Housing Market Going through a Reset?
In 2007 to 2009, the housing market went through a great property price reset.
Companies could not hold up and a housing market crash ensued.
It was the era of sub-prime lending, where major companies were caught off guard by a collapsing banking system. Today, that situation doesn’t exist. The banks are strong. Still, investors, property landlords, renters, and builders are all wary of what might push this housing market into a slide or perhaps even a housing market crash.
Will something serious break under this tremendous financial pressure? Which companies will be the first signals of a collapse?
It’s most likely we won’t see a great property price reset, but the worry could be the FED isn’t sensitive to crash signals, and their overshoot is a big threat to the markets.
The Housing Market in 2023
The housing market is characterized by bubbled-up home prices where buyers can’t buy and sellers can’t sell. It’s a standoff with no resolution, until the FED decides to lower rates. Yet, consumer spending is strong, job market is strong, and a housing shortage worse than ever. The shortage is fueling very high rental rates, which are falling. In some cities, rents are falling fast. Positively though, it’s a pressure valve that could prevent a rental market crash.
Still, a great property price reset would be a solution of sorts. More properties would be listed for homebuyers and landlord investors, real estate inflation would ease pushing the FED’s rate downward.
Real estate is a major component of the inflation index, and it represents 40% of the economy. If property prices fall, the economy would undergo dramatic changes. There would be turmoil, however given the savings of Americans, many landlords and homebuyers might be ready to buy at the reduced prices and would likely enjoy greatly reduced mortgage rates too.
So it’s not hard to conceive that many Americans might wish for a great property price reset.
From the Brookings Institute:
“Real estate is cyclical. Industry players are accustomed to periodic market resets, where credit tightens, demand is weak, and the construction sector sheds jobs. During these “resets,” some combination of time, bailouts, and corporate pivots ushers in the next cycle of growth. The current cycle began with a reset triggered by the subprime mortgage lending crisis and subsequent Great Recession of 2007 to 2009. Today, the industry is overdue for its next reset—but this one is different.”
Brookings in their report on the Great housing market reset, cite political and macroeconomic catalysts. This time, a massive infusion of stimulus cash is weighing against $33 Trillion in debt with the sudden rise of mortgage rates on bubbled up property prices.
“Regarding the Great Depression, … we did it. We’re very sorry. … We won’t do it again.”
—Ben Bernanke, November 8, 2002
Former FED chairman Ben Bernanke, 4 years ago chimed in this response to a market reset:
“the most damaging aspect of the unwinding bubble (2007) was that it ultimately touched off a broad-based financial panic, including runs on wholesale funding and indiscriminate fire sales of even non-mortgage credit. The panic in turn choked off credit supply, pushing the economy into a much more severe decline than otherwise would have occurred. My evidence for this claim is that indicators of panic, including the sharp increases in funding costs for financial institutions and the spiking yields on securitized non-mortgage assets, are strikingly better predictors of the timing and depth of the recession.”
For some prepared landlords and property management companies, a housing market reset represents new business opportunity. Change always generates new purchases and management changes. New properties to manage mean landlords or property management firms will scale up, and adopt improved software and new business models. These might deliver rare market leader changes.
NAR Shows House Sales Down while Rent Prices Rise
The housing market trend continues into this fall. Home prices keep rising while sales fall. The September sales report is out soon, but it will show a continuation of the price rise/sales drop trend. The winter period will intensify that.
With high financing rates, high material and labor costs, with slowed government spending, the construction industry would decline, thus ending its involvement as a prevention to a housing market crash.
Solutions to Prevent the Great Housing Market Reset
Some solutions have been offered, yet within them are sketchy political benefits such as climate change regulations, small business empowerment, office work resumption and more. It shows government and major corporations are still not regarding out of control costs for their panaceas.
NAHB and New Construction Stats
NAHB’s Robert Dietz reported over the last 4 quarters, 68,000 single family, built to rent homes began construction, which is a 42% increase compared to the 48,000 estimated SFBFR starts in the prior four quarters. Built for rent is said to be a major chunk of the new rental housing market.
The drop in construction is another signal to buyers that others won’t be buying in 2023 either. Permits dropped 4% from in September 2023, housing starts rose month to month, but are down 7.2% YoY, while completions rose 10.2% from August (+1% YoY).
Buyers Giving up on the Home Ownership Dream
A report on the Street.com suggested Americans are giving up on the homeownership dream. Those in Canada, Germany, UK and Australia are likely succumbing too, and are in the great reset period now. They cite a new study of buyers which suggests 94% are living in homes they can’t afford, and 51% believe homeownership is unattainable.
They now believe home ownership is just a lifestyle choice, and only 45% of renters plan to buy in the next 5 years.
We wonder how everyone feels about what is ahead for us beyond 5 years.
The big mental reset is due to unaffordability and that the outlook for purchases is worse for buyers for years. As savings run out and the job market falters, demand will be further eroded.
Affordability has sunk to its lowest level since the 2007 financial crisis.
Yun suggests home prices could fall about 15% potentially in California perhaps creating some opportunities there. Yet California home prices are leading the nation and affordability may be the number one issue there forever. Buyers in California may be fully resigned to the idea they will never buy in the state.
The focus is squarely on rental properties and investment to support the development of more rental properties (free enterprise builders).
What Drives the Great Reset of Buyer’s Outlook
The great 2024 expectation could involve:
- buyer resignation: home prices and mortgage rates won’t drop much and are too far out of reach anyway
- homelessness worry: some believe they may not even be able to afford to rent
- savings eroding: they will not be able to save for a home purchase (high rent and taxes, student loans, worsening economy)
- unrealistic homeownership dreams: they are being delusional about eventually buying
- mortgage rates stay high: government is in debt, needs to raise capital and can’t lower them
- seller indifference: they want their price and won’t accept price-discounted bids
- government support of the housing market: remains weak and could weaken further
- NIMBY interference: local governments and regulators won’t allow new construction
- government and business is dependent on real estate profits/fees: tax rates are rising yet revenues are falling
- builder fear: builders can’t or won’t stick their necks out like they did last recession
- military refocus: gov spending going to military
- US GDP is weakening: unemployment is going to rise, wages down, banks unwilling to lend
- commercial office real estate on the edge: vulnerable and can’t take a setback
The Silver Lining
This big mental reset’s silver lining is that we could see better support for the rental market, and of course profitability is supported for residential real estate investors, landlords and property management companies.
Many Americans may not understand the implications of building restrictions, high tax loads, and trillion dollar stimulus spending. The outcome is lasting and not temporary. Through a home and investment property price drop, the demand for apartments and rental houses will be solid.
Residential property price drops will help free up some inventory and lower rent prices, which should help make the rental market healthier. Businesses will be altered and new property mangement companies will evolve from it.
This is why smart money should likely be invested in rental property to serve the real, actual needs of Americans. The great reset will generate clarity and allow everyone to adjust to what will be, for whatever length of time it lasts.
There won’t be any quick solutions for the US housing market, which is why we’re seeing buyer/renter migration to cheaper jurisdictions. Right now, stats suggest people are stuck. With a recession, they would be on the move.For you as a landlord, developing a strong marketing and promotional strategy is a must. This will help you manage the threat of a rental market price reset.
What will happen after the reset? We’ll have greater acceptance of and support for the rental market and perhaps address the national housing supply crisis will ease.
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*The above post is the opinion of the author and may not reflect the beliefs of ManageCasa, its partners and affiliates.
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