Real Estate Market Top 2017
Published On: April 17, 2017 Posted by: Jeremy Peterson
The seller’s market has had a long run and may not be over. But, if we look at the signs, a change may be just around the corner.
Let’s take a look at house prices in Weber County over the past 20 years:
What you see here is pretty obvious. House prices have far exceeded their 2007 peak from the real estate bubble years. That may sound scary at first, but when you consider that everyone that has been buying a home since then has had a job and good credit and a down payment, we shouldn’t be as worried. The price increases have been driven by a couple factors. First, in-migration from other states has created a booming population. Utah’s population just exceeded 3 Million people this year. That population pressure is creating demand for housing. Second, and more importantly, builders are not constructing enough new housing to accommodate all the newcomers and local folks forming new households. We see a lot of apartment construction. But, even these developments aren’t keeping pace with demand. So, prices have increased. But have they increased too much?
To help find out, I have done the homework for you of adjusting all of this market data for inflation. When we adjust for inflation, we can see where we are in the real estate market cycle as it ebbs back and forth between a buyer’s market and seller’s market.
Here is what that looks like:
This is a much different looking chart. But, it is a our magic decoder ring that tells us where we are in time. Buyer’s incomes restrict what people can afford. So, when their incomes go up, house prices go up. It makes sense. So, in a vacuum, if we adjusted for inflation, house prices should be a perfectly flat line that never varied from incomes. But, we don’t live in a vacuum; so, we get to do the fun part of figuring out other forces are impacting REAL (i.e. inflation adjusted) house prices.
First, lets state the obvious. When adjusted for inflation, house prices are peaking right where they were in 2007. Should this chart scare you? No. Supply and demand are creating this situation, not crazy-hybrid-sub-prime mortgage lending like we experienced 10 years ago. But, what it does show us is that the market pendulum has swung as far as it can into the seller’s camp. Anything more than this starts to create bad scenarios in other parts of the economy and society. And, when you consider what a pendulum does (Hint: it swings back and forth), it can also tell you a little bit about where the real estate market is headed.
Since we appear to be at a peak (and for everyone’s sake I hope we are), the question then is what would cause the pendulum to shift directions into the buyer’s camp and what does that look like?
Here are a few scenarios that might play out:
SCENARIO 1: Light 2000-Style Recession
In this scenario, we would enter an economic recession. Interest rates could rise and cause the recession. Or, a recession could cause debt defaults which would increase interest rates and create a slow self fulfilling cycle. In any case, a slowdown in job creation would cause house prices to stagnate as demand pulled back. But, the magnitude would be muted by Utah’s diverse economy and superstar business environment. Owners would see their house values level off and move sideways until the economic clouds moved on.
Scenario 2: Armageddon
In this scenario we relive the doomsday years of the Great Recession. The Four Horsemen of the Apocalypse show up to town to water their steeds and the real estate market tanks. Pestilence, famine, and war depopulate the area and reduce demand for housing. Once the housing market is decimated, a meteor strike occurs to finish the job.
Scenario 3: Medium Recession and Other Complications
In this scenario the economy comes to grips with some of the latent problems that have been plaguing it which include central bank reflationary policy, trade imbalances, wealth inequality and other socio-economic conundrums that have henceforth been unresolved. There is a lot of uncertainty in this scenario but uncertainly does not translate into the end of the world. If trade is negatively affected then Utah’s 12-cylinder sports-car-engine-of-an-economy may start to sputter for a lack of fuel. In such a case, job losses could exceed those being created and lead to a sag in house prices. Disruptive technologies could leave large sections of society without work while they retool to new skill sets. In this scenario, house prices stagnate or fall slightly for an extended period until fundamental economics push house prices upward for another round of increases.
Anything is possible but my bet is a that Scenario 1 or 3 (or some combination of them) are most likely. If you are a buyer looking for a home, the good news is that we may be nearing the end of insane bidding wars and stunning price increases. If you are a seller, the good news is that your property’s value isn’t likely to decrease significantly into the future. However, we do need to prepare ourselves to adjust to a coming shift in market dynamics. If you want to sell, now is a great time to do it. If you need to buy, let’s probe the market for the best options available. Whatever your situation, email me or give me a call at 801-390-1480 and lets discuss the best strategy for you.