The Expert Podcast

The real estate market is changing quite a bit. Home sales volume is down dramatically, and a lot of it has to do with interest rates, house prices, and even lumber prices, which have come down. But there are three or four reasons why this is just a temporary blip in the system. Very soon, building will go up, and more importantly, lumber prices will go back up. Housing prices will probably stay about stable; they won’t go up, and they won’t go down. Now, you may see some reductions in listing prices, but that doesn’t mean that the home market values are going down. Here's why.

Let’s say a home was worth $350,000 in 2019, and that home shot up to $450,000, $550,000, $650,000, and $750,000 at the beginning of 2022. Now, if somebody’s going to put that house on the market and take a shot, they may say, “I’m going to put it on the market for $799,000 in April or May of 2022” to move the market a little higher. Well, now all of a sudden, wait a minute, there’s a pullback in the market, house prices are down, and there are more houses for sale. People aren’t buying as many. The seller may drop the price back down to $749,000. You might think that the house went down in value by $50,000, from $799,000 to $749,000. But that house was $350,000 three years ago. It was $650,000 a year ago, $700,000 six months ago. It’s still above where it was. It may not go up fast in the near future, but it’s not going down.

Home construction has a built-in pressure behind it. It’s like a pressure cooker waiting to blow. Even The New York Times says solving the housing crisis means building, even when no one wants houses. The U.S. is in a deep, decades-long housing shortage. Look at those two words: deep and decades-long. Remember 2008 and 2009, when we had a housing crash? Many, if not most, builders went out of business, especially small ones. The larger builders, like KB Homes and Beazer, slowed down in the 2010s, from 2010 to 2015. In 2014 or 2015, they started ramping up a little bit, but they were very cautious. They were only about five years away from a major catastrophe, so they weren’t going to go out on a limb and build a ton of houses. Even from 2014 to 2019, builders started to get out there but were very cautious, and they weren’t building huge volumes.

In 2019, we had a pandemic, and that shut down the housing construction market. Many job sites were shut down, so you basically only had about five years of lukewarm building to make up for the normal building cycle that went from 2009 to 2022. That’s 13 years of necessity, 13 years of pent-up demand, with only five years of mediocre building volume. That’s why, in 2020, when there was a little bit of a blip in demand, prices went through the roof because there weren’t enough houses. And that’s still the case. The U.S. housing market is under a crisis because of production. The U.S. home deficit doubled from 1.6 million to 3.8 million in two years. There’s your deficit right there.

Now, you might think, “Well, did we catch up?” It got even worse. This is from 2012 to 2019. In 2021, this deficit went over 5 million. According to many experts, in 2021, they started to catch up. They tried to add more, but really, there’s only an excess of about 500,000 houses a year that can be built. So if the deficit went up to 5 million and you add 500,000 extra houses, maybe it brings it back down to 4.5 million. But it’s not a ton. And now, all of a sudden, in 2022, builders are slowing down again.

Here’s another problem: The housing stock is old. The median age of owner-occupied homes is 39 years. In 2005, it was 31 years. Look at the age difference. These are old houses that we have on the market. Even with more homes being built, if you look from 2014 to 2019, homes were being built, which is why you can see this ledge isn’t as steep. But from 2008 to 2014, it was pretty steep. They started building some houses in here, and it shallowed out the curve a little bit. But we still have 40-year-old houses. People want newer homes, and that’s why there’s a lot of remodeling and new houses. So not only do we have a shortage of houses, but we have old houses.

Put those three things together—a shortage of houses, an immediate shutdown of new home construction, and old houses—and it’s just a matter of time. The pressure is out there for home construction. Granted, with interest rates being at 6 percent and home values now over $400,000, there might be a little bit of a catch-your-breath moment. But look at it this way: 6 percent mortgages, for most of the history of U.S. mortgage rates, is considered low. For most of the 70s and 80s, mortgage rates were 8, 9, and 10 percent. At one point, they were well into the double digits—12, 14 percent. Now, most of the people buying houses today never experienced that. They don’t know about that. So to them, 6 percent seems a lot compared to 3 percent. And, of course, $400,000 houses seem expensive when, before, you should be able to buy a house or find one for $250,000 or $300,000, or low $300,000. A decent house now costs close to $400,000.

So what do you do as a buyer? Well, first, you get scared at the interest rate. Then you get scared at the price, and you say, “Well, I’m going to hold off because I’m scared.” Then your feelings kind of get absorbed, and you look back and say, “Well, I’m still renting. I’m paying $2,500 to $3,500 a month for rent, which any halfway decent apartment or rental home is going to be close to $3,000, if not more.” Then you look at it and say, “Well, even if I buy a $500,000 house at a 6 percent mortgage, my mortgage payments are about the same. It’s $3,000.” So once you get over the idea that the interest rate is high and the price is $400,000 or $450,000, you realize that the mortgage payment is still the same, or less, than your rent, or close to it. And you own your house, which is something that most people want to do.

Once the shock value of the new market fades, and people kind of digest and absorb the new pricing scheme, they realize, “Look, my monthly payment is going to be $3,000. That’s what it is. Am I better off renting, or am I better off buying?” And rents are still going up, too. So even if they don’t come to that realization right now, next year or the following year, when the rent goes up by $300 or $400, they’ll come back to reality—especially since there will be more homes for sale. The price may not go down, and the rate may not go down, but now you may be able to find a more appealing house.

Look, one of the reasons why people were so frustrated with buying a house in 2020 and 2021, and the beginning of 2022, is because the only houses that came on the market weren’t very appealing. There was a very limited supply, and sometimes the supply consisted of lower-quality homes. Now, with more people selling, you may have a higher variety to choose from. You may still have to pay the price, and you may still have to pay the interest, but at least you can get a decent house. And once people realize that, the home-selling machine will kick back up.

Now, there are a couple of elephants in the room. If we have a deep recession, and people lose their jobs or don’t have income, they won’t be able to buy a house, no matter what the price is. If there’s a major development with inflation beyond what we already have, and gas prices rise to $10 per gallon, or food budgets go up to $1,000 a month, that could affect things too. But people need a roof over their heads. Historically speaking, the homes that are out there, and that will be available in the next two or three years, can’t instantly be flipped onto the market. This takes a long time—planning, zoning permits, floor plans, and funding for developments. The home construction machine is a very slow-moving process, so having that backlog of buyers built up can’t immediately be satisfied.

The buyers are still there. They may be taking a break for a month or two, or maybe a year, but the demand pressure will still push home sales to keep that price point where it is. You may have more acclimation back to doing contingencies, doing inspections, and doing firm commitments instead of just, “You have to buy, and if you’re not all-cash and you’re not waiving inspections, I don’t want your deal.” You may have sellers be more traditional in the deals they’re accepting, and that will keep lumber prices where they’re at.

We just saw, in a video last week, that lumber is now being traded by the truckload instead of by the trainload. That will help modulate the market, but also put more demand on lumber. You’ll probably see lumber stay in about the $600 to $700 range. It won’t go back to $300, and it probably won’t go back under $500. It may not go over $1,000, but that trading range has shifted up from $3 to $4, probably to $5 to $6, maybe $650 per thousand board feet. We’re seeing this on our construction side, and we’re also seeing it on our insurance side.

The home market is very interesting. Tell us what you think in the comments. What’s going on in your community? Are houses selling? Are they not selling? Are there more on the market? And what about mortgages? Are you in the mortgage business? Is your volume falling off the face of the earth? And are the buyers of good quality, or are you getting bad quality applicants?