If I had a dollar for every time someone has asked me about the market crashing or correcting since 2016, I’d own my own island but unfortunately, I didn’t have that as my business plan.
I get it; the Great Recession either affected you, your family, or someone you know. We all have a bit of trauma from around that time. People lost homes, jobs, security, and it seemed to come out of nowhere. So let me share five reasons that a crash isn’t coming anytime soon and a bit of a hedge of why it might. In the end, you get to make the call.
1. The Portland area (and most of the country) Has The Lowest Inventory Ever Recorded.
In May of 2005 in Portland, there were only 5,257 active listings. That record has been destroyed over and over in the last 18 months. Here’s what previous year’s active listing count looked like:
May 2006 – 7,139 (Prices went up)
October 2006 – 11,535
July 2007 – 14,831
July 2008 – 18,219
July 2009 – ~14,200
This puts into perspective how low we are now:
January 2022 – 1,412
Nationwide numbers show just as bleak a picture of homes for sale. In January of 2016, according to Altos Research, single-family home inventory bottomed out at 943,429. As of January 2022, it is at 255,976 which lines up exactly with Portland percentages.
New construction has not recovered the lost years of production. They remember the Great Recession well and are not likely to overextend themselves. The whole issue with the supply chain is making things worse.
While prices can not grow forever, I don’t see how they can drop anytime soon except for the highest-priced homes in the market.
IN 2010 there were 234.6 million adults according to the Census. As of 2020, there are 258.3 million adults. Housing units grew from 130 million to 140 million in that same time period.
The U.S. Census found that 12.3 million American households were formed from January 2012 to June 2021, but just 7 million new single-family homes were built during that time. Single-family home construction is actually running at the slowest pace since 1995.
2. Loans Are Hard To Get
Back in 2005, if you could fog up a mirror, you could get a loan. There was a loan made for business owners with inconsistent cash flow. NINJA stood for No Income No Job No Assets. These were the worst and flippers were using them. The idea was if you had good credit, you were probably good. Then they expanded this to offer it to anyone, and the banks didn’t really care. But when things got slightly shaky, the house of cards fell.
What most people don’t know is that the banks didn’t actually carry the loan. 95% of loans were sold to investors and the banks became the servicers. There were crazy loans where you only paid interest, you could borrow 120% of the value of the home (hey, prices were only going to go up forever), adjustable-rate loans that went from 5% to 10% two years later (don’t worry about that, you can just refinance in a year), and lastly NINJA loans.
The Mortgage Credit Availability Index was created to show how availability has changed over the years. In 2004 it was under 400, by 2006, it was almost 900. It is now 125.
Gone are the days of easy programs, fudged numbers, and overly exuberant banks.
3. Interest Rates Are Low
In October 1981, mortgage interest rates peaked at 18.39%. We are back to just around 4% which is where we started before the pandemic. 2000, say interest rates top out at 8.64%. Prior to the Great Recession, interest rates were at 6.5%.
Quantitative easing and other FED tools have brought interest rates down since then bottoming out at 3.32% in April of 2013. The FED started selling some of their mortgage backed securities and the most recent high was 4.94% in November of 2018.
We still have another 1% to match that. And we will get back to that at some point as the FED’s assistance will slowly fade away causing a more normal market.
4. Buyers Are More Qualified Than Ever
The average credit score of people getting home loans has never been higher. People with scores under 660 getting loans back in the day was high. In the 1st quarter of 2007, around 50% of the loans were to people with a score under 720. Now it’s around 16%.
While it would seem this would make the pool of qualified buyers smaller, I think the Great Recession got a lot of people to take their credit more seriously.
5. (Institutional) Investors Are Buying Homes To Rent
This one is a tough one for me. On one hand, if the housing market was likely to crash, investors would be less likely to buy. Institutional investors are buying; they are even building specifically to rent the homes. Currently, investors are buying somewhere around 20-25% of the homes. It’s typically 15-18% recently.
On the other hand, buying these homes takes homeownership out of the mix. If the supply is reduced, demand goes up, and typically so do prices.
Investors are still buying and they are reducing the available inventory when it’s historically low.
Now here are a few reasons why there could be a crash:
1. Russia or China Or North Korea or someone starts a war.
Wars disrupt everything. China is dependent on us to a point but they are more friendly with Russia. Truth is, war can break out at any time. If it does, look at #4 below.
2. Inflation Doesn’t Get Under Control
I recently read that 60% of inflation is attributed to corporate profits. So my gut says this is just a chance to grab some money by big companies and it will calm down. If it doesn’t, it will greatly hinder buying power, especially when you couple that with rising interest rates.
In the end, housing is what we will sacrifice the most for which is why I think missing a home payment hits your credit score harder.
3. Ironically, If Loans Too Hard To Qualify For
This one has interested me the most lately. If mortgages are not easily accessible, what happens if there is a recession and employment gets a bit scarce causing people to change job fields? Many people aren’t aware that switching career fields make it harder to get a loan. A lot of people moved to pursue other opportunities after the pandemic made them realize they weren’t as happy as they thought.
4. Consumer Confidence
Pure and simple, how people see the future determines a lot of it. If everyone thinks prices are going to fall, they will fall. If they wish they would fall but bite their lip and get a loan and buy anyway, it won’t.
When the pandemic hit, everything stopped. Institutional buyers just stopped. But then the FED jumped into action making policy changes in 18 days that took 18 months in 2008 and rates dropped. People still needed homes and relatively quickly people shrugged aside the fear and took the opportunity of cheap money.
This is why if a war starts, another pandemic hits, or if people’s jobs get uncertain, the confidence to take chances or changes will drop.
“I’ve never made a decision based on an economic prediction.”
Warren Buffet
Nobody can predict the market. As smart as Warren Buffet is, he only deals with a handful of companies and stocks. You have to make your best decision and then work off the confidence you can deal with whatever comes on the other side.
I have people who have told me since 2016 that the market was going to correct. They are still renting. There are people who bought at the top in 2007 and it took them years to get to even or they had to sell at a loss. All of our choices are half-chance.
I’ll leave you with one last story to help people, like me, that want to take in a bunch of information to make a decision.
In 1974, Paul Slovic — a world-class psychologist, — decided to evaluate the effect of information on decision-making. Slovic gathered eight professional horse handicappers and announced, “I want to see how well you predict the winners of horse races.”
Now, these handicappers were all seasoned professionals who made their livings solely on their gambling skills. Slovic told them the test would consist of predicting 40 horse races in four consecutive rounds.
In the first round, each gambler would be given the five pieces of information he wanted on each horse, which would vary from handicapper to handicapper. One handicapper might want the years of experience the jockey had as one of his top five variables, while another might not care about that at all but want the fastest speed any given horse had achieved in the past year, or whatever.
Finally, in addition to asking the handicappers to predict the winner of each race, he asked each one also to state how confident he was in his prediction.
Now, as it turns out, there were an average of ten horses in each race, so we would expect by blind chance — random guessing — each handicapper would be right 10 percent of the time, and that their confidence with a blind guess to be 10 percent. So in round one, they were 17 percent accurate and 19 percent confident in their predictions.
In round two, they were given ten pieces of information. In round three, 20 pieces of information. And in the fourth and final round, 40 pieces of information.
That’s a whole lot more than the five pieces of information they started with. Surprisingly, their accuracy had flatlined at 17 percent; they were no more accurate with the additional 35 pieces of information. Unfortunately, their confidence nearly doubled — to 34 percent! So the additional information made them no more accurate but a whole lot more confident. Which would have led them to increase the size of their bets and lose money as a result.
