When Do House Prices Crash?
The question on everybody’s mind is:
What’s happening with real estate prices, with home prices?
There’s a lot of predictions: will prices increase, decrease, or stay the same. The bigger question is why is it going to do whatever it’s going to do? There’s guesses either way but if the question is: the why behind it. Now you have a better answer that might be more reliable. If the reason that a person thinks home prices are going to go down is because they happen to have gone up. Well that’s not automatically a reason they’re going to go down. Prices have gone up many times before, and they keep going up. If it’s because it matches a previous pattern like the 2008 housing crash. You would have to look at the same factors in play.
Certainly real estate prices are extremely high, in fact, the price isn’t even the biggest factor. Affordability has to do with the interest rates combined with the price for an average house. You’re going to be looking at a mortgage payment of about four to five thousand dollars; between taxes, Insurance, interest on a median price house in the $400,00 range. That’s going to put the affordability of a home out of reach for a lot of buyers.
Is that going to affect home prices?
It depends upon availability and supply. If there are no homes available to buy, the few that do come on the market are going to get snapped up quickly. Even if they are high, people need a place to live. That may not be the case, but before we need to say home prices are going to crash. You have to make sure that the underlying reasons are true. TD Bank, one of the largest financial institutions in North America, their prediction is home prices will bottom out in early 2023. Well we’re in early 2023 right now, does that mean the home prices are bottomed out? Maybe, maybe not. They mean the first quarter, second quarter of the year. Certainly there’s a reason to think that prices aren’t going to go up anymore. That’s obvious, they go up much more. Nobody’s going to be able to afford to buy them, but are there still enough buyers to absorb the inventory that’s out there at the current price point. Going up more is not going to be any good right?
If you’re a home seller, you’re probably not going to be able to go up any higher on your price. How far down do you have to go? 5%, 10 %, or even 20%. If real estate on average goes down twenty percent, that’s still going to be way above where it was in 2018, and with the mortgage rates where they are now, the payment for that house is going to be close to double what it was in 2018. Even if prices come down 20%, it’s unlikely to come down that much. Part of the underlying fundamentals that are quoted by TD Bank, is that employment is still good. People still have jobs; they may not be high paying jobs but there’s still employment. What people are doing now is they’re actually finding ways to reconfigure their finances. Either way, the future of home prices, single family home prices, is much less certain than it’s ever been. Anybody who has a guess of what’s going to happen probably has less confidence in that prediction than ever before.
In 2007\2008 the housing price crash happened, lots of people predicted it. They said look this doesn’t make any sense. People who are taxi drivers making you know 500 a week are buying three hundred thousand dollar houses. It doesn’t make sense but now there’s less clarity in the marketplace for what’s going to happen in the future. Even though the price is high and the interest rate is high, there’s still people that want to buy a house. There’s still people that have the ability to do it. The unknown is the equilibrium of buyers and sellers at a point of matching up.
Are there more buyers than sellers? More sellers than buyers?
The other question is, in order to get a housing price crash or decline; both sides have to agree on it. Just because buyers want prices to go down and they want the price to crash; the seller sets the price until the seller is willing to sell that house at a lower price. The sale does not happen, you have to have a willing buyer and a willing seller. How many willing sellers are there to discount their house 20%?
First of all, do they have to do it well? Most of the sellers have equity, they don’t have a loan that’s breathing down their neck. That makes them can’t afford the house they have. A 2% mortgage at a low price? They could probably Airbnb or rent it out and make their payment without having to give away the farm on price. In addition there’s no inventory coming on the market. Builders have shut down new homes. Builders are not building any homes. The inventory of people selling is up higher than it was a year ago but it’s not where it was five years ago. At the same time there’s still a 5 million home shortage in the U.S of houses, versus people that need houses. So that’s putting a pressure on the market.
Where does that all settle out?
There’s also not going to be a huge wave of foreclosures in the marketplace because there wasn’t risky lending. There’s not a lot of people that are going to get foreclosed out of their house. A lot of tenants are being evicted, but not people that are foreclosed on an owned home. Another factor that affects the market. It may be a stalemate, that’s what I think is going to happen. Buyers aren’t going to buy, sellers aren’t going to sell. No houses get sold. People are going to hunker down where they are; stay where they are. Certainly there’s people that have to move because of a job or people that are forming a new household. They get married, have kids, and they have to buy a house. They may be stuck with a rental for a longer period of time because there’s no new inventory coming on the market. Builders are not building, developers are not doing new subdivisions because of the fact that they’re not sure if they’re going to sell them.
Another parallel to this we’re seeing even in the car market: dealers who are stuck with inventory that they bought up. All these used cars at high prices we’ve all read about. Bring them to the auction to try to dump them. They’re getting bids less than the what they have in it, and they’re not selling them. The no sale rate at auto auctions is at 50. Meaning half the cars don’t get sold because what the buyers bidding at the auction isn’t enough to get the seller to sell it. It’s another stalemate. This is even worse with houses, because look, the dealer doesn’t need that car right? Nobody needs to have one if you’re a dealership. You don’t need to have 50 cars on your lot if you’re not selling them. Somebody needs to have a house, so discounting that house and cutting it loose at a low price isn’t something anybody needs to do. It’s more likely a dealer is going to do that with a car than a resident is going to do that with their house. Until the sellers have this need to voluntarily sell their house for a lower price, the market’s not going to go down. What would trigger that? Job losses would, but right now job losses really aren’t in the mix. There’s some layoffs and there’s some waves of reduction of employment but it’s not a huge wave yet. If and when that happens, that may be a factor in turning some inventory loose.
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