It's time to talk about what I'm seeing in today's shifting market based on conversations I am having with agents locally and with agents and leaders throughout the US and Canada. I also have several trusted news sources whose research I value on all things housing economics and I'll share some of their thoughts and predictions as well. I can only talk about that which is based on what we know today and what I think we know. I'll also give you a game plan on how to navigate the remainder of this month and Q3. At a minimum, you should come away from this call with some talking points that you can use with your buyers and sellers.
Here Is What We Know:
- There is an undeniable shift going on in the real estate market. The recession siren bells are going off throughout the media and it has buyers pulling back and it happened quickly in most markets. Remember, nobody wants to lose money , so buyers will be wary of "buying at the top." Buyers that have flexibility have started pumping the brakes and moving from the "buy, buy, buy" gear to "wait and see, enjoy the summer" gear.
- Buyers, because of 2008, equate recession with housing crash. This is not true historically. Most recessions do not include a drop in housing prices. Only the 1991 and 2008 recessions included a drop in housing prices.
- The steep rise in the 10 year treasury yield has driven the mortgage interest rates much higher impacting the buying power of the buyer pool. The yield began climbing in March as the fear of inflation made investors move out of bonds. Rising inflation reduces the value of fixed, long term yields. It ended 2020 at .93%, 2021 at 1.52% and it ended this past Friday at 3.165%
- Prices have increased dramatically in almost every micro market since the summer of 2020, also limiting buying power.
- On the inventory front, we are still 5.24 million houses short up from 3.84 million in 2019.
- Rental prices have increased 16% in Chicago not giving buyers an easy off ramp from the market.
- There is still an extreme amount of cash in the system. The US households accumulated $2.5 trillion in excess savings between March 2020 and January 2022 (Fortune, April 4, 2022). American homeowners are in an excellent financial situation and will not sell to "get out" at all costs.
- Baby Boomers (born between 1946 and 1964) and Silent Generation (born 1928 to 1945) are in the midst of a $70 trillion wealth transfer that started in 2018 and is expected to go through 2042. $61 trillion is expected to go to their Gen X and Millennial children and the remainder to philanthropy. (Wall Street Journal, January 2022).
- The cost of construction and declining demand has home builder sentiment at a 2 year low (CNBC, May 17, 2022). This is making it extremely difficult to price out properties in order to make an investment in a new project.
- Most economists feel there needs to be 4 to 6 months of supply of inventory or more to starting seeing meaningful price drops.
There are 2 articles I want you to read:
Follow Logan Mohtashami - Chief Economist at HousingWire.com. He wrote a must read article this week "Are Home Prices About to Fall?". He wrapped up the article by saying that "months of supply needs to get over 4 months for some duration and total inventory levels need to get back into the range of 1.52 to 1.93 million. Until that happens, don't look for anything big for price declines as total inventory and a monthly supply of homes are still just too low." He calls this market a "savagely unhealthy housing market." Meaning, there is still too much demand and too little inventory. His feeling is that 2021 was incredibly unhealthy for the real estate market driving fundamentals out of whack and it will take some time to bring it back to a normalized market.
Another good read is "The Housing Market is Hot but not in a Bubble" by Zillow research, which states that:
- Sixty percent of housing experts polled by Zillow don’t believe the housing market is in a bubble, compared to 32% who do.
- The panel expects to see a short recession by 2024 as the Federal Reserve works to tame inflation.
- The panel raised home price growth forecasts for 2022 as demand stays strong.
Here's What I Think I Know:
- Living in the Midwest, I can tell you that we live for July, August and September. I think you will see a shift in focus from their current housing situation with buyers and we're already seeing it. Their focus will shift to their social life and families instead of their housing situation. They will shift to a "wait and see" attitude hoping the inventory levels will improve given them more options and better pricing.
- There will be "panic selling" for sellers who waited too late to sell and now want to sell "at the top" of the cycle. You'll see more listings hit the market by those sellers that waited just a tad too long. They will have to be realistic to be successful in this cycle of the market.
- Cash buyers might have more leverage now than ever. Expect them to start throwing out "low ball offers."
- For a world class city, Chicagoland is incredibly inexpensive. Our market will be impacted differently from those that saw 70%, 80% plus price gains. We may even start to attract buyers because of our cost of living.
- The summer will be a battle between sellers and buyers both wanting leverage in the price negotiation. Sellers will want their multiple offers and be frustrated when they don't get it. The urgency for buyers has and will continue to drop until clarity is brought to the market.
- We, as brokers, will need to navigate this market much differently. Those brokers that wrap their minds around it, study their hyper local stats, shift their execution strategies will have stronger businesses than before. In more challenging markets, there is a flight to quality. The consumer will seek out the well positioned, well prepared and professional brokers that have a strategy for a successful transaction.
Your Summer 2022 Action Plan:
- Your mindset will be key this summer. This shift will be good for your business if you have the right strategy. You must realize that it is highly unlikely that you will see a 2021 market again in your career. Move on and focus on how to navigate the market we are moving into this summer.
- Avoid the news. They get paid for each click and "calling a housing crash" is incredibly clickable. They got it wrong every year between 2012 and 2021. Logan Mohtashami details this in the article I discussed earlier.
- Focus on July, August and September. Your 2022 Q3, "12 Week" strategy needs to be well thought out. Give yourself a goal for those 3 months and execute. We'll know lots more in October once we've gotten through this summer and the buyers have taken their "time out" and get a feel for the current market. Lots can happen in 3 months.
- You must focus on the real estate review process with your Top 100. It is a perfect opportunity to have a meaningful conversation with your clients.
- Don't forget your "warm list." For those sellers and buyers that have "cooled off," they will be active again this fall in my opinion. Part of your "12 Week" execution strategy in Q3 is to build your warm list to the highest level you've ever had it. When the market settles in, you'll want that warm list full and ready to go.
- The "Take Flight" and "Ninja" sales models work in every market. Taking care of your clients never goes out of style as a business strategy. On a scale of 1-10, how healthy (connected) is your TOP 100? Would you celebrate if that number went from 6 to 8 by October 1? "Hell Yes", you would.
- When on listing presentations, it is key to set proper expectations about the current, hyper-local market. Remind them of their July 2020 price and let them know they might have to come off the peak pricing level to sell their home. Buyers will not want to buy at the top and will wait for prices to stabilize or come down, out of principle. For your sellers that are "right sizing," it is important for you to communicate to them that they will have the same negotiating power when buying. (Very 2018, 2019).
- You must commit to pinpointed pricing. In a shift market, it's better to price slightly below the suggested price to make sure you are getting "paddles to raise."
- Double down on the marketing of your listings. How you market your listings has the highest impact on your personal brand and your impact to your geographic farm.
- With your buyers needing financing, make sure to get those pre-approvals updated regularly because the ratios can change as rates increase. On the listing side, make sure you are getting an up to date approval with your contracts.
- Make sure you are following the stats for your hyper local market. I would run months of supply weekly to catch current trends. Create a hot sheet for new listings in your market versus those that went under contract. If you had 10 new listings go live and 5 went under contract, you've got 2 months of inventory. That 6 month mark is a normal market. Above 6, buyers will really start to have the upper hand if that every happens.
- Set expectations regularly with your buyers and sellers. The market is changing rapidly and you need to be the expert.
- If the last 2 years did a number on you and you are exhausted, put a focus on regaining your health, wellness and mindset this summer. This is a big part of high performance. It's okay to focus on yourself. It's not only okay, it's necessary. Build a strategy though not to lose your momentum. The sprint and celebrate model works really well in times like we are experiencing.
- Last but not least, focus on being effective this summer not busy. Work on your business. This market needs to be sorted out and you'll need to be ready when it kicks back into gear.
So in summary, I am not an economist. All I can do is editorialize what I am hearing, seeing and reading. In my opinion, there will be a battle this summer between well capitalized and financially sound sellers who don't want to believe that we are off the top of this cycle and buyers shifting their focus from their housing search to their life. For the buyer, they also stepping back to reassess the increased cost of buying. They do not have a lot of exit ramps because the price of renting is increasing as well. Inventory levels will increase as more listings hit the market with less buyers actively searching. The active buyer will be more demanding with pricing and the selection process knowing they have more leverage.
We, as brokers, will need to navigate this market much differently than how we executed in 2021. Those brokers that wrap their minds around it, study their hyper local stats, shift their execution strategies will have stronger businesses than before. In more challenging markets for sellers, there is a flight to quality. The consumer will seek out and hire the well positioned, well prepared and professional brokers that have a strategy for a successful transaction. The more your market increased in value over the last 2 years, the more severe the battle will be between buyers and sellers. Every market is different so become an expert in your hyper local market. Don't worry, good product that is well positioned and appropriately priced, will sell. This is the basis of a normalized market. Shifting markets traditionally weed out the "hobbyists" brokers and the brokerages that are not fundamentally and financially sound.
After today, how are you going to pivot? What changes are you going to make to your business? How will you navigate the 3rd quarter and the rest of 2022?