Prediction: Home Prices in Most Parts of The U.S Will Drop Nicely Very Soon.

[ironchef]

The problem @vanzandt is many people are locked into a very low interest rate fixed mortgages. The market is essentially frozen. In our local zip code, in a normal year, there are at least couple of hundred home listed for sale at any time. Today, only 26 are available. With supply so tight and almost full employment in SoCal. prices are not coming down.

When mortgage interest rate came down to under 3%, I told everyone willing to listen, to refi whether they needed it or not. All my kids refi into 2.5%-2.6% 30 year fixed rate mortgages. It is free money from our Government for this generation of homeowners.

 

[ironchef]

I bought my first house back in the early 1980s. I put 20% down and got a conventional loan at 11.75%. I thought I screwed the bank! The rates at the time were on the way to 20%+. I spent the next several decades in the stock market and real estate. Mostly I never saw rates under 9%. Usually they were over 10%. Everyone was still buying houses, houses were still appreciating. Since the early 80s I bought and sold a lot of houses, duplexes, and small apartment buildings. It was very lucrative. And the rates were always higher than they are today.

These days in my neighborhood in Texas, houses are still selling, at record prices, sometimes with multiple offers. Not much on the market because I’d say most people have mortgage in the 3s, or lower. For prices to go down all those people are going to need to sell. There needs to be supply. I’m not seeing that happen. The only supply appears to be coming from builders. I have a hard time seeing major downside movement. Worst case I could see a long period of stagnation until people get used to higher rates and have time for their salaries to catch up. Just my opinion.

I agree with you.

Even CA is in a similar situation, even when many claimed people are abandoning CA for TX, NV, FL, AZ....

 

[vanzandt]

Whoever owns these 2.5% 30 year mortgages is in deep trouble. I assume its the Fed & Fannie Mae. Lets hope it isn't the regional banks.

It's funny you mention the regional's. I just had this conversation with someone last week. And I was warning them.

Anyone who has navigated their way thru the daily bs on Stoney's thread knows I have been a bull on PNC, FITB, and the sector in general.

But last week, I kinda went "hmmmm?"...

The reason being, that move down is a big deal. Lets use FITB as an example here. At $25 going back several months, I said it was steal. Numerous times as it would go up, but then come right back down. I repeated the call. Every time it hit $25ish, I said buy it.

Finally, last month or so, it started up with some conviction. And this is not just FITB, the whole sector did. As an aggregate, they all pretty much move in lockstep with each other. But lets just use FITB as a proxy here.. When it was making a run at $30, I thought to myself, ok the banking crisis of 2023 is over. The worst was behind us, and now it will just trade like any other stock.

But then, a few gurus came out and screamed wolf. Next thing you know, FITB, had gone from $29 right back to $25ish. That is a huge move for a bank stock at this point--- post the March scare at least.

I hate to say it, but this might be some bad juju. When any other stock pulls something like that, ask any technical analyst, the next stop will be much lower. Now if that's the stock of company XYZ... who cares. But a bank stock, if you believe the TA guru's are right and that TA knows something we don't.... uh-oh. If the herd smells fear in the banks... we're heading lower once again. I honestly didn't like the XLF and its components recent drop. It better hold this level, or see a sell-off with a super high volume bounce, or we're in trouble.

But one has to wonder... what is it? What spooked bank stocks right back down after it appeared we were out of the woods?

Was it what I said in the original post? "Watch foreclosure rates." It might just be. The CRE risks are priced in, but all of what we discussed above never really covered the average Joe that is staying put, who wasn't smart enough to refi at 3.5%. There might be a lot of those types of loans out there. And adjustable rate loans that people signed assuming rates would stay down, opting for the carrot of a low five year rate, thinking they could do it agin in 5 years. Those folks right now are screwed. If they can afford the additional funds, no problem. But are there enough out there that can't? The TA on the bank stocks suggest there might be more than we think.

These stocks aren't representative of any other run of the mill type stock. Bank stocks are kind of unique. Any other stock can do that but when a bank stock, and the whole sector, does that... ... it gives rise to a "hmmmm?" I mean if >>>(insert the stock of your choice here)<<<< does that, well, it is what it is. Stocks are gonna stock. They burn players routinely. but for bank stocks to that.... it is certainly worth noting.

 

[vanzandt]

When mortgage interest rate came down to under 3%, I told everyone willing to listen, to refi whether they needed it or not. All my kids refi into 2.5%-2.6% 30 year fixed rate mortgages. It is free money from our Government for this generation of homeowners.

I did the exact same thing. And told them to take the 15 year or 20 year refi if they could swing it.

 

[OldTrader]

I don’t like the bank stocks here, either technically or fundamentally, big or small. I just don’t think any of that has an anything to do with house prices going down. Let’s face it, banks have a lot of issues: 1) Commercial real estate loans coming due in the next couple of years, 2) Assets on their books had much higher prices 3) deposits cost going up 3) new federal legislation coming etc

If you asked me where the problem in real estate is I’d say it is the office or shopping center where the loan is coming due. And btw, commercial loans are completely different than residential loans ie they mostly come due in 7 years. That means a lot of are coming due soon. Even apartment loans, coming due in 7 years, this when there’s going to be an increase in outstanding apartment units as new builds come on stream.

Don’t misunderstand bank stock prices for home prices.

 

[OldTrader]

I did the exact same thing. And told them to take the 15 year or 20 year refi if they could swing it.

Good advice. Personally, I had a loan at 3 1/4 %, and decided to pay it off because I couldn’t get a high enough rate on my funds. I’m about at a break even right now after tax if I were investing those funds over 5%.LOL!

 

[ktm]

I don't think home prices will deteriorate significantly over the next 18 months. They may flatten in some places or see very modest declines in others... but nothing material.

In addition to supply being terribly constrained by points folks made above, there are a few other things I see.

1) People that aren't buying right now are just saving cash with their 3% note while their home creeps up in value. It's like Covid times, when people aren't spending in normal patterns due to market conditions all that cash is building up. When rates come back down, that dam will break.

2) No one talks about it, but every year in the US about 1.5M - 1.8M people die as the last/sole owner of their house. Many of these homes get sold with (largely) tax free cash windfalls going to heirs. That's a huge amount of cash inflow every year.

3) Many are paying with cash today so interest rates are irrelevant. For those that aren't my feeling would be that if you MUST buy at this point...that rates will come back down in a few years and you just refi then anyway.

Back in the 80's no one would ever have believed that interest rates could be sub 6% for mortgages. It had never happened and economists said it was impossible. Today we can't believe rates would stay above 6% beyond corrective monetary measures. Of course with monetary efforts being thwarted by fiscal irresponsibility, maybe we will have much higher rates for much longer. I know the country will be in huge trouble if the Treasury has to refi all that debt in the coming years at current rates.

 

[Bodrey]

I bought my first house back in the early 1980s. I put 20% down and got a conventional loan at 11.75%. I thought I screwed the bank! The rates at the time were on the way to 20%+. I spent the next several decades in the stock market and real estate. Mostly I never saw rates under 9%. Usually they were over 10%. Everyone was still buying houses, houses were still appreciating. Since the early 80s I bought and sold a lot of houses, duplexes, and small apartment buildings. It was very lucrative. And the rates were always higher than they are today.

These days in my neighborhood in Texas, houses are still selling, at record prices, sometimes with multiple offers. Not much on the market because I’d say most people have mortgage in the 3s, or lower. For prices to go down all those people are going to need to sell. There needs to be supply. I’m not seeing that happen. The only supply appears to be coming from builders. I have a hard time seeing major downside movement. Worst case I could see a long period of stagnation until people get used to higher rates and have time for their salaries to catch up. Just my opinion.

Salaries haven't been keeping up since the 70s. That's never going to happen. Something needs to give in order for things to turn around, but it won't be that. Ultimately, supply and demand will win the day. If people aren't buying, then eventually prices (and rates) will have to come down to compel would-be home buyers to take the plunge.

 

[Spooz Top 2]

Despite what you hear, aside from a few select areas of the country, I predict the price of existing homes will come down nicely going forward. They've peaked. I am 1000% sure.

I'm no economist, and I don't have access to the types of weekly, monthly, quarterly, etc data that these folks have aside from the weekly big picture type stuff released by the various government agencies that track things... but I don't need to. I have eyes. The type of common sense that Peter Lynch and Buffett applied to stocks, applies to many aspects of our lives.

I have always used, and it's reliable, a general rule of thumb that a 1% rise in the 30 year fixed reduces one's buying power by just about 10%. Amazing, but it's true. And I really think my 10% rule, has crept, or is creeping up, for at least 70% of American families. From higher utilities, maintenance and services, property taxes (especially property taxes), the true cost of home ownership needs to be adjusted upward. Banks are gonna figure that out, trust me. Keep an eye on the foreclosure rate.

Here's common sense. We are around 8% on the 30 year, yet houses are still being priced like they are made out of gold. Don't believe me? Go on Zillow and look at prices of homes around where you live. Pretty sure you'll be shocked. I love Zillow's website, it puts a treasure-trove of data all in one place that used to take forever to find. A house doesn't even have to be on the market, you can still you just click on it from the aerial view and it tells you what its worth, sale history, tax history, pictures etc.

Now this is where my post here will sound kind of demeaning, but these real-estate agents... they are ALL using Zillow when telling folks how to price their home. Someone that wants to sell goes to Zillow and it says their house is worth $500K, even though they bought it for $320K back in 2018. They call a realtor, who also uses Zillow now since it has apparently become the de-facto authority on home prices, the realtor see's Zillow's price, and up for sale it goes at $500K.

So up until now, that has been working pretty well in decent markets, I'll give you that. It's easy to see what is selling where, asking price vs sale price, days on the market etc. There is no denying, some of that data has been quite impressive. But I am telling you guys what, this dynamic is not only tapering off, I think it's gonna hit a wall pretty soon.

There are tons and tons and tons of homeowners that were smart and refi'd a few years back, from around 4.7% on a 30 year, down to like 2.7% on a 15 year fixed, shaving years off their obligation, while their payments remained relatively flat or only slightly up. More people however did similar moves but stayed with the 30 year just for the lower payments. The good ones are probably locked in a little under 3.8% +/-. These folks aren't budging.

Think about it. What are the odds this type of slightly upper middle-class demographic (doctors, engineers, mid-level management, two income households etc) all across America, is gonna walk away from that type of rate to purchase a better home now? They can't. It's a lose lose.

Sure their homes have went up huge in market-value, but even if they have to upgrade, more kids etc... any upgrade is an apples to apples comp on price appreciation. Sure their $350K home is now worth $500K, but the guy that owns the $500K dream house they looked at 8 years ago but decided was out of reach, tough luck, it's now $780K.

And even if their salaries did go up enough to swing the dream house deal, ... that 8% interest rate on top of all the other things I mentioned above... destroyed all that like an atom bomb. "Sorry honey, we still can't afford that house. I guess we're just gonna have to buy bunk-bed for the kids' rooms."

This type of macro shift doesn't happen all at once of course, but over the course of the next 18 months, I am predicting home prices are gonna drop handsomely as all the dust settles. Those mortgage underwriters, they aren't stupid and the sting of '08 has not be lost with passage of 15 years. Time to tighten the purse strings.The qualifications for new loans will be adjusted--- and people are gonna be shocked to see what they can actually afford to buy (in the eyes of the bank at least). A lateral move using their current income--- means moving into a crappier house. People don't do that, they stay put. And new houses coming on the market, sit there as demand wanes. Prices come down.

What's the long term stock plays here? Hmmm. Not sure yet. Lots of ideas. I'll think of something. But one thing I know for sure, you folks that are looking to buy a home right now... pfff, bad move imo ----unless you have lots of money and don't care. And of course that's everyone here at ET. So nevermind. ~vz

Makes for a good discussion but I don’t see it VZ… at least here in the Northeast… Inventory is razor thin, inflation is running rampant with Owners long RE are locked into lo rate notes… In inflationary environments, tangible assets, particularly RE, will remain hi… wether it’s residential or especially rental portfolio holders, with rents pulling in top dollar, creating handsome ROI monthly/ annual returns extremely appealing to sit tight! I don’t see a substantial shift in RE transactions or prices for at least another 3-4 years out.
I’ve been in the RE racket now for 27 yrs & pride myself in keeping ahead of the curve with trends, liquidity, transactions, data, housing starts, etc… that said, I forecast a status quo environment with a continued uptick in inflation!

 

[vanzandt]

I’ve been in the RE racket now for 27 yrs & pride myself in keeping ahead of the curve with trends, liquidity, transactions, data, housing starts, etc… that said, I forecast a status quo environment with a continued uptick in inflation!

I know you have.
It's subtle, but fwiw.. and I am 1000% paying attention, I'm starting to see "For Sale" signs stay up longer.
We'll see. Won't be the first time I was wrong on stuff like this if I am.

All that said, the big date going into the FOMC, won't be Weds the 20th. It'll be Weds the 13th.CPI.