Underwater Homes Could Sink the Housing Market!
Did you buy a home this year and are afraid you are now underwater? Well according to Black Night, a mortgage analytic data source, you're not alone. In this video, we are going to discuss the findings of the people who possibly bought this year and how it could be a sign of an impending housing market crash. And we’re going to get after it right after this!
So in today’s video, we wanted to share some insights from an article we read put out by Black Knight Inc and their latest "Mortgage Monitor Report" relating to a troubling trend for those who may have bought a home in the past year.
So it’s no surprise to you if you have read any of the headlines relating to the housing market over the past 6 months or so, that the Pandemic Housing boom has been put on ice. The article indicates that annualized appreciation nationally has slowed to 9.3% in October from the 10.7% in September and it marks the 7th consecutive month of annual appreciation declines.
Now here in the Dallas Metro, we shared in our video last week that the metro is up 8.94% annually in November 2022, but it is down by 8% from the highs in June 2022. New numbers will come out at the end of December, so make sure to subscribe and hit that bell for notifications so you are alerted every week when we have new content coming out.
Looking a little closer at the Dallas Metro, it is actually much worse for resale homes compared to New Construction. Looking year over year in the Dallas Metro, New Construction homes are up over a whopping 15% still year over year. And from the Peak in June 2022 it is only down about 3%. Again this is the whole MLS, there are differences depending on where exactly you're talking about. Now for the bad news if you own a home, and good if you're looking to buy a home. Though year-over-year appreciation is still positive for the year in the Dallas metro area, up 5.44% for the year ending in November of 2022, this is down a massive 12.53% from the peak just 6 months prior in May 2022.
So New Construction is skewing the overall numbers in the Dallas Area and holding up the overall market here. So for those that are hoping for huge deals to be had in the New Home area, you may be a little disappointed, at least for now until a full-blown recession kicks in and builders start circling the wagons to appease their shareholders.
DON'T GET ME WRONG, in the past 6 months, this is one of the best times to get into a new build. They have just not yet hit the panic button and begun the fire sales. Yes, they have started to offer incentives and help with interest rate buy downs and closing costs, but not most haven't done major price reductions on the base price of their homes. So if you do want more information on the new home market make sure you reach out to us. We are in contact with builders regularly if you are wanting to get into a new build here in the Dallas Metroplex.
So back to the article we've been talking about, they noted the softening in the overall housing market throughout the US. Though the declines appeared to be slowing in October at the rate of decline anyway, at the end of October they noted nationally a .43% decline seasonally adjusted which was the smallest decline since June.
They also noted, which we have talked about in some of our past videos, the New For-Sale Listings in October were 19% BELOW 2012-2019 levels, making it the largest deficit in 6 years. This is outside of March & April of 2020 when the nation was locked down of course. This means supply is not increasing that much yet. Keep this in mind later, this is a basic principle of supply and demand and how that affects prices.
Another indication they noted was that a 35 yr low of affordability is not yet being alleviated since there has been a 3-month stall of inventory growth as we indicated before. Sellers are battening down the hatches and getting ready for a possible storm.
Now where the article gets interesting is when they start discussing the issues for those that purchased homes in 2022. Of the 450,000 homes underwater at the end of the 3rd Quarter, (Meaning people who owe more than the home is currently worth), 60% of those originated within the 1st 9 months of 2022. And these are mainly purchased loans, not refinances. So this means that 8% of the purchase mortgages in 2022 are now marginally underwater with another 20% in low equity positions. Meaning, if things keep declining, they will be underwater as well. Among most FHA purchases in 2022, 25% of those are now underwater and 3/4 have less than 10% equity in the home.
So why is all of this important? if you recall back in 2008, much of the issue was related to bad loans being sold to people who could not afford the homes they were buying, and though standards are much tighter than they were back then. If a full-blown recession kicks in, (which right now has likely already started) and people start losing their jobs, It's not a far-fetched idea that foreclosures and short sales could pick up quickly if people go underwater by a large amount and throw up their hands and walk away.
SIGNS OF RECESSION
So then where are we in this possible recession scenario since this could have an effect on home values? Let’s look at some of the common reasons economies fall into recession and see if those characteristics are currently found in our economy.
There are several indicators that can signal the onset of an economic recession, including:
1. Slow economic growth: A decline in GDP growth or a slowdown in the rate of economic expansion can be an early warning sign of a potential recession.
- (If you are paying attention, GDP has already been slowing. )
2. Rising interest rates: An increase in interest rates can make borrowing more expensive, which can lead to a decline in consumer spending and a slowdown in economic activity.
- (Enough said on that, interest rates have doubled in a year)
3. Inflation: High levels of inflation can lead to higher prices for goods and services, which can decrease consumer spending and lead to a decline in economic growth.
(Inflation is at record highs not seen since the 1980s)
4. Unemployment: A rise in the unemployment rate can indicate a decline in demand for labor and a potential slowdown in the economy.
(This currently has not been an issue. There is actually still a shortage of labor in many markets in the US.)
5. Stock market volatility: A significant drop in stock prices or an increase in market volatility can indicate that investors are becoming more risk-averse and less confident in the economy.
(a BEAR market is considered a 20% decline from the highs, we hit that in the 1st half of 2022 in the stock market)
6. Decrease in consumer confidence: If consumers are feeling uncertain about their financial situation or the future of the economy, they may be less likely to make major purchases, which can decrease demand and lead to a recession.
(According to the chart shown, you can see consumer confidence in the United States has been shot starting in 2021)
7. Decrease in business investment: If businesses are not confident in the future of the economy, they may be less likely to invest in new projects or expand their operations, which can decrease economic growth and lead to a recession.
(According to the chart, Business Confidence has also not been good since 2021)
Alright so after the test, how do we score? of the 7 indicators of a possible recession, we are showing signs of 6 of them, with only employment not yet showing a large slowdown. So there is definitely a good chance we are already in one, or soon to be. Regardless of how the politicians try to spin things.
SIGNS OF HOUSING MARKET DECLINE
So we thought we would also share some reasons housing markets decline and see how well we are fairing there?
There are several reasons that can cause a decline in the housing market. Some of the most common reasons include:
1. Economic downturn: A decline in the overall economy can lead to a decrease in demand for housing, which in turn can cause a decline in home prices.
- We just discussed this one, most indicators are indicating a recession is either here or soon to come.
2. Interest rate Increases: An increase in interest rates can make it more expensive for people to borrow money to buy a home, which can decrease demand and cause home prices to decline.
- YEP, this one definitely applies.
3. Oversupply of Homes: If there is an oversupply of homes on the market, it can lead to an excess of inventory and a decline in prices.
- This may be one of the major saving graces in the current housing market unless there is a flood of supply to hit the market (like foreclosures and short sales for example) remember our previous discussion about the underwater mortgage and the percentage of homes with little to no equity?
- Right now this is still an issue, if it doesn't happen, then I think we have a mild downturn in the market and once the economy recovers and as the FED lowers rates as it does normally when we have a recession to spur spending to get us out of it.
4. Unemployment: High unemployment rates can lead to a decrease in demand for housing, as people may not have the income or job security to afford a home.
- This is another one where right now there is no sign of, but if the recession gets bad and companies (like we have seen in the tech sector) start cutting jobs, this will increase and meet the criteria.
5. Consumer confidence: If consumers are uncertain about the future of the economy or their own financial situation, they may be less likely to make a major purchase like a home, which can lead to a decline in the housing market.
- We already discussed this one in the Recession indicators, so yes, it is a match.
6. High levels of debt: If households are heavily indebted and cannot afford to make their mortgage payments, it can increase the risk of defaults and foreclosures, which can lead to a housing market crash.
- This is another one that is not being seen right now, people still have record levels of equity in homes. Looking at the chart, currently, there are no red flags of Consumer Credit Default found in the economy. So we are still good here. But, again, this could change if people lose their jobs.
7. Rapidly rising home prices: If home prices are increasing at an unsustainable rate, it can indicate that the market is overheated and may be headed for a crash.
- This one is a match, we had huge price appreciation since the pandemic here in the US and it is nationwide. This has caused a huge affordability problem in the US and as we discussed in our previous video, there are only 2 ways to alleviate that issue. Interest rates must drop significantly, or home prices must come down. As you can see from my previous market charts, prices are giving way.
So to wrap it all up in a pretty bow, since we are getting close to Christmas. Yes, there are definitely some serious warning signals in the economy, that may indicate a looming recession and continued softening of the housing market.
However, there are also factors that were noted that are not present that would normally need to be present to cause home prices to decline significantly more than they already have. The funny thing with recessions, they have not normally named recessions until we are almost coming out of them. This is also the same with the next bull market in any asset class. Bottoms of a market tend to be found when doom and gloom are at their highest. Then, when the market swings back into the next bull market, many are stuck on the sidelines, paralyzed by fear to wait for that perfect time, to time their purchase. Unfortunately, they often have already missed out on significant appreciation sitting and watching.
For example, we were working with a client a year and a half ago that was so scared of all the bidding wars. A couple of times they were ready to bid on a house, but then they got scared about how much over-asking the home went for. Ultimately, they decided to wait until the market calmed down. They still haven't purchased a home and keep waiting now for the market to go back to normal. But do we even know when that will be? And just thinking if they would have purchased back in the beginning when they started looking the appreciation on that home would still be much higher than the current market, even with the downturn we have started to see.
So if you are thinking of making the move to the Dallas area, DO NOT be paralyzed by fear, Real Estate is one of the most forgiving investments my husband and I have ever invested in. The thing about housing is, everyone needs a place to live. You are either going to own it (or the bank anyway) or you're going to be a tenant and make the owner very wealthy.
You just need to be smart about it right now, we DO NOT recommend you buy a home if you are not in a good financial position. Right now the more equity you have in a home, the more you can weather any decline in the market. Many people who currently own homes, and have stable jobs, are not at any risk of losing their homes. many have already had 100% or more appreciation if they have owned for a while, and home equity is still at historic levels. If you can put down 20% to give you a cushion and also avoid mortgage insurance, right now is the time to do that. Then, when rates go back down, which they always do at some point, you can refinance the home into a better rate and payment. Again, if homes decline, you are going to want that cushion, you could always pull cash out later when you refi if you accumulate a good enough nest egg.
There are a few potential benefits to buying a home during a recession. For one, home prices may be lower during a recession than they are during more stable economic times. This means that you may be able to find a good deal on a home that you might not be able to afford during more prosperous economic conditions. Additionally, interest rates on mortgages are typically lower during a recession, which can make it easier to afford your monthly payments. Finally, buying a home during a recession can also be a good way to invest your money, since the value of real estate tends to appreciate over time. Some other positives of buying homes in these conditions include, not having to come out of pocket with large amounts above ask, just to get the home, you also can take your time and ask for concessions or repairs which was unheard of just a few months ago and finally you are already getting a 12% discount as we indicated on resale homes in the DFW area. Sure can it go lower? of course, it can, but remember real estate is forgiving and for most people it a long-term play.
I hope this video has helped you, if you have any questions, please reach out, give me a call, shoot me a text or send me an email. And don't forget to like this video and comment below so that way others will be able to find it as well.
and until the next time, take care.
Sources:
Black Knight Mortgage Monitor 2022 - http://bit.ly/3v1qkyR
