Somewhere's in my readings, I came upon the quote,"the problems are the path". It was based upon the learning process of humanity; in that, we learn and progress from problem solving.
We do have problems we need to solve. The problems started with the Pandemic, the shortage of employees and the shortage of homes for sale. This was then combated with the Federal Reserve System (FED) dropping rates to unheard of low that affected the entire world with some countries going to negative rates. At the time the Risk Free Rate of Return was down to less than 1%. That meant that investments of all sorts were fair game. Next to nothing in money market funds, T-Bills or saving accounts were not with leaving money in them and panic buying occurred in Real Estate, Commodities, Stock Bonds and the esoteric investments; such as, Crypto Currencies.
With the Pandemic over, those laid off went back to work. All were flush in savings with the $9+ Trillion the FED fed into the economy. Back to work and buying came in all sorts of products which were short in supply due to the lock down. Inflation ran up. The administration did not help by limiting Oil and Gas exploration.
An old play book from the 1970's and early 80's was opened up by the FED and interest rates soared. At the beginning of 2000 mortgage rates were just over 8%. It took 22 years to get mortgage rates down to a sub 3% level. It only took 6 months to get mortgage rates up to over 7%.
It appears the old Playbook is not much of an answer as Japan does not have inflation and does not have an extreme case of interest rates. So maybe it means the Playbook is BAD?
The Pandemic Housing Boom unleashed an “investor mania” unlike anything seen in the U.S. housing market since the aughts housing bubble. Average Joes poured into the market in hopes of building Airbnb empires. Institutional investors, like Blackstone-owned Home Partners of America, quickly expanded their single-family home portfolios. Homebuilders, eager to strike while the irons were hot, broke ground on a record number of “spec” homes. While iBuyers, like Opendoor and Zillow, ramped up their algorithmic home buying programs. (Opendoor just wrote off $573 million in inventory)
Fast-forward to October, and that investor mania has been replaced by investor panic. The ongoing housing correction—U.S. home prices have fallen 1.6% between June and August—and further declines in September and October to a point that home prices are equal to or less than one year ago in 2021. This has scared many investors to the sidelines. That marks the first national home price decline since 2012.
The investor pullback makes sense. While most housing economists don’t foresee a correction on scale with the Great Financial Crisis bust—during which U.S. home prices fell 27% between 2006 and 2012—they do acknowledge that this home price correction is sharper than it was in 2006. The lagged Case-Shiller Index already shows that home prices are down 8.2% in San Francisco.
Historically speaking, home prices are sticky. Sellers simply don’t want to relent on price unless economics, like a supply glut, force their hand. That’s not as much the case for institutional investors and builders. If they think prices are about to drop, they want to get out first. The fact that the Pandemic Housing Boom saw investors become a higher share of buyers, Glenn Kelman, CEO of Redfin says, ultimately makes the U.S. housing market more vulnerable to a faster swing down.
“When the shiitake mushrooms hit the fan, you [investors] want to get out first. The way to do that is to figure out where the lowest sale is, and be 2% below that. And if it doesn’t sell in the first weekend, move it down [again],” Kelman says.
In other words, Kelman is suggesting that real estate investors, including Redfin’s iBuyer business, helped drive home prices up faster during the boom and will push prices down faster during the correction.
“My take is that because builders and iBuyers account for more inventory, that leads to a faster correction. We’re one of them, we’re an iBuyer,” Kelman says. “We notice immediately when fewer people are on our website and fewer are signing up for tours…We’re sitting on $350 million worth of homes for sale that we bought with our own money, or worse bought with borrowed money. And what we always told investors is that we would protect our balance sheet by acting quickly. We don’t have hope as a strategy. We immediately started marking down things.”
A combination of low mortgage rates, record appreciation, and soaring rents simply made it irresistible for investors. It brought out everyone from home flippers, to mom-and-pop landlords, to Wall Street juggernauts.
We were in a "Perfect storm" of low interest rates, appreciating property values, appreciating rents, high income buyers were going higher and higher in purchases which led to expanding to markets like Boise and the like, and the California exodus to one conservative states where home prices were low and properties were larger.
While spiked mortgage rates have caused a historic pullback in buyer demand, it hasn’t translated into a massive inventory spike. Most homeowners aren’t scared. So how can home prices fall even if inventory levels are tight? It’s because leveraged investors don’t want to play the “wait and see” game. And all it takes is one home to fall below its comp price to reduce comps for an entire area.
“As soon as demand weakened, we were marking properties down, and that drives prices down. Every other home for sale in a neighborhood where we marked the listing down now has a comparable sale that every buyer is going to know about and talk about,” Kelman says.
Of course, so-called investor mania during the Pandemic Housing Boom wasn’t one-size-fits-all. The investor frenzy was particularly fierce in Western boomtowns like Phoenix, Austin, and Las Vegas. That helps explain why those frothy housing markets are correcting so dramatically right now.
Look no further than this property in North Las Vegas. In May, Opendoor bought the home for $540,800. Just weeks later, Opendoor listed it for sale in July at $581,000. But Opendoor was too late: The Las Vegas housing market had already rolled over. Fast-forward to October, and the listing just got taken off the market after a series of price cuts brought its list price to $472,000.
At first glance, one might assume Opendoor could soon take a loss of around 13% on the property. Not exactly. See, when iBuyers like Redfin and Opendoor buy a home, they charge sellers a “service fee” in exchange for the speedy transaction. On one hand, that buffers the potential loss for the iBuyer. On the other hand, that buffer means the iBuyer is less afraid to mark down the price.
I believe the religion of housing prices going up maybe dead! There are places in the U.S. that home prices do not escalate as we have witnessed. There are places where home owners are happy to live in a house and not treat it a part of their stock portfolio.
So, where does it leave us today. Frankly, I see prices continuing to be weak. The Fix and Flip investors have a real issue ahead of them in the Bay Area, think East Menlo Park and East Palo Alto. Facebook, AKA Meta has announced putting some $5 billion or so in reserves to get out of there real estate expansion. First to go was New York City. What does that indicate for the strip of property along the Bay across form the original Facebook Campus? No more plans for Hotel? What about the housing complex or the shopping centers. In fact; how long will those newly built offices stay empty before shareholder push the button to cut expenses and create funds for the Meta expansion. On a daily basis I search and find another Meta complex being unloaded
Buyers are all holding back. That is a mistake. There is no bell that rings when a bottom occurs. Take advantage of the liquidations and pay the high mortgage rates and refinance later.
REFINANCE LATER? Right! There is $8.7 Trillion in the FED balance sheet. The rate of return is 2.3%. The bank deposits at the FED get 3.4% per my last count. The FED is loosing money. The lost money is then put in an IOU that is put in the balance sheet that the FED redeems when it makes money again. They certainly are not going to sell bonds at a loss, They will let them mature and create liquidity. Remember the FED controls interest rates. At some point the pain factor comes home to roost and even the FED bites the bullet and lowers rates.
When rates come down the panic buying will occur. Who knows the level of home prices then?
Remember you are not buying from a neighbor. You are buying from a speculator. NO PITY! Offer a big discount, they must get out.
This period like the early 80's was the best time to buy real estate; as it was, in the period after the Lehman Collapse.
The problems are our path out to the future.
| ousing Inventory Snapshot | October 31, 2022 | |||||||
| Average List Price | 30 Day Trend | Average Sold Price | 30 Day Trend | Average DOM: active/sold | 30 Day Trend | Number of Active Listings | 30 Day Trend | |
| Santa Clara County, CA | ||||||||
| Single Family | $1,663,094 | -1.25% | $1,612,977 | -2.13% | 51 / 26 | 3 / 1 | 641 | -66 |
| Luxury Single Family | $6,032,715 | +3.90% | $4,232,002 | +2.66% | 71 / 30 | 8 / 6 | 201 | -17 |
| Condo/Townhome | $801,023 | +0.20% | $803,023 | +1.39% | 49 / 26 | -1 / -3 | 313 | -1 |
| Luxury Condo/Townhome | $1,666,810 | +2.99% | $1,550,134 | +3.67% | 49 / 30 | 1 / 5 | 102 | 3 |
| San Mateo County, CA | ||||||||
| Single Family | $1,970,812 | -8.34% | $1,910,334 | +5.31% | 44 / 22 | 1 / -4 | 395 | 27 |
| Luxury Single Family | $8,381,831 | -3.93% | $6,932,211 | +8.46% | 92 / 34 | 10 / -21 | 131 | 9 |
| Condo/Townhome | $824,423 | -0.87% | $895,835 | +2.26% | 76 / 31 | 13 / -7 | 140 | -18 |
| Luxury Condo/Townhome | $1,757,580 | +0.73% | $1,613,322 | -10.07% | 50 / 31 | -1 / -14 | 46 | -5 |
| Santa Cruz County, CA | ||||||||
| Single Family | $1,259,037 | +0.96% | $1,244,052 | +7.43% | 64 / 30 | 3 / 2 | 192 | 25 |
| Luxury Single Family | $3,872,505 | +10.87% | $3,283,889 | -15.22% | 98 / 43 | 22 / 3 | 59 | 1 |
| Condo/Townhome | $725,127 | -2.71% | $743,600 | -10.23% | 102 / 42 | 1 / 27 | 30 | 3 |
| Monterey County, CA | ||||||||
| Single Family | $932,274 | -4.30% | $914,445 | -2.87% | 61 / 28 | 3 / -1 | 254 | -6 |
| Luxury Single Family | $7,216,933 | -4.11% | $3,622,778 | -18.89% | 120 / 62 | -16 / 28 | 80 | 0 |
| Condo/Townhome | $667,497 | -0.05% | $549,600 | -27.74% | 39 / 28 | 4 / 6 | 30 | 2 |
| Contra Costa County, CA | ||||||||
| Single Family | $799,320 | -3.03% | $793,909 | -5.94% | 51 / 33 | 5 / 2 | 880 | -33 |
| Luxury Single Family | $2,655,950 | +0.51% | $2,028,524 | -10.14% | 54 / 31 | 6 / 4 | 289 | -15 |
| Condo/Townhome | $523,446 | +2.22% | $525,515 | +1.34% | 45 / 26 | 5 / -2 | 223 | 18 |
| Luxury Condo/Townhome | $1,234,951 | +3.86% | $1,122,019 | +1.09% | 46 / 25 | 10 / 3 | 70 | 3 |
| Alameda County, CA | ||||||||
| Single Family | $998,177 | -3.80% | $1,050,329 | -2.79% | 42 / 30 | 0 / 4 | 841 | -23 |
| Luxury Single Family | $2,676,608 | +2.02% | $2,201,929 | -1.31% | 49 / 25 | 6 / -5 | 264 | -23 |
| Condo/Townhome | $617,000 | -1.61% | $628,870 | -2.08% | 53 / 35 | 5 / 7 | 330 | -18 |
| Luxury Condo/Townhome | $1,163,236 | +1.68% | $1,138,194 | +6.21% | 42 / 25 | -4 / 1 | 112 | -4 |