The Recession 2019 (Hidden in plain site)!

We are in a recession!

Yes, I said it before long before you’ve heard those 5 words anywhere credible! It’s true – we are experiencing a slightly contracting economy and probably have since September 1st 2018.  And no, that’s not a bad thing for housing.  Here’s why..

 

The unemployment level may be at a record low yet when it comes to the housing market, stocks, and affordability we are experiencing a very different trend. For 2 years I’ve beat the drum that mortgage interest rates are rising and that’s going to hurt if you’re a buyer - especially 1st time buyers and retirees. A booming first half of real estate activity in 2018 marked by new record home prices and multiple contracts overshadowed the Federal Reserve’s steadfast changes to monetary policy resulting in 30 year interest rates we’ve not seen since prior to the 2008 housing crash. It probably doesn’t help that by the end of 2018 the stock market levels have ended LOWER than where they began at the start of the year, meaning people’s wealth through investments and savings are stagnant at best! So once the dust of the 2018 Spring market settled, buyers seemingly overnight realized buying a home just got a lot more expensive, and many took a step back in unison around Labor Day.


Post 2008 housing market crash..

 

Since early 2010, especially in the DMV markets, we’ve experienced a bustling, growing, and dynamic market. The injection of stimulus in the economy from the Federal Government combined with fluid, easily accessible credit markets, government backed loan programs, stock levels tripling bringing massive wealth to the buying class have all brought us here. However most notably the post- crash market created an insatiable appetite in the average homebuyer for an interest rate that allows buying in to an expensive market like ours while simultaneously putting little money down AND still being able to stomach the monthly payments. In short, for 8 years we’ve been operating in a market that allowed sellers to ask record prices year over year, and buyers have been seemingly undeterred. To be clear, the past 8 years have not resemble a normal market. Yet if you’re under the age of 35 you probably do not know what it’s like to try and buy a house with an interest rate above 5% or the necessity of putting no less than 10% down to qualify.

 

The new Normal..

 

Sometime around September of 2018 it became obvious that houses were sitting on the market which just months ago would have sold in the first weekend. They were desirable, priced in line with the market, and well-advertised.  I had a few listings in this category. In early Fall every few weeks the stock market would give back 1-2 months of gains in a day or two leading to more volatility and concerns. To make matters worse by October 1st the best interest rate on a 30 year fix I could get my clients was 5%, and that assumes damn near perfect credit and sizable down payments. So after 8 years of 3%, 3.5%, even 4.5% interest rates while putting 5 or less percent down, buyers were hit with the reality that buying a $700,000 house with a higher interest rate means hundreds of extra dollars in monthly payments and an allocation of a ton more of their savings (in down payment) to make the deal. Right away that took at least 20% of the would-be buyers out of the market yet inventory levels of homes for sale didn’t adjust. The new tax passed signed by Trump in December of 2017 took away some incentives traditionally tied to housing which definitely impacted the $450k + markets. The results: absorption rates of homes being offered for sale vs houses being purchased flipped immediately from the 8 year sellers advantage to the buyers advantage. Almost immediately for every 1 buyer there were 3 really good houses to choose from and no urgency in being outbid. With little warning buyers became king yet most sellers refused to adjust. It’s similar to the traffic jam effect. They say if simply 20% less cars were on the road at a given time traffic would go from gridlock to normal speeds. With 20% less buyers all the sudden the inventory levels got thrown way out of whack.

 

Back to the Recession..

 

To be clear I am one guy with one opinion and though I love data and use it daily in my business but this article is a pure gut-shot take though I’m incredibly confident in my thesis. The bottom line is this -- the housing market around the country is contracting. I see it every day in my business and I speak with dozens of top performing brokers in other major markets who are saying the exact same thing. Selling a house for top dollar, much less even selling at all in 2019 will require a ton more strategy and marketing than we’ve seen in a long time. And buying a place will mean getting really well prepared, navigating a market where many sellers will refuse to adjust their expectations, and finding the deal and lending solution that is right for you. This is not a knock on discounted real estate services but honestly, I do not see how they’ll be effective in this new market. That especially goes to For Sale by Owners and people hiring their ‘best friend’ or in-law who just got their real estate license. Many deals will get done in 2019 but just like we’ve had in the markets past buyers will be informed, desiring, and burdened with expensive interest rates. So sellers – be prepared and allow for more time on the market and understand the data. Don’t be left without a plan because the new normal market is actually what we’ve all been waiting for but before we can enjoy it, we need to embrace the challenges on both sides on the process and work together!

jonathan fox