“Call me when the market tanks.” That was the email I got from a recent buyer of ours. He was expressing in words what many people have been wondering anyway. I could’ve just replied and said, the market isn’t going to tank anytime soon. But I thought I would take an honest and intellectual look at the possibility and how the situation could potentially happen.
For the real estate market to tank (including here in Hawai`i) a large percentage of the population would have to sell their homes at a deep discount, say 30, 40 or 50% off the current value. What would cause a homeowner to suddenly have to “fire sell” their house at such a deeply discounted price? What economic factors would have to be in place for people to suddenly be unable to afford their home or even their vacation home? If you answer this question, then you can probably predict whether the market will truly go in the tank. So, let’s give it a try and see what we come up with.
Economic factor #1 – the loss of a job, the loss of revenue, or mass unemployment across the U.S. would be a trigger that could force people to “fire sale” their home. Well, according to the Bureau of Labor and Statistics the national unemployment rate in July was 3.5%. That’s historically low. Which means there are a lot of people working. In fact, there are 11 million job openings right now. In a normal pre-pandemic year you would have around 4 million job openings. Everywhere I travel across the United States, no matter the industry, I see “help wanted” signs. Everybody needs more labor. If somebody wants to work, there’s no shortage of opportunity and they can make pretty good money. So, people losing their jobs, or a lack of jobs is not an issue right now that could trigger a mass selloff.
Economic factor # 2 – being too far leveraged or underwater financially. This was one of the primary driving factors of the 2008 crash. Right now, we have the exact opposite happening in this country. People have more equity in their homes now than in the last 25 years. Better yet, not only do they have a boatload of equity, but a large portion of the population are in their homes at interest rates between 3 and 4%. This makes the mortgage very affordable and, in some cases, cheaper than renting. Remember, we’ve had people buying and refinancing homes for the last 14 years and they haven’t been doing that with risky mortgages. So, I don’t see this situation being a factor that would cause people to suddenly have to sell their home at a discounted rate.
Economic factor # 3 – too much speculative inventory. No question, too much inventory flooding the market would bring prices down drastically. However, we don’t have anywhere near too much inventory. In fact, we have the exact opposite, which is a historically low inventory. The number of homes for sale in the U.S. continues to drop year over a year and month after month. In fact, home builders are going to build fewer homes this year than last year so that’s not going to help fill in the supply. It would take 10 years to be able to flood the market with too much speculative inventory. So, I don’t see this as an economic factor that impacts values.
Economic factor #4 – Recession. There’s no doubt about it, most experts agree we are in a recession. If you look at the last five recessions dating back to the mid ‘80s, you’ll see the only time in those five recessions where home prices were impacted was 2008. As a rule, recessions, mild or deep, don’t have a big impact on home values. This current recession is mild and what we’ve been seeing is price stabilization, not massive price drops. I suppose there’s always the risk that the federal reserve over tightens the economy with rate hikes, but so far they have done a good job at the soft landing. In addition, since the peak of interest rates on June 15, we’ve seen them steadily drop. I predict that as we get into the fall and winter interest rates will go even lower. I suspect by the end of the year rates will be in the mid fours for a 30-year fixed. Inflation is still a problem but seems to have peaked and inflation doesn’t last forever. Historically, it flows up and down and is probably headed down as we get more people into the labor force and fix the supply chain issues.
Economic factor #5 – some type of global emergency like a pandemic? Wait, didn’t we just go through a worldwide pandemic? And who would’ve thought it would have the opposite effect on the real estate market? A worldwide crisis created the best real estate market in the last 50 years. I’m hard-pressed to think what could happen globally that would be greater than that situation. The war in Ukraine has caused some temporary issues but hasn’t created the catastrophe that most people feared. I suppose a World War would spark the market tanking but if that’s the case I think we have bigger problems than buying and selling homes at a bargain basement price.
Economic factor #6 – a total economic collapse here in the U.S. and abroad. Now, this has some legs. If this happened, then I could see a scenario where the real estate market could tank. But what factors would be in effect for this to happen? Obviously, all the five factors I mentioned above would have to be in play. The country would have to take a turn for the worse with mass unemployment; people would not be able to pay their mortgage for one reason or another, they would have lost their equity, there would too much inventory sending prices plummeting, the recession would be deep and wide and there may be another worldwide emergency like a pandemic or economic collapse in multiple countries.
What I’ve outlined here is a lot of “ifs”. You’re talking about a lot of big, major factors that would have to go wrong in the economy ALL AT ONCE. I just don’t see that happening in the next 2 to 4 years. I just came back from our annual convention in Austin, Texas with Keller Williams and Gary Keller the founder of the company was telling the audience of 11,000 that he doesn’t remember a time where he has seen so many confusing signals. A lot of the economic factors seem to be contradicting each other. It’s not cut and dry like all economic factors are pointing in one direction. Gary says the market is “confused” at best.
In 2019, I showed some friends of mine a two-bedroom condo in Vista Waikoloa. It was a regular 1,200-square-foot condo priced at 575K. Fast forward to today; that same condo is $1.1 million. So, tell me what you think could happen in the U.S. in the next 2 to 4 years to drive the price of that condo down by $500,000. Because if you say the market is going to tank, you’re talking about values having to drop 50% or more.
Some people have said, “Well Dan, you at least have to acknowledge that the market is overvalued.” Is it? Or have we just seen the greatest migration of people from one location to another in the last 75 years drive record appreciation in some states, cities, and towns? Do I think the migration is over now? Yes, I do in fact I think what you’re seeing now across the country is what we call in the real estate industry “a normal market”. I always reserve the right to be wrong and I would love to hear your feedback on what you think would trigger people to suddenly sell off their house at a 30% or greater discount.
Dan Polimino is the owner of the Hawaii Team in Kailua-Kona, Hawai`i. He and his team are the luxury residential experts for the Big Island. If you are thinking about buying or selling in Hawai`i, then please reach out to us at team@thehawaiiteam.com or call 808-913-0899.
