Is The Real Estate Party Over?

Recession Warnings, Rising Rates, Tumbling Markets, and Higher Real Estate Prices Caused by Big Money Investors

We've seen a tumultuous period over the past six, nine months, haven't we? The stock market has been dropping double digits, the bond markets falling even more. Crypto has been crashing. The one saving grace in all of this has been real estate. Real estate prices have continued to rise. They've been up double digits over the past couple of years.

But it now looks like the real estate party is over. And that has a lot of folks much worried about the implication for the stock market. New home sales have been plunging. The number of homes sold in March down 17% from a year ago. April down 28%. Robert Dietz, the chief economist for the National Association of Homebuilders, calls this a, “clear recession warning". The median sale price of houses is now $450,000. That's 20% higher than a year ago. Meanwhile, the 30 year mortgage fixed rate is over 5%. That's twice as high as a year ago.

This has created an unsustainable situation, very reminiscent of 2007. We need to understand that the ability for home prices to stay where they are is all based on the ability of buyers to afford them. But think about it, if that house is now 20% more than it was a year ago and the mortgage cost is double a year ago - you do the math. And what it means is that your monthly mortgage for a home buyer today is paying 50% more per month in a monthly payment than they were paying just a year ago.

Would you be able to afford a 50% increase in your mortgage payment? I don't think so. Not too many people could. And that means people who were trying to buy a home a year ago are now finding themselves out priced. The home is now unaffordable. How do we make the home affordable? Well, it's easy. Double your income. Well, that's not going to happen. Cut the mortgage cost in half. That's not going to happen. Or lower the price of the house. And that is what is likely to occur next. We've seen a dramatic decline in the stock market, the bond market, the crypto market, the real estate market is next. You need to pay attention to this if you're thinking of selling your house. Get on with it and sell it before the price declines occur.

Hold Off On Buying A New House… for Now…

If you're thinking of buying a house, you might want to wait a little while because it's highly likely that in six months or 12 months, home prices could be dramatically lower than they are today. We're already beginning to see a big drop in mortgage demand. It's the lowest level in 22 years. The demand for refinancing is down 75%. Makes perfect sense. People refinanced when interest rates were low. And now that interest rates are rising, well, you know, people are not refinancing anymore.

The Impact of Real Estate on the Rest of the US Economy

So we need to recognize, keep in mind that the number one impact on the nation's economy is real estate. So goes real estate so goes the economy. Because if people aren't buying and selling houses, it means people aren't moving. And if you're not moving, you're not buying new furniture, you're not buying new appliances and television sets. You're not hiring a new plumber or a doctor or a dentist or a barber. And as a result, you see a slowdown in the overall economy merely because you stayed put in your house.

We need to recognize that real estate prices have not yet begun to come down. Many are widely expecting a crash in real estate prices, just as we've seen dramatic reductions in the stock bond and crypto markets. I'm not trying to scare you. I'm trying to prepare you. If you see it coming, you can anticipate. You can protect yourself. You can adjust your portfolio, your spending, your plans accordingly. That's a whole lot better than being shocked and surprised.

Big Money Is Buying Up Lots of Real Estate - While Pricing Your Friends Out of the Neighborhood

By the way, just to illustrate how radically different the real estate market is today than 10 years ago, let alone 100 years ago, let's look at Atlanta. Where does Atlanta's number one real estate broker live? Well, that's a kind of a silly question. The top real estate broker in Atlanta obviously lives in Atlanta. Isn't that kind of like who's buried in Grant's Tomb? I mean, it's a dumb, silly question, except not really.

Atlanta's number one real estate agent is AJ Stegeman, and he lives in Florida, never even set foot in Atlanta. Last year he did 300 transactions, sold $86 million worth of real estate, and he did it all online from Florida. How could that be?

He uses software to buy single family homes for institutional investors who then rent those homes out. These institutional investors, we're talking about private equity companies, institutional investors like hedge funds and pension funds and endowments, they're buying homes by the barrel. They're not buying one house like you would. They're buying hundreds of houses, entire communities. And all they need is a software algorithm to tell them which of these houses is fairly priced that can allow them to rent them out for good rental income.

This is a total change in the way real estate has traditionally been done. In fact, so much so that many cities are now banning institutional purchases of real estate because it's pricing out of the market. Local homeowner wannabes who now find themselves renting houses they otherwise would have preferred to have bought. But because these institutional investors have so much money at their disposal, they're scarfing up entire communities, raising prices along the way. This is a huge change and it is partly demonstrating why the real estate market is where it is. What happens when those institutional investors decide to stop buying? The lack of demand will only cause the supply to fall in price.