Is the realestate bubble bursting?

[jurgs01]

Our Government threw trillions at the economy to drive demand forward and create huge market distortions and misallocation of capital, suspended foreclosures, suspended renter evictions, created policies that temporarily encouraged telework and bubbled up remote places, and have contined policies that have led to historically low down payments.

The FED's artificially low interest rate had brought and unprecidented amount of investor spec money into single family and multi family homes.

We'll see how it works out. I'm sure the smooth-brainers will blame the free market.

 

[ShokWaveRider]

Not really an issue either way for us. We own our home and will just stay here till the market gets more robust. Those with ~3% mortgages are laughing all the way to the bank. If they have to move, then they could rent their current home and rent at their destination till the markets for homes improves in their area. Those that have to sell will just have to roll with the punches. New home buyers that cannot afford a home now will have to wait or put more money down, or they probably should not be buying a home anyway.

 

[W2R]

This article that I just now stumbled upon supports the idea that home prices are going to drop rapidly very soon.

https://www.cbsnews.com/news/home-prices-for-2023-mortgage-rates/

Here's a brief quote from the article (bolded emphases mine):

Home prices have plunged during the second half of 2022 with demand for residential real estate cooling off in a number of states and cities across the U.S.. And prices could continue to fall by as much as 20% next year as mortgage rates climb and the housing market normalizes in wake of the pandemic, according to a noted Wall Street economist.

Ian Sheperdson, chief economist with Pantheon Macroeconomics, said in a report this week that tumbling demand for homes amid sharply rising mortgage rates is weighing heavily on housing prices.

"[W]e expect home sales to keep falling until early next year. By that point, sales will have fallen to the incompressible minimum level, where the only people moving home are those with no choice due to job or family circumstances," he said. "Discretionary buyers are disappearing rapidly in the face of the near-400 [basis point] increase in rates over the past year."

That's sad! When I bought my Dream Home in cash back in 2015, I was the very definition of a discretionary buyer. I already had a house but was able to sell it and get another that has been a dream come true for me. What a wonderful experience that was, and still is, and it's one I would wish everybody could have at least once in their life.

 

[captain3d]

For every 1% mortgage rates go up house prices need to drop 10% to keep monthly payments the same.

Mortgage rates have gone up 4% making house prices the most unaffordable in history in many areas.

Something has to give.

 

[Out of Steam]

In our local market, I don't see that the bubble has burst, but it sure looks to be sleeping.

This is also a reasonable description of the market where we live in Virginia.

 

[Out of Steam]

I’ve always assumed that 30 year fixed rate mortgages are specific to the US.

Without government intervention in markets, through Fannie Mae, Freddie Mac, etc., giving a 30 year fixed rate mortgage to people with ordinary income and creditworthiness wouldn’t be a reasonable business decision.

 

[SJhawkins]

Nice small development with larger acreage lots, 4-10 acres. These lots went on the market mid summer, I thought they were overpriced to begin with, guess I was right, they dropped the price a good 20% this week. If they drop another 20% maybe one of my kids will pick one up!

 

[calmloki]

We've done a number of hard money and construction loans - real stout interest. In April of 2021 we lent a large sum at 12% for a new construction home. Construction was very slow - various materials just weren't available, which held up other stages of the build. The longer the build took the more I was chewing my nails. The borrower/owner of the house being built ran into cost overruns big time and twice asked for a loan increase - we ended up loaning 35% more than the initial loan, so our risk of the borrower cutting losses and walking away went up. Was having real bad thoughts of ending up with a big new house in Washington state we didn't want instead of good ol' American dollars.

House finally was done and the owner went hunting a loan to pay us off and reduce his interest rate - this in the last couple months as the rates shot up. Took a bit, but he got another loan - Hallelujah! He signed last Monday, had a three day right of rescission, and we were to have our payoff hit the bank Friday. I kept looking online and it kept not showing up. Called the bank yesterday and was told that the wire would have caused our account to exceed the maximum account amount. So they refused and returned the wired amount. A real first world problem for sure. Would have been real nice if either the title company or Marcus bank had let us know, but neither did. I'm sure that all will be resolved tomorrow.

Main thing is, with single family 30 year loans now exceeding 7% and closing in on 8% I'm thinking something has to give. Will houses get smaller? Gal and I have never felt the need for a 4000 square foot home. Will the valuations on older homes climb? I'm pretty sure our lending will get a bit more conservative.

 

[tryan]

Congrats Calmloki !!

I said on another thread I closed my last SF in the hood in late July. Young investor accepted $400-500 monthly negative cash flow (just paying the mortgage!). Never locked the rate ... got stuck with 7.25%. Seeing investment property with a negative cash flow is a sure sign of a peak IMO.

Opendoor will bankrupt itself as even with a cooling market they again overpaid, priced up, sat on a property for over 3 months and then took a low ball offer which I think was $65k under what they bought it for. I have no idea how they get their market valuations but its so extremely flawed.

Opendoor (and the others ... redfin) have a model that requires prices to ALWAYS go up. Even if they are smart enough to STOP BUYING in a down trending market (which remains to be seen), shareholders are not going to sit and watch the corporate assets drop 10-12%/yr for 3-4 years.

 

[RobbieB]

The place across the street sold in 2 months for list price. 2 Br, 2 Ba, 875 sq-ft, $460,000.

About the same pricing as of late, just took longer and no bidding wars.

 

[Major Tom]

This article that I just now stumbled upon supports the idea that home prices are going to drop rapidly very soon.

I also saw an article speculating that prices could fall by as much as 20% next year. It might have been this same one. My first thought was that the property market cycle can take years to reach bottoms and peaks. If prices were to drop by 20% next year, who's to say they won't drop a little more over the subsequent few years?

Who knows? Certainly not I, but it is interesting watching these changes.

 

[ExFlyBoy5]

I also saw an article speculating that prices could fall by as much as 20% next year. It might have been this same one. My first thought was that the property market cycle can take years to reach bottoms and peaks. If prices were to drop by 20% next year, who's to say they won't drop a little more over the subsequent few years?

Who knows? Certainly not I, but it is interesting watching these changes.

Nobody knows...they can guess, but it's just that.

 

[Winemaker]

The neighbor's house dropped another $6,000 and they changed realtors, removed a wooden playhouse and did some landscaping.

The neighbor's house has dropped $10,000 twice in the past ~30 days, now listed at $419,900. The price has been reduced $60,000 in just about 100 days.

 

[teejayevans]

Looking at tax assessments, I’d say housing has doubled in desirable areas in last 5 years…at 20% decrease it will still be above the median.

 

[CaptTom]

Looking at tax assessments, I’d say housing has doubled in desirable areas in last 5 years…at 20% decrease it will still be above the median.

Exactly. Same thing happens with fuel. When prices double, it's noted but not really the focus of a lot of reporting. But when prices fall 10%, it's a "crash" and articles full of doom and gloom are everywhere.

10%? 20%? Eh. That's nothing. When they go back to where they were a year or two ago, let me know.

 

[jfn111]

I had my first sale, in a long time, where the appraisal came in lower then the sale price. We had comps to justify listing at $475,000. The seller accepted a good offer at $450,000 and the appraisal came back at $435,000.
The Buyer's are paying the $450,000 but I can see that the Minneapolis market is starting to weaken and the appraisers are starting to sharpen their pencils.

 

[ExFlyBoy5]

Exactly. Same thing happens with fuel. When prices double, it's noted but not really the focus of a lot of reporting. But when prices fall 10%, it's a "crash" and articles full of doom and gloom are everywhere.

10%? 20%? Eh. That's nothing. When they go back to where they were a year or two ago, let me know.

I don't know about that...my news feed was PACKED with stories about rising gas prices AND rapidly appreciating home values.

 

[CaptTom]

I don't know about that...my news feed was PACKED with stories about rising gas prices AND rapidly appreciating home values.

Maybe. I can't actually quantify it. It's just a gut feel. Of course they over-hype everything on the way up, and on the way down.

True, a 200% increase is news. But a 10% decrease is a disaster, if you believe the headlines. Frankly, I really don't care if oil stocks crash. These are still the among the most profitable companies around. And home prices coming back down to earth would be a good thing.

 

[Out of Steam]

10%? 20%? Eh. That's nothing. When they go back to where they were a year or two ago, let me know.

I think that people understand that pandemic bubbles will eventually deflate, and won't be alarmed about declines on the 10-20% scale--unless, of course, they took risks based on prices not declining.

As for me, I wasn't counting on the used car bubble getting me $10,700 for my 160K mile Subaru.

 

[Hyper]

What I find may be more interesting is how the local entities will handle a large adjustment in home prices. I know in our state every assessor was out pulling double shifts to assess at higher valuations. Sure seems they would have to drop those valuations back down after 3 yrs or so but I'm certain at least in our area that that new $ has already been spent.

 

[Another Reader]

What I find may be more interesting is how the local entities will handle a large adjustment in home prices. I know in our state every assessor was out pulling double shifts to assess at higher valuations. Sure seems they would have to drop those valuations back down after 3 yrs or so but I'm certain at least in our area that that new $ has already been spent.

Depending on the state and local jurisdiction, higher values don't always translate into higher revenues. The tax rate is usually set separately, once the total tax roll value is tabulated. Some jurisdictions will hire more people or buy new equipment, but it's in the budget for all to see. Prudent managers know values can go down and they prefer not to raise the tax rate when that happens.

 

[livingalmostlarge]

I wish. Consdering our assessed value of home went up 40% this year which I don't know how that will impact our property taxes yet for next year. It would be good. But if our property taxes go up 40% i'll freak

 

[Willers]

What I find may be more interesting is how the local entities will handle a large adjustment in home prices. I know in our state every assessor was out pulling double shifts to assess at higher valuations. Sure seems they would have to drop those valuations back down after 3 yrs or so but I'm certain at least in our area that that new $ has already been spent.

This! Our county's biannual reassessment is happening now. Our home was purchased early in 2022 at a very high $/sq ft (50% higher than others sold) because of a number of unique factors that I won't detail. I've already been contacted by the assessor with questions about our home and she clearly stated her intention to use our valuation as the comp for the rest of the downtown homes.

I don't expect them to lower the mil rate much, if at all, so there are going to be some very unhappy homeowners when they get their new assessments and calculate their tax bills.

 

[CaptTom]

My understanding is that they set the municipal budget first, then divide that by the total assessed property value to get the mil rate. In theory, if the property values all go up, the mil rate will go down.

Yeah, I know. Politics. They'll use slight-of-hand tricks to grab more. But I don't think you can assume a given home's taxes will go up just because the valuation went up. Assuming everyone else's went up by about the same amount, they should all only go up by whatever percentage the town or city budget went up.

 

[Willers]

Yeah, I understand how it is supposed to work. That is how we did it when I was part of a county metro system. I know the players well so I think this will be used as a significant budget windfall in our county. I’ll check back and post about what happens. I hope you are right.