As we’ve covered in the last couple weeks, the current trend seems to be moving towards the buyer’s direction. Rising rates and other consequences from inflation are certainly a motivating factor. However, that does not mean there is no room for the average investor to make money. This is particularly true for CRE (Commercial Real Estate) investors. There’s always money to be made in the real estate market, that is, if you’re a seasoned and skilled buyer.
“You can’t add value to bonds — and unless you own a VC firm or you’re Warren Buffett or Elon Musk, you really can’t create value by owning stocks. Other than owning a company or a franchise, only real estate allows investors to roll up their sleeves, either physically or metaphorically, and create value in an investment.”
Not only that, but in the CRE marketplace specifically, investors have so many options. From REITs, REIGs, non-traded REIT sponsors, mini-tender offers, all the way to even direct CRE property management. The latter is what Chang illuded to in his quote above. Having a “do it yourself” attitude in real estate can allow to you avoid hiring FTE’s. Thus, you’re much more likely to have room for a positive return. What will every intelligent macroeconomist suggest to businesses when monetary policy is geared towards inflationary times, or a potential recession? Minimize business costs (Wan, CloserIQ). That applies directly to CRE investors too. If you can minimize your business cost, by acting as your own property manager for example, you are undoubtably more likely to succeed irrespective of turbulent financial times.
With an official from the Fed quoted as saying he sees the Fed raising rates through the end of 2023, investors should prepare for a tightening economy (Saphir & Dunsmuir, Reuters). Rising prices with relatively unchanged labor market conditions. If you invest in FX, that likely means the dollar will be disadvantaged. But in CRE, as in the whole real estate asset class, positive returns are always on the table. To reiterate, investors who are willing to cut costs will make out well in a recessionary economic period.
The vast majority of latest prognostications point to a shift in the housing market, in favor of buyers over sellers. It’s about time. America’s housing market has been brutal on homebuyer’s, renters, and those looking to lease in prime locations for years now. There is a lot of qualitative and quantitative analysis to suggest that despite rising rates, buyers currently have the advantage.
Realtor’s Weekly Housing Market: “The Four Big Bellwethers”
Realtor has a weekly column called “How’s the Housing Market This Week?”. Realtor’s real estate economists are some of the most trusted in the industry. Weekly, Realtor delivers the most up-to-date statistics on what they coined “the four big bellwethers of the housing market”. These include home prices, # of new listings, total days on market, and of course, mortgage rates (Dutton, Realtor).
“The housing market is resetting in a buyer-friendly direction,” notes Realtor Chief Economist Danielle Hale in her evaluation. We’d be remised if we didn’t note a “buyer-friendly direction” is certainly not the same as a true buyer’s market. While the same analysis notes the obvious, historic seller’s market that’s raged since COVID-19 began, it points out that the window for sellers is closing, rapidly. Below are the previously mentioned Realtor weekly housing trends, for week-end August 6th, 2022.
-Realtor.com – Weekly Housing Trends, August 6th, 2022
What jumps out to me are the top two statistics. A 15.5% median listing price increase, coupled with 8% fewer listing than the week before (Realtor.com). Hale has a unique and thought-provoking perspective on this phenomenon.
Is There Surprisingly Good News in a 15.5% Increase in Median Listing Price?
According to Hale, yes, this number is good news for prospective buyers. The last data from July 2022 shows a median nationwide listing price of $449,000. For the week ending August 6th, a 15.5% listing price increase means the new median was $518.595. While this marks the 34th straight week of double-digit price growth, Hale points out it’s also the “second consecutive week of deceleration” (Dutton, Realtor). The previous two weeks – at the end of July 2022 – median listing prices rose by 16.6% and 15.6%, respectively. This third ‘relatively temperate’ hike offers buyers hope home price growth will finally continue steadily dwindling.
“The improvement has been substantial”, confirms Hale. She’s just as quick to add, “buyers in today’s market may still face meaningful affordability challenges as the typical home listing price remains near a record high”. But there’s little long-term evidence to suggest sticker price is a major deterrent for buyers (Dutton, Realtor). Hale reaffirms, “Persistent [homebuyers] may still continue to find success”. She goes on to add, “Second quarter data showed that homeownership rates increased from a year ago, both overall and for nearly every age and racial and ethnic group”.
Given that homeownership rates have surged — amid rampant inflation, rising mortgage rates, and other deterrents — strongly signals that buyers who are willing to have some flexibility will ultimately win. Participants who are been willing to purchase somewhere they may not have considered pre-pandemic have largely become homebuyers. It’s a true testament to the lengths that homebuyers are willing to go today, provided sellers meet them halfway.
Are Sellers Undermining the ‘Buyer Friendly’ Market?
Anything positive for homebuyers is a negative for home sellers and of course, vice versa. Many sellers with properties on the market are panicking they ‘missed the mark’ by not closing a sale on their property during the COVID-19 real estate boom. For week-end July 30th, 2022, the number of new listings dropped by 8%, year-over-year (Dutton, Realtor).
“New listings fell from a year ago for a fourth week. This is looking more and more like sellers may be wary of current market conditions, which have shifted substantially, even though they remain quite favorable to sellers who have owned for just about any length of time.”
– Danielle Hale, Chief Economist, Realtor
Hale appears to be hesitant to commit to buyer-friendly market conditions. However, she does definitively comment that conditions are becoming less and less favorable for sellers. The same message seems to be resonating across the board: if you’re a seller, the longer your property stays on the market, the worse-off your position will be.
“While overall inventory [of new and old listings] grew by 28% over this same week last year, the active listings count still trails its 2020 and 2019 levels by more than 15% and 45%, respectively. More improvement in active inventory is likely needed to bring balance, but the recent trend may be at risk if homeowner attitudes toward selling now continue to deteriorate.”
– Danielle Hale, Chief Economist, Realtor
Once again, Hale seems to reemphasize the same underlying position. ‘We’re not in a pro-buyer’s market, we’re in a market that’s rapidly growing less favorable to sellers.’
Are Rising Mortgage Rates to Blame for Homebuyers not Rushing to Close a Deal?
The last question Realtor’s frequented market assessment addresses is why buyer’s aren’t rushing to close the deal. We are in a market that’s getting less and less favorable towards sellers, after all. What happens when we hit that market floor and conditions start to change against homebuyers. That has been the case – at a staggering rate – for well over two years now (Dutton, Realtor).
In July 2022, listings lingered on the market a mere 34 days before getting snapped up. That’s nearly half the time it took two years earlier (Dutton, Realtor). Conversely, after having entered August 2022, it seems homebuyers are pumping the breaks and not feeling in such a rush. Hale’s prediction? Expect more of the same. She stated, “We expect more slowing ahead as the housing market reset”. The question remains, why?
According to data provided by Freddie Mac, rising mortgage rates are a good place to start. For week-end August 11th, 2022, the average 30-year fixed mortgage rate increased to 5.22%. That’s considered a significantly steep spike from the previous week’s 4.99% (Mortgage Rates, Freddie Mac). Realtor predicts the future will hinge on how large corporations will view the potentially looming recession.
“The big question for consumers is whether companies will over-react to the recession concerns and start trimming payrolls. A sharp pullback in hiring could have a direct impact on people’s ability to keep spending, especially with today’s high inflation.”
– George Ratiu, Senior Economist, Realtor
Realtor ultimately winds up agreeing. Prospective homebuyers should take full advantage of this buyer-friendly market while it lasts (Dutton, Realtor).
According to recent trends witnessed primarily in California, but largely nationwide, the supply in the housing market appears to be growing, while the demand is shrinking. This is what experts are counting on leading to a “cool off” period in real estate prices. “Today, week after week, we see more and more inventory come on the market and demand is down,” said broker Justin Itzen. He added, “Buyers have more to choose from, they can be more selective” (Moscufo, ABC News). Taylor Marr, chief economist of Redfin, echoed a very similar narrative. Marr made a distinguishment between expensive coastal markets and cheaper, rural housing markets. As Itzen’s remarks indicated, Marr concurs coastal cities located in California, New York, etc. will witness most of the impact.
But that still leaves the larger question unanswered; are we looking at a nationwide real estate cooling period? According to an investors report Redfin released at the very start of August 2022, the share of home listings that have been on the market for more than 30 days has increased more than 12% from 2021. Due to inflationary effects, interest rates for average mortgages were between 5-6% in July 2022, compared to 2-3% July 2021. Inflation and rising prices (or rates) go hand-in-hand, but this increase is steep enough to leave tangible impressions. With more listings, dropping prices, and definite near future housing market uncertainty, we’re hopefully finally entering a buyer’s market.
Importantly, Iesha McTier-Whyte, a broker selling middle to high-end homes in Newark, NJ advised she’s seen the same pattern. However, she doesn’t view it as a bad thing. “It’s nice to see [the market] cool down and kind of go back to the basics,” McTier-Whyte said. “What we experienced last year was like no other”. Itzen’s partner, Gio Helou, remarked “buyers are [now] able to actually go through the natural home buying process”. Assumingely, Helou meant that buyer’s now have the luxury of options. They no longer have to make the same kind of extraordinary sacrifices to simply purchase a family home.
At one point, “homes were going within days for way over the asking price,” said Tim Sherman, a prospective homebuyer. When he and his wife found a home in Huntington Beach, CA, they began considering liquidating investments to purchase it. Not only “15% over the asking price,” commented Sherman, “but it was now over the market estimates of what the property was worth” (Moscufo, ABC News).
The end to Sherman’s story really ties into the underlying assertion of this article. That first house fell through, but he and his wife did wind up purchasing a home. As soon as they saw the photos their broker sent them, they put in an immediate offer. Their former home in Dallas then sold in just one day (Moscufo, ABC News). If that’s any indication of the market dynamics moving forward, expect lower prices, more supply, and increased quality listings. A true win-win, both for individual homeowners and for real estate investors. As for the critics who continue to say there’s somewhat of a 2008-like “housing bubble” getting ready to pop, there’s little quantitative evidence to support the theory. Yet even the critics concede:
“There is now a huge supply of new houses for sale, in all stages of construction, over 9 months’ supply in total, according to the Census Bureau. In terms of the number of houses, by June [2022], there were 463,000 new single-family houses at all stages of construction for sale, the highest since May 2008, and up by over 30%, from a year ago.”
-Wolf Richter, The Wolf Street Report
Their perspective is investors need to remain patient, as market conditions are continuing to return to their equilibrium. After what we’ve witnessed with the COVID-19 global pandemic, anything is possible, but conceptually, our economy isn’t close to the same state it was in heading into the 2008 financial collapse. We have far more restrictions on speculative investments, strict leverage ratios, mandatory reporting requirements, etc. The lessons of 2008 essentially taught us how to avoid widespread economic fragility when a significant market starts looking vulnerable. Additionally, the credit worthiness, financial disclosures, and ability to repay have all tightened considerably for buyers. Time will only tell whether we are in the midst of a “cooling off” period, or if we’re about to witness about bubble bursting. From our research and observations, we see it as more of a buyer’s market than a ‘fragile’ housing market.
