While it may signal some cooling, housing is still substantially less affordable than it was pre-pandemic.
* edited to correct the time frame, 36 months not 24 months.
Sudden decreases put pressure on buyers to hold off (it will be cheaper next year), and sellers to either hold off on selling (we’ll wait for the next boom), or in rare cases panic sell ASAP if they need to liquidate due to some weird life circumstance (divorce, death, unexpected emergency move and can’t afford to keep it, etc).
So price decreases are likely to have two different types of effects depending on the ‘part of town’ you’re looking at.
The rich part can wait out boom/bust cycles (generally), so inventory will dry up and prices will stay high because no one will be forced to sell and take a loss - but most potential buyers will also be less willing to buy as the prices are even more ridiculous (relatively) than they were before.
The poor part of town will have significant inventory increases and major price drops, as people have to sell more often due to job changes, financial hits, etc.
Overall sales volume will drop across the board, as financing is harder to get - which it being easier is really what caused the boom, and it being harder is causing these overall shifts too.
Modulo local market factors of course.
The vast majority of people in the country who own residential real estate did not purchase it in the last few years. If the "value" of their home doubled and then dropped 20% they really aren't going to care, regardless of the mortgage rates.
And beyond all that, there are always going to be people who have to sell, whether they bring money to the table, still have a profit, use a short sale, or what have you. And those sales will still set comps for entire neighborhoods. I'd love to see some concrete examples of rich neighborhoods "holding out" during downturns as I simply do not believe that has ever happened.
If someone holds that property and dies, they’ll have a trust setup for it already, and almost no one will be in a rush to lose $5m liquidating it right away.
Anyone owning a place in Atherton (who bought recently) doesn’t have a ‘job’ in any every day person sense, and certainly isn’t relying on a paycheck to pay the mortgage. You literally can’t even get a conforming mortgage for those places.
Someone can (and will!) go full Kanye eventually of course, if it’s a big enough area, but those are few and far between and there is a LOT of pressure to not screw up the neighbors comps.
They’re often weird, special places anyway, so many games can be played. A friend of a friend lives there and his neighbors include a member of the Saudi Royal family, and a prominent VC LP.
That kind of wealth means there is no rush to lock in losses, and plenty of reason to pretend they haven’t happened - as usually, prices go back up.
It’s going to be easier to rent too than a terrible place in a terrible part of town.
If you’re poor? No one has those luxuries. Hell, many times no one can even afford lawyers!
Trying to buy into Palo Alto in ‘09-11 was impossible. No price drops, even less inventory, almost no volume at all. Atherton was laughable, there was even some price increases.
Sunnyvale? Near 101 (the ‘bad part’), prices literally halved. I know, I bought one. Most of San Jose was similar.
The closer you got to Los Altos/Campbell, the more frozen and ridiculous it got.
Most of sunnyvale had movement. A LOT of San Jose turned over.
I’ve seen the same thing play out in other markets of course, and know professional real estate investors.
The writing has been on the wall for YEARS pre-pandemic. Hell, good luck finding anything that would even cashflow for renting in the entire state of CAlifornia even by ‘18.
As far as anecdotes go the news media is full of stories of the ultra wealthy taking a bath on residential real estate in downturns. Sure, they might hold onto it for a year or so with an outrageous asking price, but they're also going to cut that asking price by 25-50% at the drop of a hat in my experience.
I'm not really all that concerned with the real estate habits of the ultra-wealthy. Like most people (even on this site) I'm more concerned with general trends in neighborhoods with less than 2 swimming pools per property. And I just don't think those neighborhoods are going to hold out to the extent that values will not fall and properties won't be available for purchase. That's a myth, IMHO.
They also wouldn’t be landlords (in the sense you’re talking about), that’s what they hire people for.
If the property is irritating them and they can’t offload it, then sure some won’t bat an eye at losing a couple million (or 10) on something. Most of them would stab their own mothers in the back for $100 though. But most of them literally never need to care to that level.
In the Bay Area at least, the 1%’er wealthy areas like Palo Alto? Most of the city just… stops. I’ve seen it myself last downturn.
You don’t need to be ultra wealthy to not need to sell if you hit a rough spot for a few years.
They might lay off the gardeners though.
There are just as many examples of real estate stagnating or depreciating over the course of 5 years as there are it appreciating by $500k. We shouldn't treat the last 10 years as typical for any residential real estate market. It wasn't that long ago that a typical real estate cycle was 17 years peak-to-peak. The Fed can't intervene and keep rates artificially low and buy up tens of billions in mortgages each month forever. In a market where a cycle is 17 years, 5 years at the beginning of a downturn is nothing. And that's wasted opportunity, especially for experienced investors.
We both did really well on it - she’s still angry though.
Yes, and in addition, interest rates are higher, so the monthly payment is dramatically higher.
And if you're a buyer, it's even harder because nobody wants to sell right now, particularly established homes. It's mostly just new (and tiny) units/townhouses/apartments.
Most people have variable-rate home loans. In the past few years, fixed five-year loans have become more common. Basically you're on a fixed rate for the first five years, and then after that you're onto a normal variable rate.
Most economists here predict house prices will fall further as people sell due to mortgage stress. At the moment it looks like most people are hanging on. Historically speaking, interest rates are still pretty low. And I think people are reluctant to sell due to fear they won't get a decent price, and that if they wait a few years house prices will be back up.
The problem is not with selling, there are no buyers now since the interest rates are going up.
I dont have the numbers but most houses dont have loans specially old people houses who want to downsize or kids want to sell because their parents have paswed away.
On the other hand most majority of buyers need loans which is expensive in a high interest scenario.
“…from 1999–00 to 2019–20, the percentage of Australian households that own their own home:
… Without a mortgage decreased from 39% to 30%. With a mortgage increased from 32% to 37%.”
And that’s only talking about owner-occupiers, not investment properties, which I suspect would overwhelmingly have mortgages.
You graph actually proves my point, amount of people with mortgages is increasing aka buyers need loans while old people who are selling who bought their properties 20-30 years back dont have loans.