About 10 months ago I wrote my most popular blog article that was all about trying to do the impossible - predict when housing prices would fall.
So, in the interests of self-interest, I figured I'd do a follow up. Hey, if everyone liked the first one, then why not take advant... er, I mean, why not provide even more valuable information to the discerning public?
What have we learned in hindsight?
We learned in the last article that the tried-and-true wisdom "house prices always go up" just doesn't hold water when you look deeper into the data. I posted a chart in that blog showing some interesting raw data that makes it look like median (not MEDIUM, as the caption from the source said) prices always go up year-over-year.
But, we learned that raw data doesn't tell the whole story. Little things like inflation must be factored in to show that prices definitely dip sometimes.
I found a much better graphic from the New York Times archives to demonstrate this. (I also reference this chart in a blog I wrote a couple of weeks ago about Rising Mortgage Rates.)
Looking at this kinda makes you wonder, "What were we thinking in the early 00's????"
To be fair, at the time plenty of people talked about the bubble and when it would burst. Back then, real estate bubbles were a known quantity, and the news articles and coffee table conversations about it were more akin to how we talk about Bear vs Bull markets: we knew they happened sometimes, but it only had a major effect on investors, not normal people in it for the long haul, and there was even opportunity to be had in the declines.
Check out this article from early 2006 to get a sense of what the national conversation was before the collective doo-doo hit the whirly-gig. The headline alone is cringe-worthy in hindsight.
So, what's happening now?
As I am writing this article, the Fed just wrapped up a 2 day meeting and announced, as expected, no rate hike. The fed funds rate isn't directly linked to fixed mortgage rates and incremental rate increases don't necessarily impact new home mortgage rates, but over time they can follow similar patterns.
Mortgage rates have already been on the rise for awhile. This, fortunately, hasn't seemed to impact home buyers up to this point. Average 30 year mortgage rates are still well below 6%, which, historically speaking, is pretty darn good. We've just been enjoying sub-5% rates for so many years now that it hurts a little to see them leave with hardly a fare-thee-well.
Here in the Portland metro area, and in many other major markets around the country, lack of inventory is still very much on everyone's minds. Whenever people ask me if we're at the apex of price increases, it's usually the first thing I start to talk about.
I feel a little like a broken record going over all this again, so please read what I wrote last year about inventory (third section down) and let's just say all of that applies to now, except...
2018 So Far...
Late winter and early spring sales have been strong. Not quite as good as 2017, though. They've been stymied, seemingly, only by the lack of inventory, as you can see in the chart above (remember that 5-6 months of inventory is considered a "balanced" market).
Multiple offer situations have been very common, especially for homes in whatever is considered the "affordable" threshold for that particular home type and neighborhood. And, there is no doubt that home prices have increased year over year (+6.8% as of March in the Portland metro).
I'd (very) roughly consider anything below 450K in the west suburbs and maybe 550K on the inner east side to be in the range of "affordable" to buyers.
Please don't shoot me, I'm just the messenger here. I know lots of people that will laugh at how high that number is, and others that will wonder how 450K could possibly get you a 2000+ square foot home in good condition and in well-rated school districts.
The NEW news
VERY recently, as in the past week or two, word from some of us with our boots on the ground (or sandals as the weather gets warmer) is that the pace has slowed down a little. Inventory is still low, and affordable homes are still selling quickly. But, they aren't getting as many offers. Some agents are starting to become a little more listing-heavy, and buyer's agents are beginning to close transactions and wonder when the new crop of late-spring buyers will be ready.
I don't usually like anecdotal evidence, but I've been talking to many of my peers in real estate and lending, and many of them feel that something has changed a little. It could be the calm before the late-spring storm. And/or, it could be a sign that buyers are becoming aware of the rising rates and rising prices and might be pausing to take measure of whether or not purchasing a home is worth it.
There doesn't appear to be any major national catastrophe in the making that I can see, and it's far too early for any data to corroborate what industry professionals are seeing. Short-term periods of less activity are pretty common, and don't necessarily show up in the kind of real estate data available to us.
Our (lack of) inventory issue has certainly not been solved yet. Far from it! But, I think that this tiny blip (and only in certain areas/home types) is a signal that the rapid pace of sales and price increases we've seen over the past several years are taking a toll on buyers.
To understand how we could have such low inventory but ALSO potentially experience a mild slow-down, let's take a look at some types of people in the buyer pool:
Investors looking for property with rental potential are already turning away from Portland. While rents are slowly rising, they aren't even coming close to keeping pace with the price of homes.
It's still possible to find rental properties and break even on cost versus rental income, as long as you have a good-sized down payment and are content with the equity build over time. But, it's tougher now than it used to be. Also, there are a lot of high-rise buildings under construction, especially in downtown Portland, which will further stabilize rents even as home prices continue to rise.
Of course, any investors looking to purchase rental property with financing also have to contend with rising interest rates. Rates for investment properties run higher than owner-occupied homes. That, combined with rising home prices and stabilizing rents, means less investors are purchasing properties in Portland right now.
Always a good, reliable group of home buyers, first-timers are definitely active in the market... but not as much as in the past, for many reasons:
- It's tougher to save a down-payment nowadays with the cost of living outpacing income. There are plenty of low-downpayment loan programs, but people are more wary of those than they were in the past, and more aware of the cost of PMI (private mortgage insurance) when their down payment is lower than 20% (some mortgage programs exist for lower or no PMI with down payments of less than 20%, contact me and I'm happy to refer you to some really good mortgage professionals).
- Becoming a homeowner is daunting. It used to be a given that if you wanted to buy a home, you started out with finding a Realtor and a good lender, then began the search process once you were informed, pre-approved, and felt confident that you were ready. While I love technology, the existence of sites like Zillow and Redfin have made it seem easy to find a home, but bypassing the process of getting prepared leaves many people feeling very alone and uncertain, instead of excited and ready to jump in.
- Employment is very different now than it used to be. Finding a good 40 hour a week job and staying there for years just doesn't happen that often anymore. Self-employment, contract work, multiple jobs, and flexible work situations make qualifying for a loan more difficult. Not to mention, we're all busy making $$$ and don't have a lot of time for house-hunting!
- Younger people don't necessarily see the value of home ownership. I don't like painting everyone with the same brush, but there's no doubt that, for many younger people, buying a home is looked at a lot like traditional dating: maybe something to try, but not exactly necessary.
Oh, we're still getting plenty of these! But, more and more of them are renting instead of buying, especially for the first year they're here. They see the same rate and price increases as everyone else, and have many of the same concerns as first-time homebuyers.
I wrote a blog all about Oregon's rapidly increasing population and why it's happening.
The economy is pretty good, plenty of people are employed, and the housing market has been rising steadily for years. That means there are a lot of people ready to sell their current home (or rent it out) and buy a home that more closely matches their needs and wants.
The problem is that they have to FIND a new home, and with as little inventory as we have, that can be difficult. Homes sell quickly, which means that if you need to find a new home and have the sale be contingent upon selling your current home, then it can be tough to find a seller willing to accept that type of offer.
It's definitely not impossible, but the situation requires flexibility, planning, patience, willingness, and time (and a good Realtor!).
All of these types of buyers can be readily impacted by rates and an unrelenting seller's market. It's not surprising that many of them are collectively taking a deep breath for the moment. But, don't expect that to last long!
What does it all mean?
Well, for now, the data still tells us that we're in a MAJOR inventory shortage. Housing starts (new construction) are still low, and unlikely to improve much due to a lack of buildable land, rising costs of materials, and lack of qualified workers.
However, rising rates, decreasing affordability, buyer fatigue, and other factors seem to be coming together to slow things down a tad. In the short-term, I think that we're going to see another jump in buyer activity as the weather (finally) improves and we move closer to summer. It would be difficult for that not to happen. There are still lots of people that want to buy homes and mid-spring is traditionally a time when buyers start getting serious.
Long term, however, this little slow-down in activity may be a pre-cursor to a period where there are less buyers competing with each other for homes. If that's the case, we've maybe got a shot at inventory creeping it's way back to a healthy level.
But, when are home prices going down??
Okay, you're right, that WAS the question that I'm supposed to be answering! Well, the last time I wrote this blog (nearly a year ago), I said, "Don't expect prices to flatten (let alone fall) anytime in the foreseeable future".
This time around, I would say... prices might eventually flatten (or at least match pace with inflation) sometime in the foreseeable future. Whether that's in a year or 2+ years is impossible to predict... But, no matter how long it might take, I do think a more balanced market is on it's way.
That's not a bad thing!
But, for prices to meaningfully fall year-over-year in the foreseeable future... I think we'd need:
- Rates to go up precipitously in the near term
- A LOT more inventory than seems physically possible to quickly hit the market
- Or a major national crisis
Rates will likely continue to do their thing: fluctuate up and down with a general upward trend right now (mortgage rates are actually based on mortgage bonds and mortgage backed securities and how all that works is....complicated).
When it comes to an increase in new construction and other inventory created by people selling their homes and NOT buying another one... we're far from those two things happening.
I'm not even going to TRY to predict a major national crisis. I'll leave that one to the political blogs!