By Kendra Holman | Boomerang Capital Partners
In October 2022, we shared an article entitled “Bottoms Up,” discussing our belief that the housing market was returning to normal. The conclusion/TLDR was: “The ’top-down’ (macro or big picture or overall averages) indicates a market that is continuing to cool after a very hot period. It is expected to come off 10% or so over the next three years. The ‘bottoms up’ (what our investors are seeing) remains optimistic and busy with plenty of opportunities.”
We didn’t crash. Although prices have cooled and will probably cool a bit more, we’ve never been in the ‘crash’ camp – and still aren’t, or we wouldn’t have been lending money at the valuations we were or do now. While the peak is probably behind us for a while, it is nice to no longer have to put up with the talking heads on the news trying to outdo each other, calling for an imminent housing crash.
So where are we? We are seeing lower volumes at prices that have only modestly declined, precisely what the economics of supply and demand would tell us. And if prices stabilize around these admittedly elevated levels, plus or minus a bit, how does this resolve? The answer is with TIME – it’s just going to take a while. And as anyone will tell you: there is no magic potion for beating hangovers—only time can help.
Let’s call this a housing market hangover. So how bad will it be? Well, we must see how we got here.
First, if you recall from a few years ago, conditions were rife for an expansion: easy money, lots of Millennials and demand for a first house, people resettling out of states they were no longer happy with, and the explosion of work-from-home, etc. All that demand butts up against a supply that just can’t keep up, and prices go up. And up. And then FOMO kicks in, and suddenly everyone is doing it, including people who shouldn’t.
Second, inevitably the party ends, and it tends to end quickly. Thinking of the lights getting turned on at the end of the party – everyone knew it was getting a bit late and silly, but now that the lights are on, everything looks quite different. What seemed like an excellent idea just a few minutes ago now seems much less attractive. And your head is starting to hurt. Indeed, you can crash and burn, which may be the most likely scenario if you have really overdone it. Or maybe you can go about your business a bit more tenderly for a while, shake it off, and get back in the game. So, which is it this time?
This time, the current state of the market looks much more like just a nasty hangover. As many have pointed out, loans were much easier to get last time. In fact, too easy as you didn’t even need a job or any assets; prices ripped much faster on a percentage basis; people did not have much equity; incomes were lower; and much supply came online, etc. So a crash and burn seemed to make sense last time.
But this moment is different. Yes, mortgage rates have increased, and that’s a negative, so we can take easy money out of the drivers of demand. But what of the other drivers: demand for a first house, migration from more populated states, work from home, etc.? Those still exist. And the point is not that there is no slowdown; there is, and prices are definitely starting to come down. Now we should be asking how bad it is going to be. And how long does this slowdown last? It will be much less severe, but no one enjoys hangovers.
The concerning part of this slowdown forecast is turnover, possibly even more so than prices. We continue to expect a few more years of this type of lower turnover market. Our real estate investors need homes to become available – investments that they can then improve the value of, and then they need to sell those now nicer homes for a profit. That is all turnover. Certainly, turnover is a related function of price, but our investors add about 15-20% value to the houses they work on, whether overall market prices are high or low. Interestingly, the amount of work and time required to do that type of work has remained unchanged, as reflected in relatively stable budget percentages and loan times.
However, turnover seems to be returning, albeit to more normal levels, like we saw pre-pandemic. Looking at the National Association of Realtors (NAR) Pending Home Sales Index and looking at the ‘West’ region, February has recovered by about 10% off the November lows. Here is a visualization of that historical data (West region only):
NAR also makes forward predictions. While they do not break out their Existing Home Sales by region, they are forecasting further improvements, with existing single-family sales (on a national level) expected to be about 20% higher by 1Q24.
And this is consistent with what I’m seeing with the loan applications coming across my desk. I continue to find new applications from our tried-and-true borrowers because opportunities are popping up. Additionally, the number of applications from new investors is climbing. These are all signs that the housing market hangover is waning, thank goodness! Our investors are shaking it off and stepping up to capitalize on all the opportunities that are still out there.
TLDR: “The ‘bottoms up’ (what our investors are seeing) remains optimistic and busy with plenty of opportunities.”