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?

[Jay Hinrichs]

cant see how air bnb would affect the general market as those homes are a fraction of the overall inventory.

to me this came on too quick and will leave too soon to have some huge blow to values like the GFC did.

the GFC was years in the making and took 4 years to play out.

I can see stress in rentals were the tenants work for service jobs that may not come back.. but most of those workers dont own real estate .. 

[Robert M.]

Hard to say for sure, no one knows and time will tell, we are all speculating at this point.  My personal opinion is there will be some pullback in the housing market, could be short term. I also believe a buyers market is inevitable. Most property's in my area are not selling. Lending limits and terms are changing for a reason, country is in a res session.  One thing im sure about, is the stock market is out of touch with the economy.  

[Karl B.]

Of course sales are down the past month! In many markets inventory is lower (in Los Angeles inventory went from 2,577 a month ago down to 1,883 - and that 1,883 is up front 1,700-something a week ago).

I can understand why a buyer would rather wait to buy as now - in many areas - they've either chosen or are by law unable to go and view the inside of a property (which is likely why so many sellers had their listings pulled).

With the Gilead drug showing very good results for those with pneumonia and the fact some states are opening back up to varying degrees, we'll see what happens. 

Coronavirus isn't a joke but during the 2017-18 flu season the CDC estimates 61,000 Americans died of influenza with a 95% UI of between 46,000 - 95,000:

https://www.cdc.gov/flu/about/burden/past-seasons.html


It's going to be interesting to compare markets (housing and overall) between states that are opening back up VS states that are continuing to lock down. 

[James De Stefano]

The way I see it, there are only about 250 possible outcomes from this. 

#1.....

Seriously though, It's pretty unprecedented what's happening here, and many of the jobs could come back in the coming months as we adapt and adjust, there's going to be an even bigger gap of  HAVES and HAVE NOTS. 

So I wouldn't be too shocked if investors just start dominating aspects of the markets, buying up SFH starter homes of 1500 sq feet.

It's not a secret anymore that flipping/ buy n hold is a great way to build wealth.  And I think more and more banks will get tight with their loans. 

Cash & buying power will rein supreme for a long time. Middle America is going to be even more squeezed I would imagine . 

[Joe Cassandra]

We won't know much about housing until the fall. (likely sept-oct). 

Companies will be re-evaluating their budgets (big and small) and likely if things stay stagnant in the economy, the hammer will drop and many will lose their job. 

If folks can't pay their mortgage, obviously we'll see an influx of foreclosures. 

Inventory is still down. 

If banks keep their belt tightened, then it'll be harder for new construction and obviously buying a house which increases supply and lowers demand. 

Like @James De Stefano said, having cash available is big. 

We're talking about selling off a rental we have 6-figures of equity in just to have cash on hand to buy multiple properties.

[Joe Splitrock]

@Alexander Roeschmann there is definitely some softening of the market due to several factors. Part of it is uncertainty of the future. More of it is just difficulty with trying to buy, sell and move during a pandemic. Some people are unemployed, so getting financing is difficult. On the flip side, many people are trapped in apartments or townhouses and wish they had a nice size home with yard. Being stuck "sheltered in place" makes a small home look even smaller. Some of those people have already decided it is time to move, they are just trying to get through the restrictions, so it is easier to do so. 

I doubt a nationwide housing crash is likely, some local markets could see a housing crash. Any place where tourism is the mass industry will have a tough year. Not only will investors look to exit those markets, but residents will leave to find jobs in other cities and states.

The future really depends on how fast we reopen the country. That depends on how the virus spreads as we come into summer. It also depends on treatments and testing. 

Of course some permanent damage is done to the economy. You don't shut businesses for months, spend billions in government money and expect it to be business as usual. 

[Matt R.]

I would put more weight on the 6% who took forbearance and now have 4 payments due at once. Airbnbers might be in that batch. Let's see what happens with that 6% coming up and see if it leads to any longer lasting effects in the market. I also expect some more to go into forbearance. If that number hits double digits it could get a bit sketchier. Otherwise in some locations 6% is absorbable fairly easily, as in LA, it still has extremely low inventory I think.  Good luck! 

[Karen Margrave]

I know that here in Redding, CA it's still a sellers market. There are multiple offers on homes. My house that isn't even listed and is close to 1 million mark had someone calling me today to see if I want to sell!  It's perspective. It's also area specific. If you're looking for articles to bolster the sky is falling, you'll find them.... but why? There's always going to be areas that are expanding and others contracting. Why not try to look for the good things happening around us ? Despite the challenges people in real estate and construction are pushing forward and meeting the needs, and small businesses are beginning to rebel and open back up!! People are chomping at the bit to get back out and live! WE ARE AMERICA PEOPLE .... WE HAVE THIS!! NOW... GO BUY SOME STUFF - BUT DON'T HOARDE!! Support your local businesses. Buy American when possible. 

[Dan H.]

Originally posted by @Jay Hinrichs:
cant see how air bnb would affect the general market as those homes are a fraction of the overall inventory.

to me this came on too quick and will leave too soon to have some huge blow to values like the GFC did.

the GFC was years in the making and took 4 years to play out.

I can see stress in rentals were the tenants work for service jobs that may not come back.. but most of those workers dont own real estate .. 

STR overall is a small percentage of RE but in certain submarkets it is a significant percentage. Where our STR is located (Mission Beach), my guess is over 50% of the units are STR. I would think close to as high a percentage of STR for coastal Pacific Beach. However, the RE prices in these two markets is high enough (our little ~1200' total duplex (average 600'/unit) is worth ~$1.4M) that I suspect most owners have the resources to weather the storm. We are out ~$35K in rent already (basically 2 months) and that increases every day (when I looked recently the first booking was early June). So even with many owners having the resources to handle it, no one wants that sort of loss and some owners may be more motivated to sell.

Only time will tell what sort of impact will really occur.

[Jay Hinrichs]

Originally posted by @Dan H.:

Originally posted by @Jay Hinrichs:
cant see how air bnb would affect the general market as those homes are a fraction of the overall inventory.

to me this came on too quick and will leave too soon to have some huge blow to values like the GFC did.

the GFC was years in the making and took 4 years to play out.

I can see stress in rentals were the tenants work for service jobs that may not come back.. but most of those workers dont own real estate .. 

STR overall is a small percentage of RE but in certain submarkets it is a significant percentage. Where our STR is located (Mission Beach), my guess is over 50% of the units are STR. I would think close to as high a percentage of STR for coastal Pacific Beach. However, the RE prices in these two markets is high enough (our little ~1200' total duplex (average 600'/unit) is worth ~$1.4M) that I suspect most owners have the resources to weather the storm. We are out ~$35K in rent already (basically 2 months) and that increases every day (when I looked recently the first booking was early June). So even with many owners having the resources to handle it, no one wants that sort of loss and some owners may be more motivated to sell.

Only time will tell what sort of impact will really occur.

I suspect the arbitrage folks in the high priced markets could be having some significant cash flow issues. Although I really don't know the business that well.. IE if you have permits for STR or just renting them out.. I know in places like Napa Valley the permit alone is worth big bucks same with Charleston SC.

[Ian Stuart]

I think the housing market will remain steady in the intermediate term. The Federal Reserve is backstopping the Fannie/Freddie MBS capital markets - so interest rates on loans are still relatively low, and the capital markets are still liquid in that area - so credit is not drying up anytime soon. That said - heard that Chase recently raised up their minimum SFR financing requirements, requiring a 20% down payment, stronger credit scores, and are also no longer doing HELOCs - which will squeeze single family further. Apparently things were getting a little crazy and Chase was getting accustomed to lending at 5-10% down levels to FICOs below 650... does this story sound familiar?

Would be a different story if the Fed wasn't buying GSE MBS bonds - because rates would be through the roof and acquisitions activity would grind to a halt. 

Here on the multifamily side we're still seeing Fannie quote fully levered, 10-year term / 5 IO, 30 year am, yield maintenance prepay, in the mid - high 3%'s depending on market, asset, and sponsor. 

On the single family side - we're seeing AirBNB hosts getting wiped out. And to be honest - if you're levering yourself up and not putting aside money for reserves / capex / savings - you deserve to get wiped out due to the fundamental lack of risk management in your business plan. I know this one idiot who owns (probably "owned" in the next 12 months) 10 coastal rentals, portfolio leverage of around 76% LTV; 1.10x DCR and now all of a sudden he's not able to cover his annual debt service. Some of them he's even renovating so he can try to realize some "sick upside". Borderline brain dead move.

Well capitalized owners will come in and scoop these properties up for pennies. As it should be. 

That said, the crisis is going to result in many individuals and mom & pops losing their homes in the intermediate term. The wealth gap will widen significantly once this crisis is all said and done due to the massive corporate bailouts, stock market pump, and resulting inflation that will result from the Fed's massive money printing (Giving a whole new definition to the term "BRRR"). Individual mom and pops are losing their income streams and defaulting on their mortgages, autos, credit cards - etc, and they need capital. All the while, wages will likely remain stagnant (save for UBI - which I think is likely) and inflation will be an indirect tax on those that don't own assets - which will further stifle the idea of the American Dream.

The market for single family may not crash in the intermediate term, but the assets and wealth will be transferred from mom and pops to corporations and single family syndicators. Over time single family will be consolidated more and more into the hands of operators as opposed to families, which is a shame. 

That being said - if rates spike, we're in a whole different world. If rates rise, count on acquisitions activity to tank and for discretionary refis to slow down significantly unless they have a hard stop maturity date that they have to deal with. Furtunately the Fed is bailing out us mortgage bankers by propping up demand for GSE MBS paper. (Fannie/Freddie mortgages). 

As a free market capitalist, it's embarassing to be in a industry that is getting propped up by the government. If it was a truly free market I'd be looking for a job because spreads would be sky high, and honestly I think I should be. Unfortunately I don't make the rules. 

[Alexander Roeschmann]

Originally posted by @Jay Hinrichs:
cant see how air bnb would affect the general market as those homes are a fraction of the overall inventory.

to me this came on too quick and will leave too soon to have some huge blow to values like the GFC did.

the GFC was years in the making and took 4 years to play out.

I can see stress in rentals were the tenants work for service jobs that may not come back.. but most of those workers dont own real estate .. 

@Jay Hinrichs

 Yes I agree that air bnb probably won't be our biggest issue. But what about the huge amount of debt that is currently being built by the government. The fed is literally printing money out of hot air and the inflation is going to be massive. So at one point they will have to stop and that leads to increasing interest rates and down we go the spiral of doom.

I believe they'd have to stop printing money right now, and letting the economy do it's thing in a neoclassic way rather than with Keynesianism.

Alexander Roeschmann

[Jay Hinrichs]

Originally posted by @Alexander Roeschmann:

Originally posted by @Jay Hinrichs:
cant see how air bnb would affect the general market as those homes are a fraction of the overall inventory.

to me this came on too quick and will leave too soon to have some huge blow to values like the GFC did.

the GFC was years in the making and took 4 years to play out.

I can see stress in rentals were the tenants work for service jobs that may not come back.. but most of those workers dont own real estate .. 

@Jay Hinrichs

 Yes I agree that air bnb probably won't be our biggest issue. But what about the huge amount of debt that is currently being built by the government. The fed is literally printing money out of hot air and the inflation is going to be massive. So at one point they will have to stop and that leads to increasing interest rates and down we go the spiral of doom.

I believe they'd have to stop printing money right now, and letting the economy do it's thing in a neoclassic way rather than with Keynesianism.

Alexander Roeschmann

I simply have no clue.. I just look back on 45 years of real estate living and working in the industry through 5 significant events. And somehow we all came out alive.. battered and bruised in a few of them.. So I just don't know.. We have a unique country that allows such easy debt for real estate compared to other countries. And keep in mind a lot of people not sure the % but they own their homes free and clear or nearly so.. So as was alluded to above the BRRR refi till you die have NO true equity in real estate camp.. those folks could be in for a wild ride if rents retreat .. or are forced to sell. I am on the front lines of Home sales and we have sold homes in the last 30 days in multiple markets and for full price. What tomorrow brings I will leave to those much smarter than me on economics.

[Brian Ploszay]

My thoughts evolve daily on this topic.  There are predictions for a V shaped recover all the way to a depression, 1930s-style.

For a market "crash" to happen, we will need to see larger volumes of properties go back to the bank.  I don't see that happening because of forbearance offerings to mortgage holders.  I also think that is good policy, as we don't want to see a pandemic take away lots of people's homes.  The policy is equally good for lenders.

What we are going to see is a soft market.  Also called a buyer's market.  Today, transaction volume is down. Not only are there less buyers out there, but there is a decrease in sellers putting their properties on the market.  

Inevitably there should be good deals to come.  And the foreclosure / short sale activity will still uptick somewhat.  For those who invest in commercial real estate, there is high rental performance deterioration in several classes:  Hotels, Senior Living and Retail.  The income will not bounce back on these assets quickly.

[Bill Goodland]

@Alexander Roeschmann Airbnb is such small fraction housing market and the distressed ones will be an even smaller fraction. I see the general public losing jobs to be a bigger driver in the housing market. With loan forbearance and this being a likely temporary set back in the economy I don’t think we’ll see anything close to 08 as the market fundamentals of artificially propped up prices simply aren’t there along with over supply. I think peoples energy would be much better focused on buying great deals than trying to predict which way the market will turn. Sounds like a recipe for analysis paralysis to me

[Matthew Paul]

Since there is no playbook for a pandemic , I went to my crystal ball , and all it said was " Put a mask on and get 6 ft away "  You can speculate , guess , predict and who knows , especially with the election coming up . Prepare for extreemes on both ends and it will work out . 

[Taylor L.]

As a multifamily syndication investor, low new home sales doesn't have me sweating :) Our business has risks, but more renters equals more renters.

I think we'll see stagnation in the short term overall. High cost coastal markets like SF and NYC will go down, as will the high end product in most markets. As long as the financing market doesn't lock up, on the whole we'll be fine.

[Mark Hove]

I certainly don’t know the future but I’m not sure pending sales is the best way to measure all this. Here in Durham NC we had a county order that didn’t allow realtors to even SHOW a house for 3 weeks. Now realtors can only show vacant homes. Sellers aren’t wanting to list their home if they live in it for their own personal safety. Of course there are going to be less contracts written under these circumstances! Does all this mean a crash is coming? I don’t know, but I’d look at more data than just pending sales. Had a listing receive 10 offers last week and go over list price. Buyers and still buying... just a few more hoops to jump through during these crazy times ;)

[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. 

[Mike D.]

@Alexander Roeschmann

Aren't these UE claims temporary though? And most of the people laid off don't buy houses anyway. They rent. It's not like 2008 when middle class people saw incomes drop and layoffs.

[Michael H.]

Nobody knows but in ten years it will seem

obvious and people will say they predicted it.

[Dave Nye]

I don't see how such massive unemployment won't cause significant pricing changes. Unemployment rose to 30 million in just a few weeks. 30/160 labor force is 18.75% I think its probably closer to 33million/150million labor force (many people drop out of the labor force due to Corona virus fallout) = 22 percent unemployment. I also don't see businesses quickly hiring back all there old employees. They will be cautious as they don't want to get burned if the government shuts the economy down again. I absolutely think it will get better... eventually though. 'Merica. Even if the newly unemployed are all longtime renters anyway, they'll still have to move back in with their parents, dropping total rental demand. Or I could be completely wrong, which I hope.

[Eric Bilderback]

In my local MLS we are basically closed. Nothing is going pending but nothing is being listed either. When we get in a little more normal environment I think we will see a drop in prices. But more like 10-20% then 50%.

[David McKelfresh]

Some interesting opinions here.  There are a lot of theories but I think the best thing to do is break this down into simple Supply vs. Demand.  This will be market to market, but in a lot of markets around the country the supply of homes hasn't been keeping up with the demand.  Over the last 6 weeks, we haven't seen a disproportionate decrease in either of these metrics, we've just seen that fewer buyers want to buy & fewer sellers want to sell.  With that type of a market prices won't change much.

What will be interesting is how economic factors affect supply & demand.  You'll likely have some people that have to sell because they've unfortunately lost their jobs and others who can't buy because they lost their downpayment in the stock market.  But the affects of those situations on supply & demand will likely be less drastic than the flood of foreclosures we saw in 2006-2010 due to bad loans - where supply sky rocketed.

The FED knows they need to keep interest rates low, which will prop up demand.  We will likely see some stagnation in prices for move-up buyers & Luxury homes, but the buyers that are the engine room of the real estate world (first-time homebuyers) will likely remain strong because their decision remains the same....."Cost of Renting vs. the Cost of Buying".

I don't think the future is all roses, but until we start to see some drastic increases in supply, I think prices will remain strong.

[Marian Smith]

I don’t see inflation as that is too much money chasing too few goods...the money “printed” is being spent on rent and groceries. I do think taxes will need to go up as a result.