By Dan Polomino
This past August, I was in Austin, Texas for Keller Williams’ annual Mega Camp Conference. Mega Camp is held every year in Austin, the headquarters of Keller Williams, for the purpose of educating and strategizing with top producing agents in the company. The slides I’m going to show you are a part of Gary Keller’s annual presentation on the state of the economy. There’s so much rich data here that I just couldn’t wait to share this with all of you.
This first slide talks about the probability of recession. You’ll see that the Federal Reserve thinks it is a high likelihood in 2024. What most people don’t realize is that real-estate has been in a recession for almost 16 months. The downturn in the real estate market began in May 2022 and real estate sales have plummeted in some places by more than 50%. So, when people say there’s, recession coming to the real estate industry they haven’t been paying very close attention because we’ve been in it already for 16 months. What is more likely to happen in the future is what Gary calls a rolling recession. Meaning different sectors of the economy will be in recession at different times over the next 12 to 18 months. An example would be the commercial real estate market. Commercial real estate was really the first to start feeling the effects of a downturn, even before the residential market. Another example would be used car prices. Those took off in the pandemic much like residential real estate, but now has suffered quite a drop. On the other side of the spectrum, new home building is enjoying an incredible run of demand and profit as they can’t build them fast enough. So, this is what Gary was talking about. There will be certain parts of the economy and certain sectors which may be down and maybe up in what he calls a rolling recession over the next 12 to 18 months. But a full-scale recession that affects every sector of the economy at the same time is not likely.
I love the slide on unemployment. Basically, what it’s saying is there are almost 10,000,000 job openings right now in the United States and there’s only 6 million unemployed people. The underlying message here is that everyone in the country who essentially is employable has a job. This is an incredibly low number of unemployed people at roughly 3.6%. This is one of the reasons inflation has been persistent, and difficult to reduce. There are some signs that job creation is slowing, which is an effect of the Federal Reserve continuing to raise interest rates and slow down the economy.
Here you’ll see that the projected landing for the Federal Reserve is an inflation rate of 2.3%. As you can see from the CPI and the core CPI we are not that far away from it. The graph basically here is showing that we should hit that by early 2024. And along with that, I believe mortgage interest rates will follow.
Here, you can see which industries are benefiting the most from falling inflation.
Here, you can follow which industries we are seeing the fastest in rising prices.
Now on to home sales:
This graph shows annual homes sales and what jumps out at you is a drop of almost 2 million home sales from the peak in 2021 to 2023. That’s due in large part to interest rates, inflation, and home affordability.
Home sales are closely followed by home prices. I think this is the part where I spend the most time educating buyers because most people cannot wrap their head around the fact that sales might be off by 50% in some areas and yet the prices of homes have gone up. They don’t understand how that can happen. The answer is simply in the fact that there is no inventory. Generally, in a market downturn, you have more homes come on the market and sit on the market for a longer period of time. More homes and more choice create lower prices. But that hasn’t happened. In fact, it’s been the opposite; we’ve seen less homes for sale than ever before.
Don’t miss the 4% trendline in this next graph on interest rates! We are still well above the 4% trend line at 7% across the U.S. I would expect that we’re gonna end the year here in Hawai’i at about an 8% price appreciation across-the-board. That’s great appreciation even in some tough economic times. This is one of the reasons I stress to people as to why you wanna buy an investment or second home here in Hawai`i. There’s just not that many places in the U.S. that you can get 6 to 8% appreciation year over year like you can in Hawai`i.
New home construction is not filling in the inventory gap fast enough. As you’ll see from the chart below, we’re still well below the minimum number of new construction homes needed in the U.S. To complicate matters, there is very little to no new construction here on the Big Island and so we will never be in a scenario where homebuilders help fill in the inventory supply. This is why I tell people that the inventory shortage on the Big Island is here to stay for the foreseeable future.
There’s no doubt that mortgage rates are suppressing the market. However, look at this next slide. The historical average over the last 47 years is at 7.81% and today it looks like we are right at the historical average. And while that doesn’t make anyone feel good, we do know these rates will eventually come down in 2024. How far is anybody’s guess. Having been in the business for 16 years now I have seen a variety of different markets. It’s my personal opinion that mortgage rates need to stay or hover around five or 5.5% for us to have a healthy real estate market and to make homes more affordable.
These next two slides tell incredible story. One that we haven’t seen in America in quite some time. And these next two slides also explain why no one is putting their home on the market and inventory is at 30- or 40-year low.
It’s hard to imagine that 89% of all homeowners in America are in a mortgage of 5% or less. That’s just unheard of. These people have low mortgage payments and as a result they are not overleveraged and do not need to sell. They may want to sell to upgrade to a bigger house or downgrade to a smaller house, but no one is going to give up a three, four or 5% mortgage to trade that for a 7.5% mortgage. So, the main reason why no one’s putting their house on the market is they are just waiting out the economy. They are waiting for economic conditions to improve and mortgage rates to come down to the fives where it makes sense to make a move either up or down.
Looks at this final slide! 70% of all homes in the United States have at least 50% equity in their home. Boy you sure couldn’t say that in 2009 or 2010. What an amazing difference in 13 years. Most Americans are in a good financial position with their home and are not overleveraged. Here’s one more stat to think about… 39% of all Americans own their home outright. Meaning they have no mortgage. When was the last time we saw that? This really means that we have a very healthy real estate market.
In closing I hope you enjoyed the slides as much as I have. I’m a bit of a data geek. I love numbers and I love how numbers tell a story. It just gives you so much power to make great financial decisions.
If we could be of help in making one of those financial decisions to be a permanent, second or investment property here in Hawai`i please reach out to us here at The Hawai`i Team. We would love to talk with you and have an opportunity to earn your business.
Dan Polimino is the owner of the Hawai`i 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.
