2022-23 Housing Market. Correction or Crash?

As the old saying goes, predictions are hard, especially when they involve the future.  I don't think any of us in real estate knew at the beginning of 2020 how radically the market and the whole world was going to change by the end of March of that year. When the pandemic first took hold, seemed like most thought that home prices would come down.  Seemed logical at the time. People were not going to be able to get out. Some industries, like hospitality and travel, all but shut down for a while. Instead of a decline, well, in hindsight we all know how that went. 

So now we have the rising interest rates and I know my news feed is filled with contradictory stories of what direction the housing market & prices are going to go.  One talks of affordability issues & predicts a coming crash as a result, another talks of differences between now and the 2008 crash, the still low inventory and how prices will flatten or still increase modestly.

Let's take a moment to consider these different stories & where they're coming from.  Yes, some will come from real estate sources that tend to, well, we'll call it always seeing the glass half full when it comes to the housing market. By the same token, the media in general does tend to have a bad news bias.  When interest rates, for example, rose from the historically low, (which in other words, crazy low, not seen in recent times low), some for example, will tout the increases as percentages, which can make rate increases sound all that much more dramatic. They're bad enough, they don't need to be dramatized any more, thank you! There are other examples of pushing the most negative spin on the market, but let's move on. 

My crystal ball isn't any better than anyone else's, but here's my thoughts on where we are and where I think things are headed. Time will tell if I was on the money or my crystal ball was on the blink today. 

First of all, I'm not convinced that 6% - 6.5% range interest rates, or even a little higher, just on their own are going to crash the market.  Slow it from the insanity we've seen this past couple of years? Oh yes, absolutely! Something short of the super hyped up market we've had, where buyers were waiving inspections and promising to name their first born after the sellers, to a more balanced market where people do inspections, negotiate, etc., does not equal a crash. There's a whole lotta room between the hyper market and a crash that is, quite frankly, just fine. 

I know, interest rates are double what they were! The mortgage on a $500,000 house now costs so much more a month than before! I get it, but again, interest rates have gone from crazy low to rates that, over the long term, aren't that high from a long term perspective.  I'm going to date myself here, but for example, I bought my first home back in the 90's. I got around a 7.5% interest rate and was thrilled to get it! When I first got my license years before that, interest rates had gone to 18%. Again, that's for a mortgage, not a credit card.  Interest rates in the sixes? Yeah, I've sure seen better, but I've seen worse and, (unless we're talking those 18% era days), the housing market did fine with rates like that. It may take historically low interest rates to create a hyper-fevered market, but I don't think anything short of historically low interest rates is going to crash the market, even with some level of affordability issues .

If you've ready any articles on this subject, housing inventory is always mentioned. Some tout currently tight inventory as helping to keep prices from falling while others talk of how inventory is dramatically increasing & that will lead to lower prices. First off, I don't want to make too much out of the inventory component, because quite frankly, it can turn on a dime. That's not to say it's not an important component. At the end of the day, no matter what anybody says about anything else, supply and demand rules the day. 

The other thing is all markets are local, and what happens in Boise or Austin or New York isn't necessarily what's going to be happening in Houston. What happens in the Woodlands may not be the same as what happens in Pasadena for example, even within Houston, different markets will undoubtedly perform differently, they always do. 

So all that said, as of the publication of this post in early October 2022, tight inventory is still a thing here. Yes, inventory has risen some, but it's still way below pre-pandemic levels.  Some media stories will quote things happening in places like Boise & try to make it sound like it's universal, just be wary of that. Also, for example, if inventory in a city or market, for example, was 300 pre-pandemic, dropped to 100 at the peak of the mad rush market, and is now 150, some stories will trumpet the 50% increase in inventory, and barely mention it's still half of the pre-pandemic levels.  It's not that the stories aren't true, it's just they need some perspective sometimes. 

This is an unscientific and mostly anecdotal observation, but what I've been seeing with a lot of the inventory that has increased, is a lot of it really isn't, well, that good.  

One common example is it seems flippers were not able to get the really low prices on what I'll loosely define as the train wreck listings that they would renovate for a profit. Because they ended up paying more up front, after renovations they're needing to get more and more to cover their margins and make a profit.  Many are now at what I call aspirational pricing. During the last couple of years, people could test the market by pushing the envelope on prices. Since many buyers were willing to cover an appraisal shortfall just to get a house, many were successful, very successful.  I think that train has left the station now though. 

So now you have some nicely renovated homes hitting the market, but at prices that are not supported by comparable sales.  I'm seeing many of those sit.  You may have noticed the same thing. 

During the peak of the market, houses with less desirable locations that would normally be a little harder to sell, such as facing a busy street or backing up to commercial development, seemed to be going a quick as anything else.  I'm also seeing inventory on those type of houses backing up some.

In anything approaching a normal market, most sellers knew they had to prep their houses to not only get the best price, but to just help get it sold. Making sure the house was always clean, de-cluttering, mulching the flower beds, doing some repainting, etc. The usual stuff.  In some situations, like estate sales where the heirs and family members are not local, you can have houses where no one is willing to so much as change out a burned out light bulb, let alone do upgrades or repairs. During the past couple of years in many cases it didn't seem to matter, those houses would sell too, many times in multiple offers. Things are slower now and those houses that simply don't show well are definitely sitting longer. 

I do think with some of these less desirable or less showy type listings, if we do see any prices come down, it would be limited to some of those situations. I'm much more skeptical of seeing prices come down on the rest for a few reasons.

We do still have tight inventory, especially on well-priced, more desirable types of properties. Of course like I said earlier, that could change, but as it stands now, it's still on the seller's side.  I also don't see demand shrinking too terribly much because for one, it's not like people have stopped moving to Houston. The city is still growing.  That, combined with the demographics of the millenials being in their prime home buying and housing formation years, and will be for a while, all tends to bode well for the Houston housing market.  Now I know this is where people talk about affordability crimping things, but people have to live somewhere, and this is where I think the hot rental market provides another support to the housing market. If anyone is reading this and has been renting for a while, I feel pretty confident betting you've gotten a rental increase (or two or three), that made your head spin. I'm sure you are not alone and nothing makes someone think about how much they need to buy than repeated brutal rent increases.  If you've gotten one, tell me you didn't think, I need to look into buying something! It happens, and I don't think six-something interest rates will prevent a lot of people in those situations from making the change from renting to buying.  

We also continue to have a strong job market, and that's always going to be a big factor for the housing market. 

So as long as those things stay true, I don't see prices coming down, except possibly on some of the less desirable properties, and I'm not thinking just a whole lot, if at all, even on those. 

If we get into a recession with significant job losses, then all bets are off I suppose, but it would take a whole, whole lot of people losing their jobs to really create any significant price drops.

One thing the housing market does not like, is shocks to the system. The rapid rise in interest rates has definitely done that.  This has left a lot of potential buyers a little numb, especially if they're already a little beat up from being outbid multiple times earlier this year and/or last year, on houses they really wanted. I am of the opinion that a lot of folks are currently sitting on the sidelines, uncertain about the direction of the market and possibly waiting to see if prices come down. I may be wrong on this, time will tell, and I know I risk sounding like the quintessential Broker talk that it's always a great time to buy! but hear me out on this one. 

I think there may be a window of opportunity for buyers right now. We are past the summer, past the time people buy houses around school schedules, past the peak season in whatever passes for a normal year, (what are those btw?), and heading into what is traditionally the slower real estate season.  Just like buyers, a lot of sellers are sort of shell-shocked, not getting the volume of showings, multiple offers etc., that they would have received just a few months back.  Many sellers may be in a position of being able to take their time to sell, although many who are will also be the ones to take their homes off the market for the time being or at least for the holidays.  Sellers that are left are also facing many uncertainties and may be much more flexible than they would have been in the recent past. That's not to say it's time to low-ball, but you have room to negotiate that buyers haven't had for a good while now.  Once people get accustomed to the new normal on interest rates, especially if they stabilize or if they decline any, we could easily see a strong Spring in real estate. I think there may be a window of opportunity right now to try to make a deal on homes as sellers enter the slower winter season.  Barring some massive negative economic changes, I just don't see prices coming down, and things will in all likelihood get busier in the spring, limiting that window of opportunity. 

All that said, the best time to buy is when you're ready.  More than anything it's a very personal thing and a lifestyle choice you do for yourself and your family.  When you are ready, give me a call. I'd love to have the opportunity to earn your business and help you navigate your home buying journey.