Spring and Summer Will Tell Us A Lot About #RenterNation

CBS MarketWatch has a story quoting a “prominent economist” predicting a 25% drop in homes sales by the end of the summer:

Ian Shepherdson, chief economist and founder of research consulting firm Pantheon Macroeconomics, is predicting a dramatic fall in the pace of home sales this year. In a research note, he projected that existing-home sales will drop roughly 25% from the annual pace of 6.02 million set in February to a rate of 4.5 million by the end of summer.

“The housing market is in the early stages of a substantial downshift in activity, which will trigger a steep decline in the rate of increase of home prices, starting perhaps as soon as the spring,” Shepherdson wrote in a research note distributed Sunday.

As evidence of this expected slowdown in home sales, Shepherdson pointed to mortgage demand. The most recent data on mortgage applications from the Mortgage Bankers Association shows that the number of applications for loans used to purchase homes is down more than 8% compared to a year ago. Comparatively, demand for refinancing has dropped nearly 50% versus last year.

It’s possible. Anything’s possible. And it is true that mortgage applications are down, way down. Spiking rates + declining real wages = lack of affordability across the board.

However, I think we’re about to find out something very important about the housing market and the economy as a whole this spring and summer. I think we’re about to find out whether investor demand can replace consumer demand.

I’m on record as predicting that we will have a hot seller’s market for the foreseeable future because I don’t think we have a hot seller’s market — I think we have currency devaluation, so home prices denominated in dollars are skyrocketing, while home prices denominated in something else (say gold) are not:

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With just about every bond giving investors negative yields (that is, they’re losing money by buying and holding bonds), I’ve often wondered why people are buying mortgage bonds at all if they don’t have to. Obviously, some funds have to, since that’s their whole charter, but others don’t. I figure quite a few funds will stop buying MBS bonds and start putting that money towards buying the underlying asset: the house itself. They can do that directly, or they can just pour money into residential REITS that go out and buy up properties to turn into rentals.

If home prices drop because of rising mortgage rates lead to drop in consumer demand, I figure investors can step in and buy up those houses at lower prices. Therefore, I’m thinking we might see home price appreciation slow or even reverse, but the number of sales remain flat or even go up.

Shepherdson thinks that dropping home sales could lead to rent increases slowing and even reversing. I guess anything is possible, but if I’m right and investors step in, then I think that’s unlikely absent government meddling. (Think rent control.)

We look at the same facts: rising interest rates, dropping wages, higher cost of living from runaway inflation, etc. should all lead to lower consumer demand. More and more Americans will be priced out of the housing market. That we can all agree on. What we don’t agree on is what happens next. We’ll find out soon enough.

What this spring and summer may tell us is whether wealthy Americans, institutional investors, and family funds will rotate into housing in a bigger way if price appreciation slows and replace consumer demand. That’s #RenterNation for sure. Either that or #VanLifeNation if younger folks are into living in a van down by the river. If investors do not rotate in, then yeah, we’ll have housing market drop significantly and perhaps the long-awaited “normal market conditions” will return. Time will tell.

-rsh

 

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Rob Hahn

Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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