The Expert Podcast

If you're a builder or a contractor, you're certainly trying to keep your finger on the pulse of what's going on with the real estate market. Are there properties being sold or bought? What’s going on with the values? It’s a tricky thing because, if you look back 15 years ago, there was the crash of real estate in 2008. A lot of people were stung by that. If you’re a builder or developer, you may have run into some financial difficulties when that happened. You don’t want to have that happen again, so a lot of people are gun-shy about building new spec homes or new construction — understandably so.

Now here we are in 2023, and the question is: What’s going to happen with house prices? If you’re a builder, you might be wondering, “Am I still in a business that has demand?” A lot of people have predictions, and everyone has different views. Some say prices are going to go up, others say they’ll go down or stay the same. Here’s one example from a financial institution predicting that housing prices will bottom out in early 2023. Well, we’re in early 2023. Does that mean house prices are at their lowest and will start going up? What’s the deal?

This also only addresses house prices and doesn’t tackle how many houses are being sold. That’s the big elephant in the room: Who’s buying houses, whether prices are high or low? One key factor is whether there’s still a shortage of homes. According to many experts, there’s a 5-million-home shortage compared to what people need to buy. This shortage hasn’t changed. Whether prices go up to a million dollars or down to $100,000, it doesn’t change the number of houses available. It might affect how many get built, but it doesn’t change the existing supply.

Another consideration is the volume of sales. If more people buy houses or fewer people buy houses, the number of existing homes doesn’t change. For instance, some buyers are moving from rentals into homes, which satisfies part of the market. Others are selling one home to buy another, which is like musical chairs and doesn’t change the overall demand for homes.

So, as a builder, what do you do? You still need to keep your company running. You have to cover overhead, insurance, equipment costs, repairs, employee salaries, and more. There’s definitely work in remodels, additions, and tenant improvements for commercial projects. But what about new construction? Traditionally, new construction has been a major source of jobs for builders and contractors. When will that return?

Prices might bottom out in 2023, but some believe it won’t happen. Even if they do, the real issue is the volume of transactions. I believe there will be a stalemate. Buyers and sellers may both hesitate to act. At a median house price of $416,000, the total monthly payment for a buyer, including interest, taxes, and insurance, comes to $4,000–$5,000. This is significantly higher than five years ago when a $250,000 house with a 3% mortgage cost about $2,000 per month. Even if prices drop by 10% or 20%, payments will still hover around $3,500–$3,800, which is a big difference.

Because of this, buyers may not want to buy at these price points, and sellers may not want to sell either. If you’re a seller and your house was valued at $450,000 but now you’re forced to sell at $320,000, why sell? Most people would prefer to stay put. If they have an extra house, they might opt to rent it out or list it on Airbnb instead of selling it for a lower price.

There are also fewer distressed sellers compared to 2008. Back then, many homeowners had risky variable-rate mortgages or bought multiple properties they couldn’t afford. When rates increased, they were forced to sell. Over the last decade, loan underwriting has been stricter. Buyers needed good credit, steady jobs, and down payments to qualify, meaning fewer people are in a position where they have to sell.

Employment also plays a role. While there have been some layoffs, especially in tech, unemployment hasn’t risen drastically. Inflation is another factor, with higher prices for essentials like food and gas. However, for most people, the mortgage payment on their home remains their top priority.

Even renting isn’t necessarily a cheaper alternative. For a typical property, rents are now about the same as a mortgage — $2,500 to $3,000 per month. Unless someone moves into a much smaller or less desirable rental, they won’t save much money. For housing prices to crash, you’d need not just reduced demand but also a significant number of willing sellers. Without those sellers, prices can’t drop significantly.

In 2008, housing prices dropped significantly, but by 2011 or 2012, they had recovered. That crash was driven by poor lending practices and over-leveraged buyers. Today’s market is different. Most homeowners have fixed-rate mortgages and are not overburdened with debt.

As a builder, the focus might need to shift to remodels, additions, and tenant improvements on commercial properties. New home construction may take a while to pick up. Whether housing prices rise or fall, the number of transactions is likely to remain low, and the new home production pipeline may take a couple of years to recover.