may get shifted to the fall.

Assuming things "go back to normal" would you think it possible for supply to outstrip demand in your area in the Aug-Sep time frame enough to prices drop? 

[Shaun Viveiros]

@Alexander Roeschmann

Just out of curiosity knowing what you know when will think we will see this change ?

[Matthew Terry]

Like BP insights, macro data is interesting but essentially useless to take action on. Real Estate is local and every market is different. National averages are very different than local market trends. Pay attention to the markets you serve and ignore the national data. Everything being reported so far is an obvious consequence of a pandemic and economic fear. The surprises come when you dig into smaller states, regions, and cities.

[Justin Thorpe]

No crash is happening sorry! This ain’t 2008, no point in connecting the dots. Recency bias won’t help.

- Too much pent up demand - Only 1 in 3 Millennials own homes. Most of course want to own homes. So each time price softens plenty want to buy.

- Tighter underwriting from banks since 2010. So overall good balance sheets at both consumer and bank. Fewer NINJA loans and strippers owning 7 homes.

- Low inventory. We know it’s been a problem.

Covid is a pandemic and they don’t last for years. They last for months and linger and then disappear. -

Odds life normalizes in 12 mos is very high.

Don’t underestimate medical science and their ability to come out with a drug. The stakes are very high.

The only thing to worry about is how did this Covid stuff get started. Was it a force of nature or man made. If it was the later, I would worry about periodic attacks.

[Stone Saathoff]

If you look at historical data and compare a little bit, you're going to see how heavily it varies depending on your region. Even certain pockets within your region.

I think here in San Antonio we won't be hit very hard if at all with a crash due to the underlying factors that make this city appealing, and the fact that it's already the most affordable major city in TX. 

[Sergio A.]

@Karl B. Over 62,000 people have died in the US from coronavirus in the past 4 months. The fact that this is still compared by some to the Flu is beyond me.

[Chris Pasternak]

Supply/Demand. Pueblo, CO is solid. In the last 24 hours SFR activity we've had 25 new listings, 19 sold and 23 go under contract. I added some interesting national charts below for your review...all charts provided by Keeping Current Matters.

[Rick P.]

Way to early too tell how severe the pullback will be. The government is moving the goalposts on a nearly daily basis. Will the $600/wk Fed unemployment benefits be extended past July? If so, we can kick the can down the road some more and housing can be ok. If not, then there is going to be definite pain out there. Opening the nation up isn’t going to cure things. You can’t snap your finger and have people back spending money. This is a deflationary tidal wave on steroids. White collar jobs will get hit. Salaries will be cut. People will save more if they still have gainful employment. Anyone telling you after 6 weeks that everything is fine is just talking their book. We just don’t know how things are going to go. Real Estate doesn’t respond like AAPL or AMZN during an earnings report. It takes time.

Now for the reality of where we are now. High end is going to get hit if for no other reason than there is next to zero international travel right now. The Russian, Middle Eastern, Chinese & S American buyers who flock to NYC, MIA, LA, BOS etc are going to be absent for the time being. Not to mention dollar strength has crippled some of their currencies. Does that mean prices drop, probably. It does mean that transactions will all but certainly dry up. People at this level don’t have to sell. There remains definite supply issues at lower priced housing but this is and always will be a local story. If the pace of people departing NY NJ CT IL MA etc accelerates even more after this, there will be plenty of markets that don’t miss a beat.

What we do know is the hotel, office & retail sectors face significant headwinds. CMBS just getting pummeled and it's not going to stop. What large company isn't thinking about their footprint right now? Do you really need 1.2m sq ft in Midtown Manhattan? Could they get by with 600,000 and letting people work from home? This is going to play out in every metro market around the world. If less people work in these city centers do we end up needing less hotel rooms? I would guess probably so but we can only guess at this point. I think my biggest takeaway from the past 6 or so weeks is if there is even a 5-10% Long Term change in how people live and work, we're talking about some major shifts in diff RE markets. Good luck to all and stuff safe.

-RP

[Brian Smarsch]

@Jay Hinrichs AirBnB’s effect will be based on the specific market. Orlando could be seriously impacted but Jacksonville probably less so.

[Alexander Roeschmann]

@Shaun Viveiros@Shaun Viveiros

From a macro economic standpoint, focusing down on real estate I say that if the economy does not open by the beginning of June, we will see the double dip in the stock market, which will immediately take out a lot of investors that got too greedy during this phase. According to the Elliot-Wave-Theories, we are only in the 4th section (out of 5) with the 5th being a tremendous drop.

So if the economy does not open by June (people can't pay their mortgage payments --> foreclosures --> supply goes up, while demand sinks), or if the Fed stops printing money with interest rates skyrocketing (people can't afford it anymore, same with increasing credit scores and down payment requirements), we will definitely see a huge price drop within the range of a bare minimum of 15% but going up to 40%.

There are a lot of opportunities ahead!

Alexander Roeschmann

[Victor S.]

Originally posted by @Alexander Roeschmann:

@Shaun Viveiros@Shaun Viveiros

From a macro economic standpoint, focusing down on real estate I say that if the economy does not open by the beginning of June, we will see the double dip in the stock market, which will immediately take out a lot of investors that got too greedy during this phase. According to the Elliot-Wave-Theories, we are only in the 4th section (out of 5) with the 5th being a tremendous drop.

Who are you following on EWT? Main guy (Avi Gilburt) from https://www.elliottwavetrader.... tends to think wave 4 was the low in 2009 and we're currently ebbing and flowing thru 5 on the way to 4000+ SPX in the coming years, before the next "crash" brings us down to restart everything again. 

[Alexander Roeschmann]

Originally posted by @Victor S.:

Originally posted by @Alexander Roeschmann:

@Shaun Viveiros@Shaun Viveiros

From a macro economic standpoint, focusing down on real estate I say that if the economy does not open by the beginning of June, we will see the double dip in the stock market, which will immediately take out a lot of investors that got too greedy during this phase. According to the Elliot-Wave-Theories, we are only in the 4th section (out of 5) with the 5th being a tremendous drop.

Who are you following on EWT? Main guy (Avi Gilburt) from https://www.elliottwavetrader.... tends to think wave 4 was the low in 2009 and we're currently ebbing and flowing thru 5 on the way to 4000+ SPX in the coming years, before the next "crash" brings us down to restart everything again. 

I follow Steven Hochberg and Peter Kendall. But I don't remember where I picked up that we are in the 4th wave. Hope you can educate me in this matter.

Alexander Roeschmann

[Victor S.]

Originally posted by @Alexander Roeschmann:

Originally posted by @Victor S.:

Originally posted by @Alexander Roeschmann:

@Shaun Viveiros@Shaun Viveiros

From a macro economic standpoint, focusing down on real estate I say that if the economy does not open by the beginning of June, we will see the double dip in the stock market, which will immediately take out a lot of investors that got too greedy during this phase. According to the Elliot-Wave-Theories, we are only in the 4th section (out of 5) with the 5th being a tremendous drop.

Who are you following on EWT? Main guy (Avi Gilburt) from https://www.elliottwavetrader.... tends to think wave 4 was the low in 2009 and we're currently ebbing and flowing thru 5 on the way to 4000+ SPX in the coming years, before the next "crash" brings us down to restart everything again. 

I follow Steven Hochberg and Peter Kendall. But I don't remember where I picked up that we are in the 4th wave. Hope you can educate me in this matter.

Alexander Roeschmann

 You can find some of his free articles here: 

https://seekingalpha.com/author/avi-gilburt#regular_articles

[Alexander Roeschmann]

@Victor S.

Appreciate it! I will check it out

[Aaron Taylor]

I would think for the next few months, nothing will really happen.  The people that can't pay will be in forbearance, and the people who were going to buy would have already had the money ready to go before this started.  So you're going to have a drop in inventory by probably 10% (the amount in forbearance) and the available buyers will probably be reduced by an equal amount, leading to a standstill.

It won't be until this winter/next year that there would be any possibility of lower prices in my opinion.  The other guys are right, not enough inventory.  If leading standards reduce buyers and job losses increase inventory, then that would be where you might see things swinging the other way.

I also wonder if the issues in commercial real estate will spill over to other sectors.  Lots of losses by banks, and then investors rotating to that sector for deals possibly.

[Michael B Barnard]

What are your opinions on Miami?

I feel as Miami will be the city that people want to buy in. Less nightlife/tourism more family raising and residents? I've lived in Brickell for three years now and it already feels like a ghost town 6 months out of the year. Will Absentee Owner sell their houses up North and head to Miami full time? I'm curious to hear your opinions on Miami in these unprecedented times. Thank you!

[Larkin Adey]

Nice Graphs. Read @Jay Hinrichs post. Also, the 2008-2010 debacle had more to do with mortgage lending/ballooning values, and .... fraud, coupled with large bank failures. I was an investor at the time. It wasn't pretty.

The general consensus now is that everyone wants to get back to work and pay their bills. Strict lending guidelines and low rates don't equate to a crash like 2008. Even if this goes through July.

[Walter Correia]

@Alexander Roeschmann

It’s hard to say short term but long term 1-2 years for sure as the economy continues to contract. There’s no way a V shape recovery is possible. Also, don’t forget the other wild card? The fact that millions of baby boomers are near or at retirement means that most are likely to take advantage of high home prices and sell what they can to fund their retirement. I don’t think they will continue to wait and hope for higher home prices especially after watching their retirement accounts take a huge hit.

[James Hamling]

Simply put there will NOT be any housing market collapse or crash and I can say this due to a little thing called mathematics and facts. 

Each time this false argument of a market collapse speaks of layoffs and loss of income on a universal scale, nothing could be farther from the truth. I had a prospective tenant call in yesterday looking for our very highest end house to rent, and wanted to know if she could pay 1 year in advance, she owns a business in the medical industry. 

Pleanty of thought and talk has gone to all the workers on layoff, how about some talk about those who are in a giant boom right now? Darn near anyone in any form of the medical industry, not just Doctors and nurses but how about medical supply companies, CNC machining for medical devices and on and on and on, they are all working as much as possible and holding hiring campaigns. Age centers (sorry, I don't know the PC term for old folks home today) are hiring left right and center.

I live in MN, at the height of our lockdown the numbers showed "as much as" 30% of workers were negatively affected in their working situation, be it working from home too laid off, that leaves 70% working as normal OR working and earning MORE. For those not good with numbers we call that a majority. 

So with just these above simple facts that don't even take into account the added stimulus payments to UI receiving persons affecting a 100%+ payment of regular pre UI income, it is simply not mathematical to have a "collapse" of any kind what so ever. 

Now speaking to the housing industry; it drives me absolutely koo-koo-crazy when people speak of housing in a selectable term like a hamburger or blue jeans, HOUSING IS NOT OPTIONAL. There are 3 foundational need requirements of life; food, water and SHELTER aka housing. So, in order for there to be even a possibility for a housing collapse there would require to be a surplus potential of housing, that's ingredient #1, do we have this, no, we are in a housing shortage nationally speaking. So that is barrier to housing collapse number 2. 

"But but but" you say, ok, lets find data to prove the laws of supply and demand in housing today, ok. 

In MN market right now we have a decrease in housing supply of about 40% since covid-19, interesting fun fact 40% of Minnesotans haven't died or stopped needing housing since start of covid-19. Have some buyers retracted, you bet some have, but to say all buyers or even most buyers have retreated or won't purchase in general is to also state there original intent to purchase housing was purely selective and not need-driven, which again math says is statistically impossible. So what we are seeing in MN is a housing market value INCREASE effect coming into play (not exactly a key ingredient for market collapse) and it is being driven by supply and demand, fall in supply is outpacing fall in demand, ie increase in marketable value. 

Until we find a magic genie and shazam more housing units than marketable demand (which was a key ingredient to previous housing collapse) or have a mass death event on level of statistically significant numbers such as 10%+ of Populus (for those playing at home that's roughly 35million Americans) the laws and numbers of supply and demand present an impossibility for a housing market collapse, proof number 3. 

That said, a market shift, well of course but that was happening pre-covid-19 and it just appears that most don't bother to have read about the shift to a predominantly renter based society underway, on pace to flip the numbers to 60/40 renters over homeowners vs the reversed historic average (yeah, thought I was just a pretty face huh). So, yes, this may accelerate market shift, especially as a very high density of those adversely affected by covid-19 are in lowest economic strata and those positively affected are in the higher strata (historic renters vs historic homeowners) and the market effect at play is compression, not collapse, yup market shift without doubt. 

And know what, yes things will be a bit different, like when the housing collapse changed mortgage finance it did not end the industry, it changed it, the internet changed retail, YoMTV changed.... ok thats a bad example, point is adaptation will be required, some evolution of how business is done and there will always be those few who simply can not or will not adapt and evolve and with such go the way of the dinosaur, but for vast majority, life will go on, we will go on, housing will go on. 

[James Hamling]

Originally posted by @Walter Correia:

@Alexander Roeschmann

It’s hard to say short term but long term 1-2 years for sure as the economy continues to contract. There’s no way a V shape recovery is possible. Also, don’t forget the other wild card? The fact that millions of baby boomers are near or at retirement means that most are likely to take advantage of high home prices and sell what they can to fund their retirement. I don’t think they will continue to wait and hope for higher home prices especially after watching their retirement accounts take a huge hit.

I have to correct you on 2 accounts. 

First, are you aware the age for babyboomers is from bout 55-75? The vast majority have been empty nesters for decades, and in most cases have sold the family home already and now reside in an "empty nester" home. It is family homes that drive the housing market by in large. Not to mention those already dead, in centers, age-restricted communities, rental units and I am sure a few more, maybe 4-ever cruise. 

On second, correct it will not be a V-shaped recovery, it will be J, see QE(quantitative easing). The amount of stimulus is of such size that at some point quantitative easing will happen, yet again. For those without economic backgrounds, in simplest terms, it makes the #'s of everything a bit bigger; the NASDAQ, car prices, dinner, home prices, everything. This is what brought us a DOW near 30k vs 2005 at just 10k, there wasn't 3X the commerce and wealth last year vs 2005, not 3x the people working nor 3x the earnings, it is the joy and magic of inflation. 

So, we will have a rapid recovery due to the suppression of markets releasing (that's what lock down is, a suppression not a decline) and the inflation will push things to appear as all-new heights (this is where politician fill-in-the-blank will take credit for things being "better than ever" because the DOW tells him so)

There ya go, my 3 cents worth. 

[Fred K.]

@Russell Brazil

I do wonder when inventory will start picking back up again. At this rate, in a few years there aren’t going to be many homes left to buy in major metro areas!