The Housing Market

Audio Version

Hey, everybody. Thanks for coming to the channel here and talking with me today. My name is Sunny with Synergy Real Estate and Property Management, Bakersfield Maintenance and Construction, and Commercial Asset Management. Today, we’re actually going to be talking about an article that just came out through one of the real estate channels here. And they’re talking about how the housing market is going to face a painful correction. And so this is an article written by a CoStar news that’s come out on the economy and the housing economy in particular. They talk about how they had a low rate environment, which kind of everyone knows throughout the past few years that has definitely built up some steam as far as real estate sales, real estate values. And I think that’s becoming very pertinent right now in that we are seeing those raised interest rates. This article actually goes into the fact that housing affordability is really coming down while interest rates are going up. And there is that inverse relationship between them. So as interest rates go up, housing becomes less affordable because your payment becomes more. Therefore, those prices either have to come back down or these people have to look other places. In a majority of areas, you’ll start to see those prices kind of come back down.

And so really what was interesting to me is they put a graph in this article. Housing affordability vanishes as mortgage rates rise.
And what they show in this graph is kind of there’s a back and forth relationship between, okay, I’ve raised the interest rates, now the affordability goes down, I’ve raised affordability, now interest rates are down. And so really what we’re looking at now is there really seems to be a parity where a certain point we can hit, where affordability stays kind of as high as it can be while interest rates stay as low as they can. If you look at this graph, it kind of looks like around that 5 to 6% mark is really where we want to be with interest rates. So long term, 5 to 6% looks like that will keep our affordability at about as high as we can afford to have it. While the interest rates will be as low as we can afford to have it to keep that kind of stable market. If you look at it that way, then we have people now talking about back in the day, people were happy to get an 8 or 9% mortgage and I think that’s not too far off here, but I don’t think that that is going to be sustainable either.
And if we do go that direction, those prices will continue to crater because people will be less likely to afford something. And so, for example, if you were to get a $400,000 mortgage a year ago when the rates were in the threes versus a $300,000 mortgage today, now you’re talking about basically the same payment. Either you’re going to have to come up with another $100,000 to pay for this house or you’re going to have to look somewhere else or the price is going to have to come down. Really, most people are just going to want the prices to come back down. Now, as this is all happening in the background, people can afford things, by their wages. If their wages go up, that is generally a good thing because that gives them more disposable income, which allows them to purchase more, which will offset kind of the increase interest rates that you have. However, if you have increased income, but you also have increased expenses, i.e. inflation, those two things will negate each other.

On top of that, if you have rising interest rates, then you will see a real slowdown in that market as well. Not only are people, yes,
they are making more, but they’re spending more to live the same lifestyle which gives them less disposable income, which means they’re going to have less money to go and buy a property or put things on savings. That then will in turn slow down the housing market, which then in turn brings down prices. If you really look at your wages. So you look at, okay, well, people’s wages are going up as far as dollar per hour. However, inflation is also going up. And so those costs are actually yes, you may be making more on paper, but you’re actually spending more. So net net. It would have been better to go to a lower wage, lower inflation environment. The disparity between what you make and what you have to pay to live is a little bit larger than what it is today, if not upside down. That’s kind of the biggest thing for us now. Home prices have started falling and even rents we’ve seen have started falling. This is kind of taking place in the past few months.
And really, I think we’re going to start seeing it over the next few months as well, as long as they keep on going with these interest rate hikes.
Now, if you keep raising the interest rates, 8% mortgages isn’t far off at this point.

A really interesting conversation would be okay well hard money, which you used to get generally between 8 and 10% is now going to be just regular money. And so do these hard money lenders become actual lenders at this point? And that’s just kind of a whole other topic we can get into in a different video if that is of interest to somebody. But basically then you start to look at, okay, well developers. So, developers want to build single family homes. And so we have huge amounts of starts. And then all of a sudden you start to see that, okay, well, things are kind of teeter tottering. And now you see, okay, well, there’s a little bit less happening on those starts in this article. They talk about really what they’re interested in is what is going to be happening to these home prices and their theory of places that saw the hugest incline. So, for example, the Sunbelt, those places now we’ll start to see the biggest declines as well. As interest rates start to go up even more, as prices start to come down even more. I think what they’re trying to say is that people just flocked to this Sunbelt part of the country that increased the prices immensely over there. As we go through moving forward, people will start to move out of that area and back to places where they came from. As we come out of the pandemic, as we go back to lower home prices in these East Coast and West Coast regions. In doing so, not only are you going to see the effect of increased interest rates, the effect of decreased demand, but you’re also going to see the effect of increased
supply from people leaving. Again, this is all conjecture, but I mean, it does kind of make sense for me. What I’m looking at is with 8% interest rates, people aren’t going to be able to afford to keep their real estate values where they are. And we’re already seeing that. And so really, if we keep on increasing these interest rates, what happens? Really looking at the Fed here and how they’re treating interest rates, it doesn’t seem that they’re saying, oh, okay, well, we’re going to hit some kind of stop somewhere. Really. They’re saying, okay, well, if we need to keep increasing, increasing, increasing, we’ll keep doing that.

But essentially what I think is going to happen is they may take it one step too far, be a little bit slow to come back, and then you start to see a
little bit more of a decline than you would have originally seen. Again, just kind of looking at things and the way that I see them. I would love to hear more in the comments of about what people think and kind of if you have any comments on this article or anything else in the real estate space, property management space. Thank you for taking the time and we will see you next time. Thank you!

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