Waiting For The Market Crash
By Mercedes Shaffer l Published in AOA Magazine
The media is full of headlines indicating that a market crash is on the horizon, and according to Consumer Affairs, 78% of Americans believed there would be a housing market crash by the end of 2022, while 50% expect it to happen in 2023. It’s also worth noting that 75% of the people Consumer Affairs surveyed responded that they would likely try to buy if the housing market crashed, and 84% of Gen Zers are actually hoping for a market crash so they can buy in, believing it could bring prices within their reach.
With so many would-be-buyers waiting for prices to drop, and still record-low inventory, how likely is it that the market will tumble?
Now that foreclosure moratoriums have expired, the number of bank-owned homes has been on the rise. In all of Southern California’s 5 counties, San Bernadino, San Diego, Riverside, Orange County and Los Angeles County, the number of residential properties that have gone into foreclosure has more than doubled from the start of 2022. When you read about the foreclosure rate doubling, it sounds catastrophic, but when you look at the data and put it into perspective, Southern California went from having under 70 foreclosures at the beginning of 2022 to having just over 170 foreclosures by the end of 2022. While it did more than double in one year, it’s a relatively small amount of foreclosures.
Foreclosures Prior To The Pandemic
When you compare this to the three-year average prior to COVID, there was 963 foreclosures in all of Southern California, which is 466% higher, and we were in a Seller’s market back then. Going back even farther, in 2012 there were 12,000 homes in foreclosure in Southern California, over 70 times more than what we have today.
The number of eager buyers still outnumbers the available inventory, so there is no foreseeable influx of foreclosures that would lead to a market crash. Even nationally, the delinquency rate for first lien mortgages is only 2.79%.
One of the main reasons we have so few homes in delinquency is because homeowners have built-up a lot of equity in their property. Most homeowners who bought prior to the pandemic saw 15-30% year-over-year gains in their property value over the past three years. The people who are most vulnerable to falling into foreclosure are those who bought in the last year or two, and especially those who paid significantly over asking when prices got very frothy and buyers were willing to pay anything to assure they won the bidding war. Even these buyers are likely to be in good financial standing because lending requirements are a lot tighter than they were a decade ago, so fewer people are over-extended. Also, it was often the all-cash buyers or the buyers who had the strongest offers with the most money down that were selected, and they are more likely to have the financial fortitude to whether market shifts. Nonetheless, significant life events like job loss, divorce, etc. can make some of the more recent buyers vulnerable to foreclosure.
According to the Census Bureau, in the state of California, over 45% of the population are renters and the number is rising. Redfin published a study showing that the median monthly asking rent in the U.S. increased 17% year over year on average across the US, 11% in Southern California and at the top of the list was Portland, Oregon with a 40% annual rent increase. This is good news for rental property owners. With so many would-be-buyers waiting for a market crash to purchase a home, there continues to be a high demand for rental housing.
Prices are high and interest rates are higher than they’ve been for over a decade. There’s a lot of uncertainty and the market has been so hot for so long, our previous economic model suggests that the housing market is overdue for a financial downturn. However, according to Forbes, nearly 40% of homes are owned free and clear, and of the remaining homeowner’s that have a mortgage, 71% have an interest rate at 4% or lower. In order for there to be a significant drop in prices, there will need to be a lot more inventory, and most owners won’t sell in this market if it means trading in a low interest rate for a high one.
With so many homeowners in good financial standing, there are no signs of a tidal wave of distressed homes coming on the market, but high interest rates have caused the market to soften and there are good deals to be found -- it just takes more skill to find them. With the right strategy, there are some great opportunities for buyers who want to purchase a home or multifamily property, but for those who are waiting for a housing market crash, they might be in for a very long wait.
If you would like to have a conversation about creating a personalized strategy for buying, selling or doing a 1031 Exchange, I can be reached by phone at 714.330.9999, by email at InvestingInTheOC@gmail.com or visit my website at www.InvestingInTheOC.com. Mercedes Shaffer is a real estate agent with Coldwell Banker and specializes in helping clients buy and sell real estate and perform 1031 Exchanges. DRE 02114448