← BiggerPockets Real Estate Podcast
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- [00:00]
Dave Meyer
Is this Housing market healthy? Despite all the news and the noise and the confusion, could we actually be in a healthy housing market right now? Today we're going to find out. Hey, what's going on everyone? It's Dave, head of real estate investing at Biggerpockets, and I was recently reading this article from a housing market analyst who I really respect and I follow closely. He's also been on the show a couple of times. His name is Logan Motashami. He works for Housing Wire and I follow and have been following Logan for a long time because like me, he's a data guy and he doesn't say things just for clicks or hype. He just calls it like he sees it and has a very long proven track record of really good forecasting. So when I saw a recent headline from him that was titled why the Housing Market Is actually much healthier in 2020, it really made me think, are we actually in a healthy housing market right now? I know that might seem crazy because everything feels crazy and confusing, but is there actually some truth to this? I decided to dig in and I thought about this question a lot. I did some research and in this episode I'm going to share with you the conclusions I came with. And just a reminder, this right here is an audio only bonus podcast episode of the Bigger Pockets podcast. We're dropping them on some Thursdays with my commentary on the housing market market in additional to our usual Monday, Wednesday and Friday episodes. So make sure you're subscribed to this podcast feed so you don't miss any of these bonuses. So when talking about a quote unquote healthy housing market, the first thing we need to cover and discuss is what is a healthy housing market in the first place? What makes a market healthy? I actually sat down and thought about this for a while because I had never really put pen to paper and defined it before. But I came out with five basic criteria. Number one is a good balance between supply and demand. And this basically means that we have relatively equal numbers of both buyers in the housing market and sellers. And this can be measured in a couple of different ways. You've probably heard me or other people talk about this, or maybe you track them yourself, but these are things like inventory, days on market and months of supply. But basically, whatever way you measure it, it's just the idea that you need a solid amount of both buyers and sellers to make a healthy housing market and have enough transaction volume and not have pricing moving too far in either direction, either going up too fast or going down. My second criteria is that prices at least keep up with inflation. This is actually historically what is normal for the housing market. We have seen periods recently during the pandemic or even really since the Great Recession where prices have outpaced inflation. But if you look back historically, the average appreciation on Homes is 2 or 3% about the pace of inflation. And to me, as an investor and someone who cares about housing in this country, I think that's a very good number. It has to at least keep pace with inflation. We don't want prices going down, but on the same rate, I don't think we really want prices going crazy. That leads us to these unaffordable markets like we see right now. That leads me to my third criteria, which is reasonable levels of affordability. Some investors might love seeing prices go crazy. I personally don't think it's healthy for that to be happening. And I think we need the average American to be able to buy the average price home. That's just good for our society. It's good for wealth building. And I think it's sort of a key component of a healthy housing market. Number four is solid transaction volume. I know that for a lot of casual observers of the real estate market, they just look at prices or prices going up, that's good. Are prices going down, that's bad. Or maybe you want prices to go down, I don't know. But most people just look at prices. I believe that you need a reasonable amount of transaction volume. You need homes to be bought and sold. This is key for a healthy market. Anyone who's an agent, anyone who's a loan officer already knows this because their whole business depends on it. But this is important for the whole country. Housing makes up about 16% of our GDP of total economic output for the country. And so what? Housing. To be a pillar of our society and our economy, which I think we do, we need homes to be bought and sold. So that's number four. And then the last one is just low rates of distress, right? We can't have a lot of delinquencies in the market. We can't have a lot of foreclosures in the market. People who are not paying their mortgages or, you know, are being forced to sell their property at inopportune times, we can't have those. So those are the five criteria. Just as a reminder, it's a good balance between supply and demand, prices, keeping up with inflation, reasonable affordability, solid transaction volume, and low rates of distress. And by these criteria, the housing market has not been healthy at all in recent years. Think about 2022 to now. We are missing at least three of the five criteria. Supply and demand. Balance. No, it has been a strong seller's market for five plus years. So we definitely haven't had balance transaction volume. It's terrible. It's down 50% from 2022, it's down 30% from what is normal. So I would definitely say we're failing on that one. Affordability, it is close to the worst we have seen in 40 years. So those three right there, three criteria that we are missing, we are and have been hitting the other two, which is prices keeping up with inflation. They have done that at least and more for many, many years now. And we have also had low rates of distress. That's actually been a bright spot for the housing market. And despite the fact that that the housing market is sort of softening, that continues to be one of the bright spots for the housing market. It has been a signal of health. So all this to say, I wouldn't blame anyone for thinking that the idea that we're in a healthy housing market is just absolutely insane given where we've been in the last few years. But Logan, getting back to the article that sort of brought about this episode, Logan has some points here that I want to share. In just the last few weeks, we have now seen year over year pending sales growth. So that means despite higher mortgage rates, we're actually starting to see transaction volume go up on a year over year basis. And just so you know, I tend to like year over year data when I look at the housing market because it is a seasonal market. And so we need to compare March to March, April to April. That's the best way to look at sort of long term trends and patterns in the housing market. And what we're seeing, it's not a lot, but it is modest growth in sales volume in just the last few weeks. The second thing that's gone on is even though mortgage rates have really gone up and stayed higher than a lot of people were calling for and expecting, demand has actually remained pretty high. It's up year over year. I like to measure demand in the housing market by looking at something called the Mortgage Purchase Index. It's basically how many people are applying to buy new homes right now. And that is still up. And so that's encouraging as well. The last thing is that inventory is rising. The number of homes for sale at any given point is up 32% over last year, still well below pre pandemic levels. But if we want to tick one of those boxes in my criteria for a healthy housing market, we need more supply and supply is going up. So all of these are pretty good points here. And I should mention that this article talks about a lot of the points and data that we share with you or I share with you every month in our housing market updates and I am working on that one for May. That will be out in a couple of weeks. But if you want to know in depth more what's going on with inventory, pending demand, all of that, I'm going to give a really detailed update on that in just a couple of weeks. But back to our article here. What Logan has pointed out is that even though we're not sort of back to pre pandemic levels, things are moving back towards something that resembles at least normality. But does that make it healthy? Are we actually in a market that is good and healthy? We do have to take a quick break, but I'll give you my take when we get back.
- [08:28]
Aaron
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- [09:28]
Dave Meyer
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- [10:31]
Ryan Reynolds
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- [11:20]
Aaron
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- [11:37]
Dave Meyer
BiggerPockets podcast where we're talking about whether or not we are actually in a healthy housing market. And when we left off I was sharing some thoughts of Logan Motashami and his belief that the housing market is healthier in 2025 than it has been in years. And now we're going to check for ourselves whether we believe this assertion. Now just as a reminder, my personal criteria which I stated for what A healthy housing market is, are, number one, a good balance between supply and demand, two, prices keeping pace with inflation, three, solid transaction volume, four, reasonable affordability, and lastly, low rates of distress, delinquency, foreclosures, all that. So let's go one by one and look at how these have changed and whether or not they are actually healthy right now. First up is the balance of supply and demand. For this, I like to look at inventory. Again, there's other ways to look at it, but if you look at inventory, like I said earlier, it is up and rising. It is still below pre pandemic levels, but it is trending in the right direction. Days on market, which is another good measure of the balance of supply and demand, is actually pretty darn close to pre pandemic levels. Normally we expect about 60 days on market. We're at 53. So that is like pretty darn close to normal. So that measure, I think we're close to healthy. I think overall, with the balance of supply and demand, I actually think we're healthy. Are we at 2019 levels? No. But was 2019 some perfect model of a healthy housing market that we have to absolutely get back to also? No, I think that was sort of the best that we have because the last years have been so crazy. But I think if we get in range of what was going on in 2017, 2018, 2019, that's more of a model of a normal, healthier housing market. And so being closer on inventory, especially given where we are with interest rates, I think this is pretty good. Of course, there's a question if it will blow past our 2019 levels of inventory and we'll start to see higher inventory and prices might go down. I think that's a good question, but for our purposes, we need to just talk about where we are in 2025. And right now I think we are moving towards help. All right, onto our second criteria, which is our prices keeping up with inflation. Yes, just short answer. Yes, they are right now. Again, if inventory keeps going up, that could change in the future. But we're just doing this analysis right now. Snapshot in time, 2025. Are prices keeping up with inflation? Yeah, pretty much. They're pretty darn close. Some markets aren't going to be there. But I think if you're in, you know, 0.5 of inflation in most markets, you could say that that's pretty much keeping pace. So I think we check the box there. Our third criteria is transaction volume, and that's how many homes are being sold. And this is still just an enormous fail. We are taking a huge L on this one. We are averaging about 4 million home sales per year right now. That sounds like a lot. It's not compared to normal, healthy markets. Normally we'd expect about 5.25, 5.3 million. That's about a good average. So we are about 30% below that. We are way below where we were in 2021. Not that we should expect to get back to the. Those are sort of like peak levels. We shouldn't expect to get back there. But transaction volume, big fail. And I don't think that one's getting better anytime soon. Affordability, also just a huge fail. And I think these things go hand in hand, which I'll explain in just a minute, but we are still near historic lows for affordability. It has actually flattened out, so it's not actively getting worse. But, you know, mortgage rates are fluctuating, home prices are still high. So I think we're really not doing well in terms of housing affordability. So through the first four, we were only hitting two of those five criteria, but luckily the last one we are hitting, which is foreclosures. So this is still pretty good. I would give this one a check. They are going up a little bit for certain segments of the market. But if you look at the sort of the big picture, you zoom out. Foreclosures are still really low. Delinquencies are still pretty low, despite some upticks for VA and FHA loans. Overall, I don't think we're seeing high levels of distress in the housing market by any sort of historical standards. So is this a healthy housing market? I would say no. I don't think we are. We just have three of my five criteria now. We are doing better than we have been because I think the one thing that has improved is that balance of supply and demand and that single improvement is notable. Seeing an improvement in supply and demand is something we all feel and notice as investors, right? We see better deals, we have less competition, we have more time to make decisions about potential deals. This is actually really helpful. So although we've only gone from meeting two out of five of the criteria to three out of the five criteria, I think that is a notable one, particularly for investors. And now I do want to give Logan credit. He didn't say this is a super healthy housing market. He said that it is a more healthy housing market than it has been in recent years. And I do agree with that. I, you know, just like I said, I have these five criteria. We've gone from meeting two to meeting three. That is progress. The thing though is I think it's super unclear when these last two criteria are going to improve. I do think that they will happen eventually and they'll happen together, because transaction volume, the reason we're not hitting that is because affordability is low, at least in my opinion. That is not some proven thing, but I personally believe that if we see affordability improve, we're going to see transaction volume improve. Now, sure, transaction volume could get marginally better. Like we're starting to see some signs of without better affordability. But there's also chances that it could get worse. And I think for the housing market to truly get restored to normal, healthy levels, we need affordability to come back. That could come in the form of prices coming down, but that would take away one of our other criteria that could come in the form of lower mortgage rates or rising wages. And we don't really know. I actually think will probably be some combination of these three things, but we don't know exactly when and how that will happen. So overall, as we're asking ourselves in this bonus episode, are we in a healthy housing market? I would say no, but we are moving in the right direction. And my hope is that we'll see a return to a healthy housing market sometime soon. How soon? I'm personally not holding my breath. For the next few months, I think rates are likely to stay relatively high, which means that we're not going to get restored affordability or transaction volume. I also think we might actually go backwards in the short term because prices may not outpace inflation for parts of 2025. I'll get into why. I believe that in our May Housing Market update, which will be coming out in a couple of weeks. But I just think we still have a ways to go before a healthy housing market. And we might actually go in reverse a little bit before we get better. But I do think it will get better eventually. Before we go, I want to make one last really, really important point here, is that a healthy housing market does not mean investability. Right? The housing market was anything but healthy in 2020 and 2021, and that was a great time to invest. I bought my first property in 2010. It was a super unhealthy time in the housing market. There was a lot going on. There was horrible distress. Prices were definitely not keeping pace with inflation. And it turned out to be a great time to invest as well. These are not the same things. Healthy markets can be great times to invest, but often what you see is the best opportunities come during these periods of uncertainty. And this is basically another word for an unhealthy housing market. Right? That's what hats when it's unhealthy, you get this uncertainty. That's what we're seeing right now. So I just want to encourage people to Although this idea that we need to get back to a healthy housing market is true, I do think that's important. That doesn't mean there aren't short term opportunities. In fact, it probably means there will be a lot of short term opportunities, but you have to sort through a lot of junk on the market there to find really valuable assets. And again, that is what the upside era that we are in is all about. So that's where I come out. But I would love your take. And everyone make sure to tune in for the May housing market update in just a week or two, because I'll get into more details about what's happening in the market, what regions are at risks, what regions are doing really well, and my outlook for the summer market. I'll see you then, but I'll also see you for a couple other episodes before that. Thanks for listening. Thank you all for listening to the BiggerPockets Real Estate Podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian Kay, copywriting is by Calico, content and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.biggerpockets.com. the content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk, so use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose, and remember, past performance is not indicative of future results. Biggerpockets, LLC disclaims all liability for indirect, consequential or other damages arising from a reliance on information presented in this podcast.