The Current State of The Real Estate Market

On today's podcast episode, I talk about the current state of the real estate market and where I think the market is heading. 

One of the questions I get asked the most is "what do you think of the market right now" or "do you think the real estate market will crash. This podcast episode answers those questions. 

Disclaimer: I cannot predict what will happen. No one can. There are too many unknown variables like war, interest rates, the Fed, the dollar, stock and bond markets, etc. However what I can tell you is my opinion on what I see and how I interpret it. That is what this episode is about. 

Prices have moved exponentially higher. I was looking today at houses that were worth $150,000 in 2000 that are now on the MLS at $300,000. In many markets, prices have doubled in two years. So be very careful of listening to the "Case Shiller Home Price Index" and other data that is put out by mainstream companies because a lot of this data is skewed because it's an "average" or "median" of the entire country.

Different cities and different States have completely different demographics, population growth, job growth and demand (or supply). Averaging this data gives us a big picture. But we cannot invest in our local market with data based on the entire U.S. Real estate is local. If my market is Port St Lucie, FL I am not interested in what is happening in Phoenix, Seattle, San Diego or Philadelphia. I doubt prices in Buffalo or North Dakota doubled in the past two years. Because no one is moving there. But people are moving to Florida. Florida has been hot and Covid exacerbated that. The past two years have been absolutely insane and it seems like everyone in the U.S. was trying to move to Florida. For that reason many people that are local do not see a problem in our local market. However based on my own research I am seeing some cracks forming. 

What I am seeing on the ground is a little disturbing. 1/4 of the listings of the homes on the MLS in some cities are new construction homes built by builders in the past few years. Many of these were "build to rent" homes which were supposed to be purchased by hedge funds and private equity funds (and home buyers). But demand has dried up. No one predicted that rates would move from 3% to 6 1/2%. So these builders are sitting on excess inventory and have had to slash prices.

At the same time, their biggest buyers are drying up too. Many of the largest single family home buyer funds are not buying any more and have ceased their buying operation until they can get a handle on this market (and their inventory). Offerpad, Open Door and other iBuyers are hurting. Some of these operations even have going concern situations (Offerpad just dropped below $1 a share today). Invitation Homes and American Homes For Rent and most of the large Hedge funds have stopped buying too. They stopped buying around July/August of last year. Some only stopped buying at the end of last year. Now they know there is a problem.

So if the largest private equity and hedge funds, titans like Invitation Homes and American Homes for rent are not buying then what are they doing. According to my research they are selling. They are reducing the homes on their balance sheet and they are increasing cash reserves because they know what is coming. Goldman Sachs put out a report just last week of 4 cities that could see a 2008 type of decline. Those were San Diego, Phoenix, San Jose, and Austin. None of those cities are in Florida, but often when troubles start in hot markets like Phoenix, that pain spreads to other cities and towns (and States). And prices being marked down affects their balance sheet, their financing and how much lenders are willing to lend.

It looks to me like the smart money (Wall Street) is not buying houses and is selling houses. So So my question is who is going to buy all of these houses? The first time home buyer has seen rates moved from 3% to 61/2% in the past 12 months. The average home buyer has sticker shock when they see what their mortgage payment will be. They simply cannot afford it. So either rates have to come down or prices have to come down. Listening to the Fed Chairmen Powell, I don't think rates will come down too much. He says rates are going up (he said that yesterday).

So do I foresee a price decline? You bet I do. I see prices that are already down 10% to 15% in my local market. The Core Logic Us Home Price Insights Report (which came out yesterday) shows a that home prices increased 6.9% from 2021 to 2022. That data tells us nothing about what prices have done in the past 6 months. Prices could have gone up 16% and then dropped 10% resulting in a  6.9% year over year increase. In my local market I see declines at 10% to 15%. New home builders have slashed the prices of new homes from $420,000 to $380,000 in just the last 3 months. That's a 10% decline. Core Logic says prices will down 3% for the next 12 months. I would really like to believe that - but I don't. I think it's more likely that they are down that amount in 1 month!

Be careful in this market. Pay attention to what the home builders are doing and how they are pricing their new homes. If the prices of new homes are being marked down, then what does that do to the price of existing older homes? 

Watch the iBuyers and whether or not they start buying again and whether or not some of them go out of business. That will affect demand and supply. Listen to the earnings calls of the large publicly traded companies and read their reports and what is written in them. Pay attention to details. I believe that prices will come down and that 2023 and 2024 will be a great time to buy real estate. At some point the Fed is going to have to pivot and start lowering rates again. And when they do (whenever that is) it will be the start of another run up in real estate prices. And the hedge funds and private equity funds will be ready to pounce. So Be patient. Wait for the right price and then when you see deals that make sense buy them. Buy anything that will cash flow for you. And don't forget to keep an eye on interest rates. These new homes if they decline another 10% to 15% would look like really good long term buys to me. Keep an eye on that and their prices (and price per square foot).