The Expert Podcast

The question on everybody's mind is what's happening with real estate prices. With home prices, there are a lot of predictions: it's going to go up, it's going to go down, it's going to stay the same. The bigger question is why is it going to do whatever it's going to do? There are guesses either way, but if the question is the why behind it, now you have a better answer that might be more reliable. If the reason that a person thinks home prices are going to go down is just because they happened to have gone up, well, that's not automatically a reason they're going to go down. Prices have gone up many times before, and they kept going up. If it's because it matches a previous pattern like the 2008 housing crash, well, then you have to look at whether the same factors are in play.

Certainly, real estate prices are extremely high. In fact, the price isn't even the biggest factor in affordability. It has to do with the interest rate combined with the price. For an average house right now, you're going to be looking at a mortgage payment of about four to five thousand dollars, including taxes, insurance, and interest on a median price house in the four hundred thousand dollar range. So, that's going to put the affordability of a home out of reach for a lot of buyers. Is that going to affect home prices? Well, it also depends on availability and supply. If there's no homes available to buy, the few that do come on the market are going to get snapped up, even if they are high, because people need a place to live. That may not be the case, but before we need a knee-jerk reaction to say home prices are going to crash, you have to make sure that the underlying reasons are true.

TD Bank, one of the largest financial institutions in North America, predicted that home prices would bottom out in early 2023. Well, we're in early 2023 right now. Does that mean the home prices have bottomed out? Maybe. Maybe not. Maybe they mean the first quarter or second quarter of the year. Certainly, there's a reason to think that prices aren't going to go up anymore. That's obvious. If they go up much more, nobody's going to be able to afford to buy them. But are there still enough buyers to absorb the inventory that's out there at the current price point? Going up more probably isn't going to be any good, right? If you're a home seller, you're probably not going to be able to go up any higher on your price. But how far down do you have to go—five percent, ten percent, even twenty percent? Look, even if real estate on average goes down twenty percent, that's still going to be way above where it was in 2018, and with the mortgage rates where they are now, the payment for that house is going to be close to double what it was in 2018. Even if prices come down 20%, it's unlikely to come down that much.

Part of the underlying fundamentals that are quoted by TD Bank is that employment is still good. People still have jobs—they may not be high-paying jobs, but there's still employment. What people are doing now is they're actually finding ways to reconfigure their finances. Either way, the future of home prices—single-family home prices—is much less certain than it's ever been. Anybody who hazards a guess about what's going to happen probably has less confidence in that prediction than ever before. In 2007 and 2008, when the housing price crash happened, lots of people predicted it. They said, "Look, this doesn't make any sense. People who are taxi drivers making $500 a week are buying $300,000 houses." It didn't make sense. But right now, there's less clarity in the marketplace about what's going to happen in the future.

Even though the prices are high and the interest rate is high, there's still people that want to buy a house and still people that have the ability to do it. The unknown is whether the equilibrium of buyers and sellers is at a point of matching up. Are there more buyers than sellers, or more sellers than buyers? Another question is: in order to get a housing price crash or decline, both sides have to agree on it. Just because buyers want prices to go down and they want the price to crash doesn't mean the seller has to lower their price. The seller sets the price. Until the seller is willing to sell that house at a lower price, the sale does not happen. You have to have a willing buyer and a willing seller. How many willing sellers are there to discount their house by 20 percent?

First of all, do they have to do it? Well, most of the sellers have equity. They don't have a loan that's breathing down their neck, making them unable to afford the house. They have a two percent mortgage at a low price. They could probably Airbnb or rent it out and make their payment without having to give away the farm on price. In addition, there's no inventory coming on the market. Builders have shut down. New home builders are not building any homes. The inventory of people selling is up higher than it was a year ago, but it's not where it was five years ago. At the same time, there's still a 5 million home shortage in the U.S. of houses versus people that need houses, so that's putting pressure on the market. Where does that all settle out? There's also not going to be a huge wave of foreclosures in the marketplace because there wasn't risky lending. So, there's not a lot of people that are going to get foreclosed out of their house. There's a lot of tenants being evicted, but not people who are foreclosed on an owned home. So, that's going to be another factor that affects the market.

It may be a stalemate. That's what I think is going to happen: buyers aren't going to buy, sellers aren't going to sell, and so no houses get sold. People are going to hunker down where they are and stay where they are. Certainly, there are people that have to move because of a job, or people that are forming a new household—right? They get married, have kids, and they have to buy a house. They may be stuck with a rental for a longer period of time because there's no new inventory coming on the market. Builders are not building. Developers are not doing new subdivisions because of the fact that they're not sure if they're going to sell them.

Another parallel to this: we're seeing even in the car market, dealers who are stuck with inventory that they bought up—all these used cars at high prices. We've all read about it. They bring them to the auction to try to dump them. They're getting bids less than what they paid, and they're not selling them. The no-sale rate at auto auctions is at 50%, meaning half the cars don't get sold because the buyer's bid at the auction isn't enough to get the seller to sell. So, it's like a stalemate. This is an even worse factor with houses because, look, the dealer doesn't need that car. Right? Nobody needs to have, if you're a dealership, 50 cars on your lot if you're not selling them. Somebody needs to have a house. So, discounting that house and cutting it loose at a low price isn't something anybody needs to do. It's more likely a dealer is going to do that with a car than a resident is going to do that with their house.

So, until the sellers have this need to voluntarily sell their house for a lower price, the market's not going to go down. What would trigger that? Job losses. Right? But right now, job losses really aren't in the mix. Yeah, there are some layoffs and some waves of employment reduction, but it's not a huge wave yet. If and when that happens, that may be a factor in turning some inventory loose. Drop some comments below with your opinion on this so we can get a sense of the pulse of what's happening in your market area.