By Douglas Katz
Unless you live under a rock or just don’t care, you are aware that the housing market has slowed. Depending on the source, the degree of impact varies with descriptions ranging from the aforementioned slowdown to correction to recession. The last of which is the view of the National Association of Homebuilders who have already begun to adjust their plans to more appropriately sync with the market. Regardless of the degree, the general acceptance that housing peaked and it receding to the norm or somewhere below needs to be part of the planning process.
Zillow has released some very good data as to their own predictions to more reflect the rapidly changing market. I know that that many look at Zillow valuations dubiously with the demise of Zillow Offers, but any information is good to get a clear picture. In July, Zillow’s national forecast was an optimistic 7.8% but they adjusted this to just 2.4%. It is important to remember that this actually represents a forecast that would bring housing appreciation back in line with historical norms. I personally feel that this fails to fully account for the unprecedented growth in home prices and the fact that much of the growth was as unwarranted as it was unprecedented. That adjustment could legitimately come outside of the 2023 planning horizon for the report, but it should be a factor for any investor. That said, the basis of their analysis was valid.
Recent economic data sent mixed signals for the economic outlook, which also factors into these forecasts. On the upside, the labor market posted stronger-than-expected job growth with a falling unemployment rate in July. Meanwhile, inflation – as measured by the Consumer Price Index – decelerated in July, which will influence the Federal Reserve’s policy decisions in the months to come. Mortgage rates for prime borrowers remain elevated compared to last year but have recently leveled off. On the downside, real GDP fell by 0.9% at annualized rate in Q2 – the second consecutive decline this year – driven by contractions in consumer spending and corporate investment.
The national number only tells part of the story and, as with all thing real estate, it is the local impact that matters. Fortune put together a decent heat map that where you can see the trends and the most negative impact limited to several states. Many of the hot markets will continue to outperform, but at a lower pace. The question for is where the contagion spreads to. Many are calling for the biggest drops in the areas that had the highest gains but, if that is the case, it has not yet manifested.
Charleston, W.Va. (-4%)
Lake Charles, La. (-3.8%)
San Jose (3.6%)
Odessa, Texas (3.3%).
El Centro, Calif. (+8.5%)
Homosassa Springs, Fla. (+8.4%)
Ocala, Fla. (+8.2%)
Idaho Falls, Idaho (+8%)
Sebring, Fla. (+7.8%)
I think that the good news for investors is that any cooling brings opportunity and the bigger the dip the better. While the strongest markets will likely take the longest to become target rich, there are a lot of exceptional markets that will serve investors in the next cycle. As the markets cool, the undesirable properties that residential buyers would hold their nose and bid on are becoming much less common. If the house is in bad enough shape and no buyers want to take on the renovation, capitulation by sellers on price that investors are willing to pay will emerge and grow. Additionally, there could be some great opportunities when dilettante investors realize their numbers are wrong, overly optimistic or not flexible enough for the rapid market shift and they need to get out before they sink. Patience has not just been the virtue for investors, it has been only choice lest the overpay. Even though forced upon them, I see investor’s patience being rewarded.