Is the bottom about to fall out of the local real estate market?
Short of having a crystal ball (in working condition), no one can say with absolute certainty what the real estate market will look like months or years into the future. What we can do is analyze various data points and formulate a realistic hypothesis, based on how the market has behaved in the past.
The last economic downturn, widely known as The Great Recession, was a real doozy and the real estate market bore the brunt of the impact. There are several reasons for this, not least of which is the fact that widespread issuance of subprime mortgages was the literal epicenter of the last recession. One thing is very clear as we enter into a new recession, sparked by the shutdown of economies worldwide due to the COVID-19 outbreak:
Things are much different in the real estate industry and real estate markets this time around.
Without a doubt, real estate markets across the United States will suffer given the record levels of unemployment we are facing as we navigate the reopening of the economy. In fact, the market took an immediate hit as soon as the shutdown order was put into place. The end of March saw about a 50% drop in buyer activity compared to the beginning of the same month (RMLS, 2020).
Here are four important differences between this recession and the last one, in terms of the housing market:
1. Current mortgage lending standards are much more stringent.
Below you will see a chart known as the Housing Credit Availability Index. The actual data shown is the percentage of mortgages that were likely to default within a given time period. You can see that leading up to 2008, a much greater number of risky loans were being originated. During that time period, (2004-2007) if you could fog a mirror you could probably get a mortgage. Fast forward to now and the percentage of loans likely to default is a third of what it was leading into 2008. In short, it is much more difficult to get a mortgage now than at any time in the last two decades.
2. Prices are not rising at astronomical rates.
I know what you’re thinking … “Yes, they are!” If you’ve been watching home prices in the Portland Metro area over the last few years, you’ve seen them rise significantly. Oregon has seen appreciation rates slightly above the national average over the last few years. From the beginning of 2015 through the end of 2019, homes have appreciated 46.5% in Oregon compared to the national average of around 30% (FHFA, 2020). The reasons behind that require a whole different conversation that we can get into another time.
Take a look at the graph below and you will see that, leading up to 2008, home appreciation in the United States topped 10% per year. As we know, prices bottomed out in 2008 and began a long, slow crawl out of the gutter. Appreciation eventually stabilized across the country at around 5%. Historically, residential real estate appreciates at an average of 3.6% (FHFA, 2020) over long periods of time; however, this number can vary drastically from state to state and even neighborhood to neighborhood. That said, it is still useful as a baseline for the sake of comparison.
So yes, it is true that home prices have been steadily going up and at a slightly higher rate than “normal”; however, we are not seeing the crazy appreciation in short periods of time that we saw leading into the 2008 crash. We are seeing healthy appreciation.
3. Months of inventory remains low.
Leading up to the last recession, months of inventory (the length of time it would for all the active listings to sell if no new inventory was added) at a national level was very high. Generally speaking, four to six months of inventory is considered a balanced or neutral market, one that doesn’t particularly favor buyers or sellers. Just prior to the 2008 crash, there were nearly ten months of inventory across the country. This was pushed even higher as the economy imploded, eventually peaking in January of 2009 at 12.2 months of inventory. With so much supply and rapidly dwindling demand, it’s easy to see how pricing crashed, right along with the rest of the economy.
As of March of this year, the national inventory level was at a balanced 6.2 months. Here in Portland Metro, our inventory levels are much tighter. Across the region, we are sitting at around 2.1 months of inventory as of this writing, and in certain pricepoints and areas, it is as low as 1.5 months. This means that even if the market slows significantly, there is still much more demand than there is supply. This will almost certainly foster a healthy market as we move forward through this recession. Even if twice as many homes were for sale right now with the existing buyer pool, we would have what is considered a healthy market.
4. Homeowners are equity rich, not tapped out.
This may be the most important difference between this recession and the last one. Leading into The Great Recession, homeowners had become accustomed to treating the equity in their home as an ATM, doing cash-out refinances and opening home equity lines of credit (HELOC), and subsequently spending that money in less than responsible ways. In 2007 alone, US homeowners took out $239 billion dollars of equity from their homes.
In contrast, leading up to this recession, homeowners have been much more conservative with the extraction of equity from the value of their homes. Concurrently, equity levels have risen to record highs as you can see on the graph below. As of the end of Q4, 2019, US homeowners have a total of 18.7 trillion dollars of equity. In fact, nearly 39% of all homeowners own their homes free and clear (US Census, 2018). Going into the last downturn, many homeowners were very thin on equity, and thus, when prices tanked, they saw little reason to stay at their house given the negative equity situation. This set off a massive amount of foreclosures, further punishing the already battered housing market.
This time around, far more homeowners are positioned to weather the storm, should home values start to drop. Locally, significant drops in price are unlikely due to the previously mentioned low supply, high demand.
When it comes to our local market here in the Portland Metro area, buyer and seller activity is already on the rebound. The 50% drop in buyer activity that we saw early on has almost recovered to pre-pandemic levels. Sellers that decided to hold off on listing their home for sale once the stay-at-home order went into place are now deciding to continue to move forward.
To be sure, buyer and seller activity is still down compared to this time last year and this will likely continue to be the case as local economies incrementally get going again. There is an interesting disparity in these numbers though. Compared to last year, buyer activity is down 25%, while new listings are down 33% (RMLS, 2020). This is having the effect of pushing inventory levels even lower than they already were.
Even during this pandemic, we are seeing multiple offer situations in many cases. Three months ago it might have been six to eight offers, even more sometimes. Now we’re seeing two or three, maybe four. It is especially competitive around the median price point, $424,000 for the Portland Metro area. Anything in that range or lower is still selling extremely quickly. Months of inventory doesn’t get above two months until you get above $500,000.
What does this mean for you if you are thinking of buying or selling soon?
BUYERS
If you have been planning to buy a home this year, chances are it will be highly competitive. It has been very competitive for buyers for the last several years and will most likely remain that way for the foreseeable future. In fact, there is a strong possibility that as things begin to open up and more people become comfortable with the idea of moving forward with buying a home, prices will start to rise quickly via multiple offer situations that drive up the final sale price.
Consider what kind of monthly payment you can afford and how much you are qualified for. If you are qualified for $400,000 now and we see a 3% increase in pricing over the next three to six months, which is very possible, you may be priced out of the market. Either that or you will have to make sacrifices when it comes to location, size, and features of the home. As the pent up buyer demand is released upon the market, it could turn into a little bit of a frenzy out there.
Of course, you need to make the decision that is right for you and your family, and perhaps it does make sense for you to wait. Only you will be able to figure that out. Certainly, it would be wise to reach out to your realtor and get their input. A realtor’s job is to provide you with facts and guidance so that you can make the best, educated decision when it comes to your home purchase.
SELLERS
For those of you who have been thinking of selling or were already planning to do so, you could hardly ask for a better market to enter. There is so much buyer demand right now, interest rates are low, and so are inventory levels. Strike while the iron is hot!
Understandably, you may have concerns about the health and safety of you and your family and are apprehensive about letting strangers come into your home for showings. It is natural to feel this way and I can assure you that any and every measure is being taken to make sure that showings of occupied homes are executed in a responsible manner. As the owner of the home, you are allowed to set rules and restrictions that you deem necessary to preserve the sanctity of your domicile. Your realtor will be able to guide you through this process and help you establish protocols for showings that meet your standards and will help keep you at ease throughout the process.
Selling your home is stressful even during the best of times and with all that is going on right now, the most important thing is to do what is right for you and your family. For some, that may be to hold off on selling your home and for others, this could be a golden opportunity for you to move forward and get into the next home of your dreams!
Uncertainty, a word you probably hear countless times a day, is still one of the best ways to describe what is happening right now in the world. This can lead to a kind of paralysis wherein we are simply unsure of how to proceed. I hope that, in reading this post, you have gained some perspective and insight that has perhaps quelled that feeling, even if only slightly.
If you have any questions or comments about any of the points I’ve made in this post or any of the information contained within, or if you have any other questions, real-estate related or not, please comment below. There are buttons at the bottom of this post to reach me via phone, email, and social media. Please feel free to reach out to me anytime, using any of those methods.
Thanks for reading!
