Q: Last week, the stock market turned downward by twenty percent. If we are headed into a recession, how does that affect real estate?

A: Let’s look at some recent trends, and then talk about it from a buyer’s perspective.

June 2020- April 2022:

The real estate business has been feeling like it couldn’t get any worse for buyers. There’s been a constant barrage of “news” reporting semi-truths that became the perception of normal. Since June 2020, it has not been normal. What has not been normal is that there has been excess demand, and not enough supply.

A recession is likely to decrease demand, which is good for buyers who remain in the market.  

High demand is bad for buyers. When people stayed home at the beginning of the Covid-19 pandemic (March-May 2020), they noticed how their living spaces didn’t work for them. Some renovated. Some moved or attempted to move. There were enough wannabe movers that real estate demand spiked.

High demand gave seller’s agents the upper hand in negotiation. They played that hand hard, requiring that buyers offer high prices and cede their rights to inspection and mortgage contingency. Some sellers realized that the best buyers wanted inspections and mortgages, and sold to those buyers. In fact, almost all pre-approved mortgages close. Houses that don’t have serious defects generally do not come back on the market after a home inspection. Foregoing home inspection and mortgage contingency, we contend, is mostly a convenience for the seller’s agents.

When sellers or their agents overplayed their hands, properties didn’t sell immediately. After a week or two, buyers thought something must be terribly wrong with a property that didn’t sell in the first weekend. Those properties had the rare price-drops that we saw in 2020 and 2021.Early spring of 2022 looked just like more of the same.

Since May 2022:

Something happened in the middle of May, 2022. Our agents felt it and saw it. Generally, the number of competing offers (when there were bidding wars) were fewer. Yes, some properties still drew more than 10 offers; we saw three to five offers as more common. More properties remained on the market a week or two.

The mortgage industry started to report deep drops in mortgage applications at the end of April. This translates to a drop in housing purchase demand. Fannie Mae has a team of economists, and they reported the change that we felt. This was blamed on the rise of interest rates.

Reading the news with a buyer’s eye

Whenever I read this economic news, I need to keep my focus on how it affects buyers. This news is focused on a different audience than our clients. It almost always addresses the economic benefit to real estate professionals and property owners. So, I need to translate it back to how it affects our clients and us, as exclusive buyer’s agents.

Fannie Mae publishes monthly reports. This month, they are predicting “dire” changes, according to Inman News.

“The latest forecast from Fannie Mae’s Economic and Strategic Research Group, released Thursday, paints a more dire picture than May’s forecast, which envisioned an 11.1 percent drop in 2022 home sales. In January, Fannie Mae forecasters predicted that although rising mortgage rates and home prices would price many homebuyers out of the market, 2022 home sales would decline by just 1.2 percent.” [source]

FNMA June new release includes the following. (My notes to our clients in blue below each paragraph.)

Housing Predicted to Drag on Growth Through 2023 as Financial Conditions Tighten

WASHINGTON, DC –  The compounding effects of elevated inflation and higher interest rates are expected to further weigh on economic growth and home sales as the year progresses, with full-year 2022 growth now forecast at a slightly reduced 1.2 percent and expectations of a late-2023 modest economic contraction unchanged, according to the June 2022 commentary from the Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group… Translation: the change we “felt” in May matches FNMA model showing a contraction (slowing) of the real estate market. Overall, this is a modest change.

Substantially higher mortgage rates are now the housing market’s primary constraint. The ESR Group expects total home sales to fall 13.5 percent in 2022 – down even further from its 11.1 percent projected decline last month – and, correspondingly, for mortgage originations to move downward to $2.6 trillion in 2022 and $2.2 trillion in 2023. Refinance origination activity. Many fewer people will refinance when the rates are higher. Total home sales volume (the number of sales) will drop by a large amount. This affects people who make a living in real estate. It is not inevitably bad for buyers.

“Our view continues to be that the magnitude of response required of monetary and fiscal tightening to return inflation to the Federal Reserve’s target will likely result in a recession, which we currently expect will be modest and occur next year. Notably, the recent market response to continued heightened inflation suggests that the predicted recession could occur sooner and be deeper than our current baseline forecast.” The expected recession is starting sooner than expected and looks like it will be worse than their models indicated.

[source]

What should a buyer do?

If this is the time in your life to buy, this is a better time to buy than any since June 2020. If demand goes down, buyers’ choices and their ability to negotiate both improve.

Why? Demand is down. Supply is low, but it has been low for a long time. There is no expectation that supply will become any lower, so the balance between supply and demand is moving in the buyer’s favor. If the recession grows in severity, it is better for buyers still in the market. Some recent owners may need to sell, since they overbought during the boom market in 2020-2021; that would further improve supply.

One caveat: do not expect that prices will go down. It is unlikely that the supply and demand balance will tilt far enough in the buyers’ favor to that the happen in a general way. The best we can hope for is a good deal on specific properties, depending on the situation. But we are always looking for that. In every market there are moments that favor our clients and we work to capitalize on them.

How do you know if it is your time to buy?

  • Would your life be better in a different living space?
  • Has your family size changed or do you expect it to change in the next one to five years? Do you need a different size home to accommodate that?
  • Can you afford a mortgage payment for that better living space? We can help you do that arithmetic, and so can a lender.
  • Do you anticipate that your income will remain stable or improve?