Housing Market Crash?

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Housing Market Crash?

Alexander Roeschmann
Rental Property Investor · Gilbert, AZ · Member since 2020 · 30 posts · 25 votes

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?

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Ian Stuart
Lender · Seattle, WA · Member since 2017 · 118 posts · 161 votes
6y

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. 

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  • Tony Palombini jr
    Member since 2020 · 4 posts · 6 votes
    6y

    Actually the country was doing great until the lock down and that's the key to recovery.  Unlike the previous housing crash, the problem isn't systemic.  In other words, there was nothing that could've prevented that crash.  In this case I believe the situation is entirely fluid.  We just don't know what the employment situation will be.  I'm pretty sure next year will be a great time for investors; low rates, prices a bit lower, lots of pre-foreclosures/foreclosures/short sales.  But the economy was very strong prior to this mess and is well positioned to bounce back if the employment situation isn't a complete disaster.  If it is, I'm investing in a large cardboard box.  

    3Reply
  • David Y M.
    Dallas, TX · Member since 2020 · 42 posts · 10 votes
    6y

    @Tony Palombini jr The problem can become systemic, and the real estate market lags 12-24 months compared to stock market. It's also not just mortgage debt. It's just an overall debt bubble. It's credit card debt, auto debt, student loan debt, subprime debt, etc. We're not just seeing forbearance on mortgages, but in a variety forms of credit. Simply put, it's possible we can be in another financial crisis - let's just hope otherwise. 

    The average down payment for a home is around ~5%. In Texas it's around 10%. The people who bought a home in the last 2-3 years are in trouble if they didn't plan their finances well. 

    Assuming forbearance tops out at 10% (it's probably going to be higher), let's make some assumptions based off Census data based on a safe market - Texas.

    • - Homeownership Rate: ~55%
    • - Homes with a mortgage: ~50%
    • - Number of housing units: ~12,000,000

    In 12 months, ~330,000 homes are at some risk of foreclosure if more stimulus does not come out or if jobs don't come back. Let's assume 10% of those homes have low equity. That's still 33,000 homes at high risk of foreclosure assuming current data for 2021. I'm sure this affects other markets a lot differently, but the thing is these homes may all come pouring in at the same time. That's a lot of distressed properties, and I'm sure the savvy investors are probably going to capture at least 50% of it. 

    Down payment average: https://www.housingwire.com/articles/49443-the-average-down-payment-is-much-smaller-than-you-think/





    3Reply
  • Tony Palombini jr
    Member since 2020 · 4 posts · 6 votes
    6y

    David, my mention of the previous housing market crash being systemic was with reference to the standards by which lenders evaluated borrowers, the absence of risk for lenders due to government meddling and a whole host of other issues that are a bit beyond my pay grade.  But I do agree this can become systemic because once again we see government meddling and that never works out.  

    I'm not an economist, but here's the 2 big issues for me.  In the short term, who gets the stimulus.  At this point, I believe all government stimulus must go to business, specifically small businesses.  It's an obvious point, but it's worthwhile stating anyway.  I'm hearing too many stories of people choosing to collect government checks rather than going back to work.  Keeping small businesses afloat while putting an end to the stimulus checks and endless unemployment benefits is an absolute necessity.

    The other issue of course is inflation.  That's even more complicated and I won't even try to get into the particulars because that's way beyond my understanding.  But as we both know, you simply cannot print money and expect to maintain value. 


    So I definitely agree there's potential for systemic problems down the road.   The ray of sunshine is if take this whole mess as challenge to make certain needed changes.  For example, given the immense borrowing necessitated by this crisis, it might be high time to at long last reform entitlement programs.  Obviously this all depends on November's elections, but based on the outcome I can see a very serious effort at overhauling social security and medicare.  If we at long last tackle those subjects, then the short term pain will yields incredible long term gains.  

    1Reply
  • Patrick Snyder
    Real Estate Consultant · Lansing, MI · Member since 2011 · 356 posts · 306 votes
    6y

    This is great...another post where people argue something about which they have no idea.  Even though it's all speculation, someone well be right, and then he or she will be really smart.  i can't wait!  Until then, I'm going to sit back and enjoy the show!

    3Reply
  • Erik Green
    Member since 2020 · 1 post · 2 votes
    6y

    Just a quick note from an Ohio Real Estate Agent, Appraiser, and Investor. Our market is a little bit of a tale of two cities. Some areas are moving along normally: very generally areas under $300k that appeal to younger folks. On the other side, the inventory for $400k and above is skyrocketing. I just did an appraisal in a mid-$400's market and the housing supply is up from 1-3 month average last year to now at 19 months. Another neighborhood went from sub-30-days at this point last year to currently 7 months.

    My appraisal business is also changing significantly. At this point in the year, for the past five or so years, we would be doing about 70% purchases, and 30% refi's. With the low rates we expected to see more refi's but it has almost completely flipped and we are doing mostly refi's. The number of purchases we are doing are down by about 40%.

    Someone smarter than me will have to figure out if this is temporary, and some pent-up demand will flood the market this fall/next year, or if this is the beginning of something more protracted.

    2Reply
  • David Y M.
    Dallas, TX · Member since 2020 · 42 posts · 10 votes
    6y

    @Erik Green I'm starting to see homes over 350k in Texas getting listed below tax value pretty consistently right now, so I wouldn't be surprised if DOM is that high. 19 months still sounds absurd though.

    0Reply
  • Michelle Backer
    Rental Property Investor · Brooklyn, NY · Member since 2019 · 75 posts · 43 votes
    6y

    @Alexander Roeschmann

    I live in nyc. I was born and raised here too

    So my fear is that we might lose a lot of our wealthiest people and cycle back to the 80s.

    Right now it’s like it was back in the 90s which wasn’t bad yet transplants arent used to this. a lot of my neighbors are moving for different reasons: the peak of the corona virus was horrifying — ambulances 24/7, like a war zone. — they want to move before second wave in fall

    2. Protests and crime — there’s been an increase in crime and some are scared. I’m in a wealthy area and I’ve noticed this

    3. Economic ! A lot of people I know have lost

    Jobs, can’t pay rent and have simply left .. I assume to go back to their families homes wherever that may be. Nyc will only subsidize them for so long

    4. Schools are shut! We are stuck in apartments homeschooling our kids until god knows how long. I don’t see how this giant public school system will open in fall. They simply can’t.

    I think the real test is the fall. How bad will this be in fall? New Yorkers, such as myself, are exhausted from months of staying indoors in our apartments. Very.

    Plus also remember that a lot of people who live in nyc now aren’t natives. Honestly if my family didn’t live here for generations I’d probably pick up now and leave myself before fall hit.

    We are not doing too good at all. You can’t look at the stock market to truly assess or predict how this Will end. Nyc is not in the best shape and I predict we are headed for harder times:

    https://www.nytimes.com/2020/07/07/nyregion/nyc-unemployment.html

    4Reply
  • Account Closed
    Specialist · OverTheRainbow · Member since 2020 · 607 posts · 909 votes
    6y

    I can't tell. Are things getting Better or Worse?

    *************************************************************************************

    The Forbearance Tsunami: 4.1 Million Mortgages are in Forbearance with many on Extensions.

    "A startling number of American households are currently not paying their
    mortgages. This number is at 4.1 million and this data was before we
    entered what now appears to be a second shutdown as cases of the Coronavirus spread across the country. Yet somehow, people think the housing market is going to be perfectly fine.
    The reality is, there are massive systemic shocks that are hitting the
    system and housing is always a lagging indicator. In California, the
    unemployment rate is at 16.3 percent which is the highest since the
    Great Depression."


    *************************************************************************************

    NYC Landlords Slash Prices On Third Of Rentals As Newyorkers Flee

    "More than one-third of New York rentals were discounted during the second quarter
    as demand continues to slump thanks to the economic effects of the
    COVID-19 pandemic - including the flood of workers telecommuting instead
    of vying for limited rental space downtown."


    According to Miller Samuel Inc. and Douglas Elliman Real Estate, Manhattan leases dropped 35.6% in June vs. the prior year, which followed declines of 37.7% in March, a record 70.9% in April and a 62.2% drop in May.

    0Reply
  • Jake M.
    Member since 2020 · 17 posts · 13 votes
    6y
    My predictions for a couple of scenarios: Corona increases > second shut down > More unemployment > more loan forbearances > flood of business bankruptcy's and loan defaults > banks have big problem > fed bails out banks > some banks fail > real estate prices stay the same or go up until early 2021 > Fed will probably do another cares act and extent forbearance period > then it is possible the dollar will continue to devalue > then inflation will occur > real estate prices will go way up as dollar becomes worthless and banks fail > central banks switch from us dollar to Crypto > politically, either way the election goes we will have instability and unrest. > no way to know how serious it could become. > If civil unrest, covid problem, bank problem, or devalued dollar from inflation doesn't occur, and everything holds together, then real estate will only devalue a small amount starting early in 21. Mortgage lenders, realtors, and real estate sellers all have incentives to keep real estate prices high. And if everyone is willing to pay that price then it will continue. I think it is because real assets become more valuable as the dollar is devaluing, so real estate prices will keep climbing. Personally I think it is because the Fed is creating money and propping up the economy and financial institutions. There appears to be a business credit bubble from CLO's that is threatening the stability of the financial system. “We may be seeing significant pricing disconnects between the market and economic fundamentals, which could result in sudden and sharp repricing,” Federal Reserve Vice Chairman Randal Quarles. Such factors left central banks with no option other than intervening, he said, speaking in his capacity as chairman of the global Financial Stability Board. https://www.theatlantic.com/magazine/archive/2020/07/coronavirus-banks-collapse/612247/ https://www.greenwichtime.com/business/article/A-new-credit-bubble-gets-ready-to-burst-13911193.php What comes next, dollar becomes so devalued that it triggers the great reset and crypto based economy. https://www.weforum.org/agenda/2020/06/now-is-the-time-for-a-great-reset/ https://www.zerohedge.com/news/2018-11-22/did-imf-reveal-cryptocurrency-new-world-order-end-game https://www.imf.org/external/pubs/ft/fandd/2018/06/pdf/fd0618.pdf https://www.zerohedge.com/crypto/bank-england-governor-signals-central-bank-digital-currency-coming
    1Reply
  • Jake M.
    Member since 2020 · 17 posts · 13 votes
    6y
    I have no Idea why the forum puts my post as one big paragraph, when I entered it with good spacing. And there is no way to edit it either.
    1Reply
  • Jake M.
    Member since 2020 · 17 posts · 13 votes
    6y
    The links didn't show up as clickable either.
    0Reply
  • David Y M.
    Dallas, TX · Member since 2020 · 42 posts · 10 votes
    6y

    @Jake M. Crypto based economy is like still like 5% chance. Used to be like .001%. A lot of things need to go wrong for that to happen - like the US government would have to collapse entirely. I have started house hacking despite everything I have said in my initial post - only because I weighed the risk, and decided why not given my scenario. Each market is still highly idiosyncratic in terms of real estate. We'll def see a lot of social habit changes as a result of this, but I'm just making sure I'm reading a lot on foreclosures and shortsales and doing everything I can in my current job to stay employed at the moment. Come 7/31 - we may see some big shifts or another CARES pt 2. It's gunna be a great next 2-3 weeks in terms of stimulus news.

    0Reply
  • Jake M.
    Member since 2020 · 17 posts · 13 votes
    6y
    I think despite inflated real estate costs in certain markets, it is still a good investment. Even if things turn for the worse, the gov will prop it up and people will still keep making money. If the US economy collapses the world economy will probably follow and we will all have bigger problems to deal with,
    0Reply
  • Suzanne PlayerPro Member
    Attorney · New York City / Long Island, NY · Member since 2020 · 597 posts · 248 votes
    6y

    @MichelleBacker 

    Outside of New York City, Nassau & Suffolk counties (Long Island NY) are showing higher median home prices in June 2020 over June 2019

    http://links.mlsstratus.com/ac...

    https://wcbs880.radio.com/arti...

    Probably this is due to demand from people in New York City who want more space in case the Covid 19 restrictions remain in place for an extended period of time.

    This will probably be beneficial to the rental market as well.

    516-503-7959
    0Reply
  • Henry Kwong
    Accountant · New York, NY · Member since 2017 · 1 post · 2 votes
    6y

    There's just too much money sloshing around in the system now. We'll have to wait until everything settles before we can make any long-term conclusions about the effects of COVID-19. We have to see if COVID-19 cases continue to spike, how many people lose their jobs, along with their unemployment benefits. We will also have to see how many of these "old school" companies go bankrupt. Seems like most of the companies that are supporting the current economy are in tech.

    No matter what happens, I know that whatever "the masses" think is usually not what happens in the real world. Markets were created to take money/wealth away from the masses and redistribute to the few, who have foresight and ingenuity. So, if you hear most of your friends and family agree on something, chances are that the markets (whether in stocks or real estate) will behave differently.

    2Reply
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