Is the Real Estate Market Crashing?
by Peter Rizzo
This is a headline that I have been seeing over and over again in many of the online publications such as Forbes, Wall Street Journal and many others.
One of the reasons for it, is that we are in a society of Clickbait Journalism (People are paid for articles by the number of clicks it gets, not for the content). Many writers make the title so dramatic that people can’t help but click and see what the story is, even if they weren’t initially interested in the topic.
Somebody might say I did that and I probably did for effect, but I’m not being paid on how many people click on the link to read the story. I think it’s important to understand the dynamics of the real estate market, for many of our clients use our platform for real estate investments. You can then make an educated decision rather than an emotional or fearful one.
So, let’s delve into this. Is the real estate market crashing? Some say a minor slowdown or balanced market is coming and others such as the CEO of a large real estate firm, that we are in for a price crash. The crash theory has gotten a lot of play, as has this person’s take that there are so many fall throughs because the markets are ready to nose dive. Mind you the CEO’s background is in software development and built a firm that’s completely unprofitable, by developing and using algorithms.
Looking at the algorithms, in his mind, there’s an iceberg in the way. I talked to seasoned veterans in the industry to find out their take. They have a much better picture of the market and opportunities that may come about and here are the reasons:
1. Mortgage rates have actually fallen in the last month, for even though the federal reserve has raised rates they do not set mortgage rates. They just set the federal funds rate. The last two red hikes (¾ of a percentage) in July and June actually caused mortgage rates to drop. The truth of the matter is that mortgage bonds, those that are the pool of residential mortgages purchased by Fannie Mae, Freddie Mac and others hate inflation. If the investors in the market for mortgage back securities have faith that the rate hikes will control inflation, the mortgage rates will go down or stay stable, keeping the affordability of housing what is right now.
2. There is still a very low supply of inventory. With a pandemic causing material shortages, labor shortages etc. more housing units need to be added to the market in order to balance the demand.
3. Lack of oversight caused the last crash in the housing in market. That has not been the case during this cycle. Even though there have been some very aggressive mortgage plans, there still needed to be equity and the buyers need to have some skin in the game, so it is much more difficult to walk away from the equity you have put in or built up.
4. The large fall thru rate did not come from buyers not being able to get money, but because of all the press and Internet articles calling for a big downturn. In many cases the buyers tried to renegotiate and the sellers said no let’s put it back on the market. There were also buyers coming to their senses and stopping the panic buying that occurred most of 2021.This comes from a balanced market which is what we are starting to see.
5. Real estate investors are not wholesaling their portfolio as many stock market investors do. A good portion of their investment decisions were made on percentage of return from rents or other income and that percentage continues no matter how the market values itself.
The bottom line is, if you are considering investing in real estate or any of its different investment opportunities, get your information from licensed professionals educated in the market. The percentage of your return with rentals will continue no matter what the market does. And lastly there will be some bargains for many people are believing the internet and rumor, rather than hard data from a professional.
Good common sense article Peter.
Good thoughtful analysis.
Good analysis! As a real estate professional, I agree with all your points.