Your Market's Slowing Down? Here's why...
Across the nation, many in the real estate industry are beginning to talk about a slowdown in the market place. Rather than hours on the market, homes are beginning to spend days and weeks on the ad pages. Instead of 10-15 offers, 'competitive' situations are involving 2-3 buyers with some slightly under-list price offers. While things still lie heavily in a seller's favor, something seems to be happening. One agent I saw deemed it not a slowdown, but a "Shift". Well my jargon-ridden-you've-read-too-many-Gary-Vee-books-recently-friend, a shift in which the market slows down and homes sit on the market longer after years of homes selling at a furious pace already has a name. It is, in fact, called a slowdown.
First, some facts. Home buying is still a tremendous opporutinty for stability and wealth in our country. Impending recession or not, now is still a fantastic time to buy. Homes will continue to appreciate (something about birth-death rate, inventory-demand, taxes, blah blah another blog for another day...). Interest rates will be moving up, making it smarter for someone to buy today than tomorrow.
With all of those attributes pointing toward the fact that buyers should (still) be in a frenzy, then why are we starting to see a slowdown? Why are rumblings amongst the real estate community that things are about to get tough?
I would point to a single cause - there are likely hundreds of real causes, but only a handful of major ones, and the biggest of all is appreciation. Classic supply and demand models have played out perfectly over the past couple of years - low inventory of a hot commodity (homes) has driven prices up. Many, many people have jumped back into the market, buying despite prices skyrocketing above what's been supported by comps, and in many cases, common sense. Savings have gone toward paying above appraised value. Cash has been put to work to win bidding wars. People have done just about anything they could to land a new home due to the fact that dream homes aren't being built like they used to be.
But under it all, wages haven't come up. Home prices have. Rents have. But wages have not. In many major markets, we've seen home appreciation at the low end 5%+, and on the high end upward of 15% in markets like the Bay area in California and Seattle, WA. Wages though, are lagging severely, with wage growth stuck a hair above 3%. It's simple math, really. If home prices continue to go up 8%, and rents go up 5-6%, with wages going up 3% - eventually, we reach the point where people can no longer afford housing. The only way to bring things back to balance are extreme wage growth (not gonna happen...see above note about impending recession), or home values need to come down. OR, of course, inventory could be increased to balance the market, but in most markets, this is a pipe dream.
There are $0 down programs for buyers in many markets, but with those programs borrowers see the reality of a rising rate market and costly PMI that severely eats into their buying power. Sure, they could afford a mortgage with 20% down, but rents are too high to save any substantial amount for a down payment. Plus, all the while they're saving, home prices and interest rates are going up, so the extra savings are barely putting a dent in the potential home buyer's dilemma.
So we've identified a major problem? What's the solution? For one, homes need to come down in price. Home buying hysteria needs to stop - people are still only staying in homes 10 years on average (and this is skewed higher by the fact that many people had negative equity 10 years ago - in fact, they HAD to stay in their homes if they wanted to avoid a short sale for at least 3-5 years of those 10). So it makes no sense for most people, especially entry level buyers, to start off with negative equity. It's not a big deal when you buy a Honda Civic. It's a really big deal on a $250,000+ home. Buy based on comps, long term financial goals, and ability, and not based on the "I want it now so I need it now" mentality that so many people have.
The government should also be helping. Not with handouts, but by bringing back the benefit of the FHA loan. When HUD changed the mortgage insurance model of FHA, it all but killed the program - no buyer wants to be stuck with PMI for the life of a loan, and in a rising rate environment, there may never be an opportunity to refinance into a better loan than the one available today. Conventional loan alternatives have pricing based on credit, so borrowers with credit even just slightly south of perfect are faced with higher rates and mortgage insurance premiums than the FHA loan comes with. FHA changing their PMI model to match the conventional model would open the door to more buyers who have trouble saving a down payment.
One final way we could help is in educating more buyers to the alternative loan products out there. 203k and other renovation loans can help buyers enter more affordable homes and create the home they want, rather than overspending for a home that already has all the upgrades, bells, and whistles. As Fannie Mae and Freddie Mac sort out the hurdle of qualifying the rising number of people participating in the gig economy , opportunities will open to those who have the income, but not the documentation, to qualify for a low down payment mortgage. Help should be on the way from the mortgage industry, but the big question is "will it be enough?".
For now, inventory is low, rates are still low, deductions are still available, and home ownership is still a straight path to wealth and stability. It's a great time to buy, but we need to open the door to more buyers.