By Mike Bodeen · 26 June 2023
Last Monday we wrote about a “Reverse Crash” that could be (is) heading our way.
A normal crash, a plummeting of values, can be seen on the chart below from June 2007 to June 2009, when prices crested at $258,000 then dropped to $115,000 – a 55% drop in value in less than 2 years.
I define a Reverse Crash as a seismic “rise” of values in a short period of time. We just experienced one such crash from 2020-2022 when the median value rose from $293,000 in June 2020 to $475,000 in June 2022 – a 62% value increase in 2 years.
The result of that, combined with the meteoric rise in mortgage rates, in my opinion, is as much an economic tragedy as the 2007 – 2009 debacle. Why a tragedy? Each crash resulted in tens (hundreds?) of thousands of folks no longer able to buy a home. So many became renters.
The tragedy, which I’ve alluded to in the past, could be nothing less than the extinction of affordable housing for all but the wealthy and the lucky. What would you call lower and middle class Americans who are not able to buy a house due to the prohibitive cost? One term that comes to mind is “renters forever.”
According to the National Association of Realtors (NAR), the U.S. housing market is short over 300,000 homes. In Phoenix, we’ve returned to a decrease in listings, a steady rise in prices again and all this with 7% mortgage rates.
Below are some bullet point reasons that are leading to this tragedy, which is lead by an ever decreasing amount of homes to buy due to:
Strong resistance for Boomers (and other gens) to sell because of basement level mortgage rates they won’t give up. (i.e., Why give up a 2.5% – 3% rate to get a 6.5% – 7% rate?)
Acquisition by wealthy corporations and individuals buying up real estate for their “safe” portfolios. Few better places to do this than Phoenix Metro.
Acquisitions from wealthy neighbor states relocating (migrating) here with vast cash holdings to acquire homes for cash, either to live in or rent out as an investment.
A number of builders (and Phoenix is leading the charge) are building “homes to rent,” not “homes to buy.” And honestly, it’s pretty smart of them. They can sell these blocks of homes to large corporations who can hold them, or at some time in the future release them to sell. The homes they are building to sell are in wealthier neighborhoods that well exceed the median sales price.
The next 10-20 years does not give us much affordability relief either. Another discussion we’re not hearing much about is the current MASSIVE transference of wealth being passed down from the greatest gen to the Boomer gen to the millennials. This wealth transfer of trillions is creating untold millionaires in our country, and around the world. How will they invest their inheritance? Certainly, in many ways, but real estate is among the safest. This will continue and increase. These are cash buyers. They won’t need to live in these homes, as they can rent them out bringing them a good and safe return on their investment.
Some of you may be thinking, Mike, you’re an alarmist! Listings will increase, prices will moderate. Mortgage rates will drop. Sales will increase. And we’ll all live happily ever after.
May it be so. All things are possible.