Real Estate Business
Is The Real Estate Market In A Recession?
By Mark Weithorn
President of DPI Showcase Web Sites
The year was 2006, and the real estate market was in a feeding frenzy. Investors were buying, and everything was selling. Realtors were driving all over the state of Florida, looking for anything to offer their investor clients. Being the owner of DPI Showcase Websites, a tech company that works with Realtors, I found myself at a real estate luncheon to talk about investing in real estate. The moderator, a successful real estate agent, was exclaiming how easy it was to make money. Like finding gold on the streets. The real estate agents there were giddy. They could do nothing wrong. Making lots of commissions, buying Louis Vuitton handbags and BMWs was the norm during this time. My instinct was to raise my hand and ask, “When will this crazy market come to an end?” But not trying to ruin the mood, I sat quietly and ate my dessert. Two years later, we all know what happened. The house of cards came tumbling down, bringing the whole country into a recession. Lots of BMWs were being returned to the dealerships.
Today, we are coming off of one of those wild rides. Interest rates were low, and the pandemic was creating a demand for single-family homes. Realtors were selling everything they could get their hands on, and sellers were getting more than they asked. Unfortunately, this type of market was unsustainable, and naturally, it has come to an end. So, the question is, “Are we in a real estate recession?” Let’s look at the stats.
Since I live in Florida, we will be using stats from the Florida Association of Realtors. Comparing Q3 2021 to Q3 2022, single-family home sales were down 22%. Condo sales were down 26%. Pending Sales (these are signed contracts that haven’t closed yet) for single-family homes were down 23%. Condos were down 26%. Comparing Q2 2021 to Q2 2022, single-family home sales were down 16%. Condos sales were down 26%. Q1 2021 to Q1 2022, single-family home sales were down 11%. Condo sales were down 6%.
According to Forbes, in August 2022, a housing-market recession occurs when home sales decline for six months straight. They claim a recession officially started in July 2022.
There is a bright side. According to the Florida Association of Realtors (FAR), if we compare Q2 2022 to Q3 2022, the average price of a single-family home has dropped from $598,000 to $551,000, an 8% decrease. Condos prices declined from $474,000 to $413,000, a 13% decrease. This is a positive sign that the market is returning to pre-Covid-19 normalcy. Will prices drop to pre-Covid 19 levels? This writer doesn’t think so. Before Covid-19, the average selling price of a single-family home was around $350,000 and condos $275,000. I believe we will settle in at a price somewhere in the middle.
The next common question is, will this cause a crash in the real estate market? I don’t believe so. A Berkley University study about the 2008 Recession showed that banks gave risky loans such as “NINJA” loans (a loan given to a borrower with no income, no job and no assets) and Jumbo loans (large loans usually intended for luxury homes) to individuals who could not afford them, knowing that the loans were likely to default. After the collapse, the Dodd-Frank Act tightened up lending rules. Today, according to Nerdwallet, a 10% deposit is required for a $350,00 home loan giving the buyer equity or at least a cushion against a decline in prices. Historically, in my experience with the real estate market, if they live in their house for a number of years, prices will again increase, giving them additional equity. Add to that the high levels of employment, and we should be fine. Owning a home is also a great hedge against inflation. Your monthly mortgage payments stay the same. On the other hand, if you rent, your monthly costs have gone up and will probably continue to do so.
There is one other set of statistics that we should look at: month’s supply. This is how long it would take to sell the existing inventory of real estate listings (provided no new listings came to market). In real estate, there are two types of markets: a seller’s and a buyer’s market. Less than six months of inventory is a seller’s market; low inventory. Over a six-month supply is a buyer’s market; too much inventory.
With the onset of Covid-19 and with people looking to work remotely, we were in a seller’s market. But now that interest rates have gone up, and some people are returning to the office, we are shifting towards a buyer’s market. Sales are slowing, and sellers are starting to lower their prices.
Florida Association of Realtors defines the seller’s and buyer’s market during the last few years, giving more insight into what we have witnessed and/or experienced. Pre-Covid-19 single-family homes were sitting at four months of supply; a seller’s market. At the end of 2021 we were sitting at one-month’s supply; extremely low. Today it has gone up to two and a half months supply and it is still climbing.
FAR continues to update our understanding of the market. For condos, pre-Covid-19, we were sitting around five and a half-months supply; almost neutral. At the end of 2021, we were at about one and a third-months supply. Today it has gone up to two and a third-months of supply.
When looking at a month’s supply we want to be between five and seven months of supply. This is a healthy market. The past two years, before interest rates were increased, we were sitting with extremely low levels of inventory. This type of market is dangerous and unsustainable. It was destined to change. Which it is doing now.
To sum all of this up, the real estate market is transitioning from an extreme seller’s market to a neutral or a buyer’s market. Closed sales are down, prices are decreasing and inventory levels are going up. One can only guess how far this will go before settling in.
As a consumer, people are always asking, “Should I rent or buy? Should I wait for the market to bottom out?” Do the math. Which will cost less? Do you have the money for a down payment? Ask your accountant about the tax ramifications. History will tell you that if you plan to live in your home for many years, owning real estate has always been a solid investment.