The media has a lot to say about the real estate market, and I am here to provide clarity. I’ll answer: What should you believe from the media regarding the real estate market? Does a recession mean the housing market is going to crash? What happens in a recession? Can a housing market slow down or become more balanced during a recession? Does it have to be a dramatic 10 to 15% drop?
Recently, the Federal Reserve Chairman talked about how they would continue to look at rate increases to tame inflation. I want to highlight the bottom line without much economic talk about that strategy. That being, not all negative economic happenings will negatively affect the real estate market in a way that will be considered a crash or recession.
Real Estate Market Media Coverage
One of the unintended consequences we have seen because of all the chatter around the market is a decrease in inventory on the market. When the media says the real estate market is slow or interest rates are going up, sellers and buyers take notice.
We’ve been in an inventory shortage for many years, but we aren’t seeing the significant increases in homes available for sale that many projected would be seen. Why? I always say real estate is very localized. What people are experiencing in one market might not be what people are experiencing in another market.
It’s essential to understand where your market is functioning because what’s happening in one market might be very different from what’s happening in markets across the country (or even state-wide).
How to Research and Prepare for Your Business
When you look at your local market, there are a few specifics I recommend looking at.
Year-over-year Price Growth
Not just current pricing but what it was last year. For example, in my local market, the previous year, prices were going up by around 18-20 percentage points. Now, we’re seeing that come down a bit, to about 13-14.
It’s an important secondary number to look at aside from simply price because year over year, it shows you the popularity of last year’s market versus this year’s. I think some markets were getting a bad reputation for not being as great as others. It shows you that there’s a change and a slowing down. Some markets when they experience highs, also have the exposure to experience a lower low, meaning they’re going to drop faster than more stable markets.
Month-over-month data is an indicator of what is happening right now. However, that data’s about 30 to 60 days delayed, but it will start to show you if there’s a slowdown. And in some markets, there is a slowdown. It might only be a very small percentage, but it’s going to accumulate and show more of a trend over time.
Forward-looking indicators: Days on the Market and Inventory
Look ahead as a potential indication of what buyer behavior will be.
Days on the market have gone about two or three days… It’s gone from about 26 days to 28 days. This is not a significant difference since most people consider 50 to 60 days an acceptable amount.
Inventory goes hand in hand with days on the market. Again, many markets haven’t seen significant increases in inventory because when sellers don’t think people are going to buy their houses (due to what the media is saying about buyers’ fears), they’re not going to sell their home. After all, they don’t think that anybody’s going to qualify and want to buy it. This makes for a significant consequence of the media’s portrayal of the real estate market and not thinking locally.
Therefore, we have a lot of people sitting on the sidelines in our market, waiting to see what will happen when it comes to buying a home. I would say this mentality started around the end of July 2022. This is a snowball effect, where buyers are not seeing what they expected to see and when they need to pull the trigger quickly, they’re left with fewer options.
Keep in mind that buyers sometimes don’t have a choice but to buy a house. This is especially relevant if you live in a place with large employers and if those employers have employees that are relocating or if you live in an area that generally is desirable for buyers.
Housing Shortage for Millenials
Lastly, a shortage of housing in the United States for several years with the millennials entering the housing market. In the past few years, we have seen the supply outpacing demand by about twice as much, meaning we have half as many homes as buyers.
This is remedied by new construction. When we look at new construction, there was about a 10-year period from around 2007 to about 2017 where builders were holding back because they got stuck with a lot of inventory back in 2008 when the market crashed. They didn’t want that inventory, so they ended up selling it at a liquidated price, sometimes resulting in a loss.
They had just reached the level of building new construction in the last couple of years that they were back before the last crash. That was going to be a shining light that some people thought would help us solve the ultimate housing shortage that we have in this country. However, we’re seeing, from 2021 to 2022, new construction housing has dropped 30%.
What Builders Are Doing
If builders are building fewer houses, that means the demand for existing homes will continue to be strong because there isn’t another option for a buyer.
You might wonder what happens to new construction homes that aren’t selling. They typically discount it. However, as a renovator and somebody who fixes existing homes, I never compare sales between an existing home and a new construction home anyway. While that price decrease should it happen for builders inventory may affect other recently built homes that go on the market, it’s not necessarily going to be a factor for an existing home that’s been flipped.
Also, just because builders are stopping or decreasing their activity doesn’t necessarily mean there will be less demand from buyers. So that’s a reinforcing opinion when it comes to why flipping houses and why working with existing homes is still something that might be a viable option no matter what happens with the market.
Looking at the Market Realistically
Just because we’re hearing the word recession everywhere does not mean that the housing market will crash. A simple definition of real estate “crashing” I use is a 10 to 15% decrease rather quickly in a short period. And even in 2008, that didn’t happen right away. It happened over about six to 12 months. Some areas were hit harder with those changes in pricing than others.
Will it have a significant decrease in some markets? Potentially. I’m sure in many areas there are indicators, but those are also the areas that experienced significant double-digit growth. We had communities with 40% growth and it’s not sustainable. But just because we’re talking about recession does not mean that the market is going to crash. And there’s a difference between a market that is stable and one that is crashed. There’s a difference between a real estate market that is cooler and balanced than one that is crashed.
Takeaways for Your Flipping Business
Your reason for getting started in real estate should never be how the market is or what is going on economically. The decisions you make with the properties you purchase, your renovations, the improvements, and what you list for will all be affected by the market and the environment. But whether or not you decide to get in is a personal decision that should not be impacted by the current market.
In the same vein, your business is different from others. Take it from me and my experience. I started this business in 2007 and in 2008 I bought my first property. Anyone you ask would probably assume it didn’t work out if they didn’t know my story. Instead, every day I’m incredibly grateful for the opportunity that I took and created for myself.
Taking that opportunity years ago prepared me for what the market did in the last three years. I was ready, I was creating products that were good, and I was creating products that people wanted. I was in the market when people were looking for something that I was able to offer. That would not have happened had I not started when I did, learned what I did, refined what I did and knew the areas that I wanted to be working in and the areas that people wanted to buy in, it wouldn’t have happened. The next takeaway is regarding the house market crash
Lastly, remember that at any stage, you have the option to either sell something, hold onto it, or take a loss. The only time people are committed or forced to take a loss is if they have to sell that asset or that real estate purchase or that house. The only time you take a loss is because it’s a choice because maybe at that moment there are other options you would rather be doing with your money and your time.
You have the opportunity to turn down an offer that isn’t favorable or profitable and either keep the property as a rental or wait till a better offer comes forward. The only time you ever really get stuck losing money is if you feel like it’s your only choice and you choose that option.
Time is the great equalizer when it comes to real estate. Consistency is the only way that you navigate out some of these peaks and valleys. This is why there are so many different strategies in real estate investing. Strategies can be layered together to create a bigger picture for financial success and flexibility and freedom ultimately long term.
Ready to take that next step when it comes to flipping?
Here are some resources I’ve put together to help you get the information you need to move forward on creating your flipping life.
Make sure you have the Fixer Upper Checklist so you know which areas are critical to added value in a home.
If you are interested in learning more about the House Flip Blueprint course, go here! There are several videos on finding houses, renovations, and funding on YouTube. Check out your favorite flipping topics and new videos weekly.