Potential buyers have been listening to plenty of negative social media channels that have been steering unsuspecting consumers in the wrong direction.
Facts and Data
Ignore all the consistently negative social media channels and stick to the facts and data.
Negativity sells. The overabundant doom and gloom real estate headlines obtain a lot of attention. Many YouTube, TikTok, Instagram, and X (formerly Twitter) channels are devoted to pushing negative narratives about the real estate market. From bubbles to crashes to foreclosure waves to the coming collapse in home prices, the same storylines are pushed on a weekly, monthly, and yearly basis. These channels rack up hundreds of thousands of views, steering countless consumers in the wrong direction for years. These prognosticators lack any economic credentials and have been preying on everyone who has been unable to or missed their opportunity to purchase over the years. Many would-be first-time home buyers have been rooting for a collapse in housing so that they, too, can finally obtain their piece of the American Dream.
It is hard to sit on the sidelines and watch housing prices skyrocket at an alarming pace from 2020 through the first half of 2022 amid a once-a-century pandemic that temporarily shut down the economy. Home values reversed course for the second half of 2022 as mortgage rates ballooned, yet prices have been rising ever since. The dream of owning for many has been out of reach. As a result, the negative narratives blossomed. It is challenging to sift through all the headlines to determine what is true and what is fiction. Yet, the answer is straightforward in examining all the facts. It is time to bust through the myths that have developed about housing.
MYTH—Housing is in a bubble and about to crash. This could not be further from the truth. When home values plunge, as they did during the Great Recession, it is essential to consider supply, demand, and the overall health of the housing stock. The U.S. total housing inventory averaged 2.2 million homes from 1996 through 2005. In 2006, before the Great Financial Crisis, it eclipsed 4 million homes and remained elevated for five years. The glut of available homes was matched with very weak demand, exasperated by job loss and an unemployment rate that surpassed 10% in 2009. There was a flood of forced sellers in a financial jam, unable to pay their monthly mortgage with no equity in their homes. Today, the total housing inventory in the U.S. is 1.21 million homes, less than a third of where it was from 2006 through 2008. And today’s housing stock, all U.S. homeowners combined, has been built on strong credit, great jobs, low fixed payments (an excellent hedge against inflation and rising rents), record tappable equity (take out a second loan or cash-out refinance and still have 20% equity), record equity rich (over 50% equity in a home), and record owners who own their homes free and clear. Leading up to the Great Recession, the housing stock was made up of homeowners who purchased with very little or no down payments, low credit scores, subprime loans, pick-a-payment plans, teaser rate adjustable mortgages, fraudulent lending, and a flood of cash-out-refinances. Today’s chronically low inventory is matched against weak demand, a much better balance than the bubble years of the Great Financial Crisis.
MYTH—Housing inventory is just as bad as last year. Economists and housing analysts consistently point out the lack of available homes to purchase, a depleted inventory with no hope of turning around. While it is true that there is a definitive scarcity of supply, a trend has emerged that sets the housing market apart from last year: the inventory is rising. The active listing inventory in Los Angeles County has grown from 6,827 homes at the beginning of the year to 9,622 homes today, a rise of 41% or 2,795 homes. It is at its highest level since December 2022. Last year, it was at 6,996, which is 2,626 fewer homes or 27% less. It is still far from the inventory levels before the pandemic. The 3-year average before COVID (2017 to 2019) was 12,139 homes at the end of May. That is 26% higher or 2,517 extra FOR-SALE signs. The U.S. inventory is at 1.21 million homes compared to 1.04 million last year, 170,000 fewer or 14% less. It is the highest level since October 2020. Yet, the 3-year average before COVID was at 1.85 million, 52% higher or an extra 640,000 homes. Nonetheless, the housing inventory is moving in the right direction. There are finally more homes for buyers to choose from, a step in the right direction for a housing market desperate to receive a fresh supply.
MYTH—When rates drop, prices will drop. Currently, the high mortgage rate environment is preventing many homeowners from selling. They are enjoying their low, fixed-rate monthly mortgage payments. According to the Federal Housing Finance Agency’s National Mortgage Database, 84% of all homeowners in California are locked in with a mortgage rate at or below 5%. As rates drop, it will entice more homeowners to sell their homes when the difference between their underlying mortgage rate and the rate of the day narrows. The thinking is that more sellers means the inventory of available homes will rise, ultimately leading to an oversupply of homes. The trouble with this argument is that buyers’ purchasing power improves dramatically when rates drop. Lower rates allow a buyer to look at larger homes. For example, if a buyer desires a $5,000 per month principal and interest payment with 20% down, last October, when rates were at 8%, they were looking at an $851,250 home. Today, with rates close to 7%, it improves to a $940,000 home. If rates were to drop to 6%, they could purchase a $1,042,500 home. When rates fall, it will open up a floodgate of demand, pent-up potential buyers waiting on the sideline to purchase due to affordability constraints. With a drop in rates, the increase in demand will outpace the improvement in the number of homeowners willing to sell. Many will still opt to stay put and continue to enjoy their fixed low rates.
MYTH—With unemployment rising, there will be a lot more foreclosures. The unemployment rate has risen from a 50-year low of 3.4% in April 2023 to 3.9% in April this year. Yet, 3.9% is still a historically low rate. Even if unemployment continues to rise, it has a long way to go until it is problematic. From 1996 to 2006, it averaged 4.98%. That was before the start of the Great Recession when the economy was just chugging along. The foreclosure wave back then was built on easy credit, little to no down payments, and just about anyone could get a loan regardless of their ability to make their monthly obligation. When the housing market turned, many homeowners were underwater immediately with negative equity. In October 2008, there were 2,856 closed foreclosures and short sales in Los Angeles County, 90% of all closed sales. In April of this year, there were 4,140 closed sales, yet only 17 were foreclosures, and five were short sales, 0.5% of all sales. Today’s tight credit standards, insulating housing from a repeat of the Great Recession, can be traced back to the Dodd-Frank Act, a 2010 law in response to the Great Financial Crisis. It prevented excessive risk-taking on Wall Street and provided common-sense protections for consumers in obtaining a loan. The Los Angeles County housing stock is strong and resilient, able to endure economic swings, including 2022's largest rate increase since the 1980s.
The bottom line: ignore all the housing myths and social media channels devoted to negative narratives. Instead, stick to the facts and data. The data does not lie.
