The Coming Golden Era in Real Estate
KEY POINTS
There are several important factors that Buyers and Sellers looking to make a move in 2023 need to be aware of if they are to be successful
While the 2008 Housing Crash and the current housing market share some similarities, there are several vital distinctions that should be made between the two periods
Patience and data-driven decisions guided by highly competent real estate agents will be crucial to Buyers and Sellers in the year ahead if they are to achieve their goals
There is reason to be optimistic that 2023 may usher in a new Golden Era in Real Estate, where opportunities abound for Buyers and Sellers alike
It’s safe to say at this point that the residential real estate market has entered a period of adjustment. After two years of meteoric price increases that saw home values skyrocket by 40%+ between early 2020 and late 2021, home prices at both the national level and within the regional Northern Colorado market finally began to peak in the early summer of 2022, with prices beginning to slide just as the summer buying season got into full swing.
Chart: FRED
Source: S&P Dow Jones Indices LLC
Fast forward to January 2023 and the intended outcome of the Fed’s plan to reset the housing market is in full view for all to see, with December 2022 transaction volume utterly collapsing to levels not seen since the depths of the 2008 Housing Crash.
Twenty twenty-two proved to be a challenging market and 2023 brings with it a host of uncertainties about the future. Despite this reality, Buyers and Sellers working with highly competent agents can still expect to their see their plans succeed. In fact, I would argue that despite the challenges that lie ahead, we are poised to enter what may well become a new Golden Era in Real Estate in the near future. While it may be difficult to envision such a prediction being possible at the moment, it’s important to keep the latter half of 2022 in perspective and to remember that the real estate market has a long and well-established track record of serving as a vehicle for wealth generation over the years for those that commit to approaching it unemotionally and pragmatically.
Of course, success is never guaranteed, and no one can predict the future. But as the saying goes, “Luck favors the prepared,” and for the prepared, there is still plenty of reason to believe that the future is bright. As we enter the new year, there are several things that every home Buyer and Seller needs to know in order to be truly prepared for the year ahead.
Here are three of them:
1. This is not a repeat of the 2008 Housing Crash
It’s tempting to look at the current housing correction and to want to draw parallels to the 2008 Housing Crash - which saw peak-to-trough home prices tumble by 26% - but we are not there yet, and many more things would need to unfold for us to get there. That does not mean that there is nothing for us to learn from the 2008-2012 period in time or that there are not potential risks ahead, but it would be unwise for us to proceed into 2023 with the mindset that a repeat scenario is already upon us.
Let’s briefly take a look at each of these two periods in time, and then I will discuss what all of this means for Buyers and Sellers in the year ahead.
The 2008-2012 Housing Crash
In a nutshell, the 2008-2012 Housing Crash was precipitated in large part by the 2008 Financial Crisis, which began with cheap credit and lax lending standards that fueled a housing bubble. When the bubble burst, the banks were left holding trillions of dollars of worthless investments in subprime mortgages. The Great Recession that followed cost many their jobs, their savings, and their homes.
Four factors underlie the rise and fall of housing prices and the conditions that eventually culminated with the crisis of 2008. They were:
Declining Lending Standards. There was a dramatic change in mortgage lending standards beginning in the mid-1990s. To a large extent, these changes were the result of regulations designed to promote home ownership. However, they had secondary effects. Borrowers were encouraged to take out imprudent loans, purchase housing with little or no down payment, and gamble on rising housing prices.
Federal Reserve Interest Rate Policies. The low interest rate policy of the Federal Reserve during 2002-2004, helped drive housing prices upward and the Fed’s shift to higher short-term rates during 2005-2006 contributed to the housing price collapse.
Excessive Leverage. There was a dramatic change in mortgage lending standards beginning in the mid-1990s. To a large extent, these changes were the result of regulations designed to promote home ownership. However, they had secondary effects. Borrowers were encouraged to take out imprudent loans, purchase housing with little or no down payment, and gamble on rising housing prices.
Increased Household Debt. High household debt also contributed to the collapse of 2008. Between 1950 and 1980, household debt as a share of disposable (after-tax) income ranged from 40 percent to 60 percent. Starting in the early 1980s, the debt-to-income ratio of households began climbing at an alarming rate. It reached 135 percent in 2007, more than twice the level of the mid-1980s. As of 2021, this figure sits at 101% in the U.S. More debt means that a larger share of household income is required just to meet the interest payments.
It’s easy to begin to understand how an environment of lax lending standards, monetary policy that encouraged price increases, excessive leverage, and increased household debt, all set up a scenario where a rapid, prolonged economic downturn led to a collapse in home values.
The 2022 Pandemic Housing Bubble
The 2020 Pandemic Housing Boom and ensuing Bubble in the last half of 2022 was – and still is to a large degree – largely predicated on the mismatch between the demand and supply of homes. Homes simply aren’t being built fast enough to match demand. When the Fed slashed the interest rate on the Fed Funds Rate to zero when the pandemic first began, a new wave of hopeful homeowners hit the market, buying up property. This caused home values to skyrocket in a very short period of time, with national home prices increasing by nearly 40% in under two years. The slowdown that began in mid-2022 actually began in late 2021, when fatigued Buyers finally started to give up en masse, sidelined by little-to-no available inventory left to buy at reasonable prices. What remained of the Buyers still looking by June 2022 effectively evaporated overnight as interest rates began to climb, pushing already-strained affordability to levels that most were no longer willing – or able – to bear.
2008 versus 2022
The mechanics behind today’s housing market growth are fundamentally different than what happened prior to the 2008 Housing Crash. Back then, home prices skyrocketed due to an unprecedented explosion in the subprime mortgage market. Banks were giving loans to nearly everyone. In many instances, lenders would completely skip due diligence lending practices like income verification and credit score requirements. As such, the housing market became propped up by these risky, variable-rate, subprime mortgages. As millions of Americans defaulted on their loans in 2007-2008, the subprime bond market collapsed, sending the wider economy into a recession.
Prices in today’s housing market are the result of organic supply and demand, facilitated by market forces. Lending standards are also much stricter, and homeowners enjoy considerable equity in their homes. These two factors alone mean that homeowners will be in a much better position to weather a downturn in home values the next time around. Even still, it’s imperative that Buyers and Sellers alike understand that there remains considerable uncertainty in the housing market at the moment, and for every well-respected economist calling for a housing crash, there is an equally well-respected economist calling for prices to remain stable.
What this means for Buyers
Buyers need to understand that there is a good possibility that home values will continue to fall through the remainder of 2023 and into 2024. For economists calling for home values to decline, these declines range from less than 1% all the way up to 22% and will vary dramatically from region to region within the country. On the flip side, the highest predicted appreciation currently stands at 5.4% in 2023 at the national level. Given this reality, Buyers need to know that unless they plan to stay in their next home for 4-5 years or more, and a decline in home values manifests over the next 12-24 months, they may find that they are unable to sell it for the price they paid today. For Buyers who are looking for a forever home, or who did not foresee selling in the next 5+ years, a potential decline in home values presents less of a challenge. In fact, for these Buyers the coming year may be incredible. The chart and table below show the change in median sales price for single family homes in several towns and cities within Northern Colorado through the end of 2022, as well as the change in median sales price since the peak of the Pandemic Housing Boom. While there are certainly declines happening at the moment, the take home message for would be Buyers and Sellers here is that the price changes vary widely. This is just one of the reasons why hiring the right agent will be so important in the year ahead, as we will discuss more in a moment.
The upside here is that the current market has already seen home values decline slightly, and this is making some Sellers nervous. Remember, there will always be Sellers that have to sell. Homes like these present unique opportunities to negotiate discounts and concessions that would have been completely impossible a year ago. Buyers’ ability to realize these perks will be dependent almost entirely on their agent’s ability to negotiate, because Sellers – who have had nearly all the negotiating power for the past two years - have been slower to embrace the changing market than Buyers. So long as interest rates remain at current levels, Sellers who have to sell will be forced to drop their list prices and get out.
New Construction will also continue to present great opportunities for Buyers. Unlike Sellers of existing homes, home builders are willing and able to reduce prices and offer incentives that cannot be found in existing homes. These savings can be substantial, often totaling upwards of 4-10% of the purchase price on a new home. Buyers can expect these opportunities to remain available in 2023, and perhaps increase, as the inventory of available new construction homes remains elevated.
Chart: FRED
Source: U.S. Census Bureau, HUD
What this means for Sellers
Sellers, just like Buyers, need to understand that home values are sliding in some regions. This means that Sellers who wait to sell could find that they are not able to sell their home for the same price that they would have been able to in the past. This reality become especially important to recognize in situations where the equity in a home represents money that a Seller is relying upon to purchase another home or to live off of.
When the time comes to list a home, Sellers need to understand that the days of throwing a sign in the yard and receiving multiple offers on the first day are over. A year ago, it was not uncommon to see a home get 30+ showings and 10+ offers in the first two days on the market. Today, homes may see only a handful of showings in a month and rarely sell above list price. More often, homes are selling at or under list price and/or with the inclusion of Seller Concessions. In December 2022, 42% of sellers offered at least one concession to Buyers. That’s up from 31% a year ago.
To that end, Sellers must be willing to be reasonable in their negotiations with Buyers regarding inspection items and other contingencies. Many Sellers are offering concessions up front to help Buyers pay for rate buy downs, other closing costs, and/or home warranties. Buyers are also becoming more likely to ask for small inspection items to be addressed, such as having carpets professionally cleaned, or drywall repairs to be made. If a home is in need of larger repairs, such as issues with the roof or a faulty furnace, it is almost guaranteed that a Buyer will require these items to be addressed before agreeing to purchase a home.
The silver lining for Sellers is that inventory remains incredibly low. This means that Sellers do not have to endure the competition that comes with a surplus of other homes for sale. However, as I discuss in more detail below, Sellers should not be lulled into a false sense of security that low inventory will prevent future home price declines. You can see quite clearly in the chart below that the decline in available inventory of single family homes in Weld County in the second half of 2022 has thus far failed to prevent a decline in prices from the peak in May 2022.
Chart: Jamison R. Walsh, REALTOR®
Source: IRES MLS. Data current as of January 3, 2023
Lastly, because buyers are paying double the interest rate on homes which have appreciated by upwards of 40% in the past two years, they are in many ways paying a premium to purchase a home today. As a result, they have become hypersensitive to home prices. That is, the idea of listing high and negotiating down with a Buyer is even less of an advisable option than it was in the past, as Buyers will simply not even look at a home anymore if they feel that the price is too high. This means that there will be no Buyers to negotiate a price reduction with, because no one has come to see the home. List prices must be supported by the comparable properties that have SOLD recently. A comparable home that was listed for sale but did not sell was overpriced, no matter what anyone says, so how can it be used to justify the same list price for your home if you really do want your home to sell? And don’t even get me started with your Zestimate.
2. The most successful 2023 home Buyers and Sellers will be the patient ones whose agent is a total data nerd with the negotiation skills of an f.b.i. hostage negotiator
Successfully buying or selling a home in 2023 will require both patience and a deep understanding of the data regarding the local market. Patience is easy, although not enjoyable. You just have to commit to it. If you don’t have to buy right now, then don’t! The right house will get listed for sale eventually. If you don’t have to sell right now, then don’t! The market is slowing, it’s not crashing. Once you’ve decided to proceed, commit to being reasonable. Unless money is not a factor for you, there is no perfect home and there is no perfect buyer for your home. If you have to buy or sell a home now, recognize that this is especially true, and that your home buying or home selling journey will be less about finding the perfect home or buyer and more a process of elimination to find that the home or the offer that will work for you. This might sound like misery, but in 2023, it’s absolutely necessary.
The real challenge will be finding the data.
Data is everywhere and everyone is an “expert” these days. There is a saying, “We are surrounded by data, but starved for insights.” The reason for this this is simple: most people look at the wrong data. A classic example of this is what I call the False Supply Narrative.
The False Supply Narrative is the erroneous claim made by many real estate agents that low inventory will prevent home price declines. For the better part of 2022, it has been almost universally proclaimed that home price would not fall because inventory remains at historically low levels. However, prices have fallen – and continue to fall, even as the inventory constraints have worsened. This is data without insight in action.
The reality is, inventory is actually a pretty poor predictor of future home price growth when compared to other available indicators. The problem is, few real estate agents lack the competency or willingness to look beyond the headlines and into the most reliable data for the local market.
So, what does all this mean for you? Simply put, you need to be sure that the agent you choose to hire actually understands your local housing market. I don’t work with clients looking to buy or sell a home in Lakewood for the same reason you wouldn’t hire a piano tutor to teach you how to play the violin. Sure, I could probably be reasonably successful in helping a client in Lakewood, just like the piano tutor could probably offer you enough insight to pluck out Mary Had a Little Lamb on the violin eventually. That’s because while the process of buying or selling home Lakewood is essentially the same, the local market is a total mystery to me. Is that really in anyone’s best interest here? Is it really the best use of anyone’s time and money?
A recent survey of homebuyers showed that nearly 75% of Pandemic Homebuyers had buyer’s remorse, and lawsuits against real estate agents from Buyers who bought homes with values that have since declined increased by 9% last year, and that number is expected to grow in the year ahead. As home prices climbed in the last few years, the number of new agents exploded with people hoping to make easy money helping friends buy or sell a home. There has always been a larger-than-ideal gap between the least competent and most competent real estate agents, but in recently history this gap has widened significantly. This means that it’s more important than ever before for Buyers and Sellers to ensure that they are hiring an agent that has the professional competency required to ensure their best interests are not playing second fiddle to an agent’s interests of landing a paycheck.
Finding a highly competent agent is not all that hard, but it’s so important that you commit to doing so that I’ve created some great resources to help you along the way. There’s one for Buyer’s Agents and one for Seller’s Agents. There’s absolutely no obligation on your part to use these resources, so I truly hope that you will!
If nothing else, this one hard and fast rule is a great starting point:
Only hire an agent that works full time as a real estate agent (that is, their primary source of income is helping people buy and sell homes) and lives close enough to the area you are going to be buying or selling a home that you’d call them if you had a flat tire.
Of course, there will be exceptions to this rule from time-to-time, but for the vast majority of Buyers and Sellers, following this one rule alone is half the battle.
3. This may be the dawn of a Golden Era in Real Estate
For most folks, the last two years have been pretty exhausting, and the real estate market has offered little solace. For many who have been successful in buying or selling a home, most would probably tell you it was anything but a mundane experience. I struggle to think of any of my own clients in the past two years that would do it all over voluntarily under the same conditions. This is especially true for Buyers, but Sellers have had their fair share of trauma as well. For those who have been unsuccessful, the past two years has been even worse.
The truth is, a balanced market is better for everyone. Sure, Sellers love the idea of bidding wars and offers over list price for their home, but the euphoria of crushing Buyers wears off pretty quickly when it’s time to begin their own home buying journey. Unless a Seller was one of the lucky few to find themselves selling a home in a frenzied market so they could buy a home is a frenzied, but much more affordable market, the process of selling and buying in the same area has been pretty brutal for some time now. Of course, the flip side of that scenario is true for Buyers, and they may get a chance to experience that eventually. But think about how nice it would be if you could buy a home for a reasonable price, sell it some time later for a reasonable profit, and then go buy your next home without feeling like you’ve just been beaten with a sock full of nickels. This is precisely what a balanced market offers, and after the last few years, that sounds downright amazing to me.
These periods of balance in the market are what I like to call, “Golden Eras,” because everyone stands to gain. And what’s wrong with that? If you’ve been wanting to buy a home in the last two years but have been sidelined by the rise in prices and interest rates, you might be hoping that home prices take a nosedive. There are days where part of me wishes prices would crash too. But remember that in order for that to happen, there has to be a reason. Maybe that reason is a prolonged recession. Maybe that recession leads to you losing your job. Now what? It doesn’t really matter how low prices go if you can’t qualify for a mortgage.
A balanced market is a happy market because a happy market is a market where you and the people you care about can reasonably expect to achieve the goal of owning a home, or buying your next home, or any other thing as it relates to real estate, so long as you’re willing to put in the work to get there.
The good news is, the coming year presents a rare opportunity to return some much needed balance to the market. As part of that return, there will be pitfalls and there will be opportunities. Whether you encounter one or the other depends almost entirely on how you prepare for the journey ahead and who you choose to guide you through it.
No matter what you hope to achieve in the coming year, and no matter what the market may hold in store for us, know that I would be honored to be a part of your journey. Whether you hire me or not, I am always available to serve as a resource for you and your family as you navigate the local market. Feel free to reach out anytime, and I will do everything that I can to help you.
Stay warm, and Happy New Year!