A Wave of Inventory Hits the Market. Is it Too Much?

Realtors, Lenders, and homebuyers have been praying for more housing inventory since the pandemic began. Housing inventory fell to as low as just 300,000 in the U.S. for sale by the fall of 2021. This is 1/10th the inventory we had 15 years prior. Record low mortgage rates combined with record-low inventory led to insane bidding wars across the U.S.

Over the last 6 months, we have seen mortgage rates almost double, leading to an affordability crisis in many parts of the country. We have seen homes listed for sale in Boise, Austin, Seattle, and Port Lucie more than double in the last 60 days. Inventory in the U.S. always rises during the late spring and summer as sellers look to move during the summer break. We have seen a 50% increase in the number of U.S. homes listed for sale. However, this is what we need and what we want to see. As a real estate professional putting a sustainable housing market ahead of my personal financing interests as a mortgage company CEO, I want to see housing inventory rise back to 2019 levels. We will get there if mortgage rates stay over 5% for the next 6 to 9 months.

Housing Markets Seeing Above Average Homes Listed for Sale

Home values should decrease by 10% to 15% in about half of the housing markets in the U.S. However, the remaining 50% of markets will behave very differently.

Markets in the Midwest and Northeast will likely see less than 10% home depreciation due to experiencing a milder housing boom than the west coast, southwest, and southeast markets. We will also see markets like Austin, Boise, Seattle, San Francisco, Salt Lake City, Raleigh, Nashville, and the west coast of Florida see more significant price declines, as much as 30%

Below is a chart of the markets I expect to see the most severe price declines over the next 12 to 18 months.

Austin, TX is my pick for the housing market that will see the largest drop in home prices over the next year. This market is most susceptible due to the following metrics:

• P/E Ratio: This is a metric that shows the number of years of income it takes the average person living in that market to cover the cost of the home. Ex: Austin taxpayer earns $60k/yr, and the average home price is $600k. That would be a 10X PRICE TO EARNING RATIO. It would take them 10 years of PRE TAX income to buy the median-priced home. The higher this is, the more likely home prices will decline.
• P/R Ratio: This means the difference between what a mortgage payment would be on a home compared to what it would rent for. For example, with 5% down, if the mortgage payment is $4,000/month and the house rents for only $2800/mo. Then this would be a 30% discount. Meaning it’s 30% cheaper every month to rent the home vs buying the home. The bigger the discount, the more likely a price correction to bring balance to the market.
• The last measure I use is the Trend Crash. This metric shows how high current home prices have risen compared to their 25-year average appreciation. If home prices on average grew at 5% per year over the last 25 years and in the previous 24 months prices increased by 80%, then this market is grossly overinflated and likely to see a more significant correction.

Here are the 25 markets most likely to experience a price drop greater than 22% over the next 18 months.

Even with last months strong jobs report I still firmly believe we are in the early stages of a recession. A recession is a natural market cycle and is needed to rebalance the market.

If I had to outline a timeline of my expectations for the US Housing Market and Economy, here is what it would look like:

• Federal Reserve Hikes Rates Again by .5% or more end of this month
• September – a Recession is officially declared after negative growth in the US Economy during the first 6 months of 2022
• Fed Reserve hikes rates one more time in September
• Mortgage Rates stay over 5% until early 2023
• Fed Reserve stops hiking rates by end of 2022
• Mortgage Rates begin to decline in spring 2023
• Housing inventory reaches 2019 levels by spring 2023 in 3 out of 4 Housing Markets
• By early Summer 2023, home prices have modestly softened, and mortgage rates fall below 5%
• Homeowners who took advantage of a cash-out refinance in 2022 have funds on hand and begin to swoop up bargains in the market as well as refinance into mortgage rates that are 1.5% lower than the 2022 higher
• Rents remain elevated as rental homes are in high demand due to population growth
• Mortgage rates reach 4% by the end of 2023.

The last point I want to make is there are many doomsdayers that are calling for 7% to 9% mortgage rates and also calling for a deep recession. Macroeconomics does not allow for both of these items to come to light at the same time. The only way mortgage rates will reach 7% to 9% for conventional financing would be in the economy continues to run hot and the fed has to continue hiking rates to bring down demand.

As an economy that is fueled by consumer spending, the only way our economy will continue to run hot is if consumers keep spending massive amounts of cash buying consumer goods. This means we see elevated home sales and increasing consumer discretionary spending. Now we have already seen both of these numbers begin to fall dramatically since the start of the year. Unless we see a dramatic change in our economy in the next 30 days you can definitely rule out 7% to 9% mortgage rates.

Please remember the crash of 2008 was caused by excessive subprime mortgage lending (nonexistent for the last decade), insane overbuilding by home builders, and a large number of adjustable-rate mortgages being made with little to no down payment. None of these items have existed for the last decade. I predict a similar recession to the one we experienced in the early 2000s following the dotcom crash.

I am currently monitoring the market for good Airbnb opportunities in strong markets as well as continuing to purchase multifamily homes (2 to 4 units) in strong job markets with a heavy concentration of government and public service jobs (health care, law enforcement, etc).

If you have any questions about taking cash out of your home while values are still high to pay off high-interest debt or set aside a reserve to purchase some investment properties in the next 6 to 12 months feel free to call 951 595 3495 or email me at decker@modernteam.com

Follow me on Instagram @thebriandecker where I post daily content on all things investing and housing.