Real Estate Days on Market?

[2manyrocks]

I'm not sure we should conclude that inflation will not be as long or as bad when we've never seen such levels of fiscal spending and QE nor is there much to suggest any fiscal restraint is coming soon.

Appraisals during 2020-2022 were made when buyers were bidding well above list and beyond the appraised value of homes. One survey indicates buyers paid an average of $65,000 over list. It becomes extremely difficult to make an accurate appraisal because the sampling of closed home prices becomes skewed by one record sales price to the next.

Many buyers closed without inspections to assess issues with the homes. In some cases, the buyers didn't even personally view the home before making an offer. If buyers didn't know what they were really getting, I doubt appraisers knew, either.

In the days of 5-8% appreciation, there was a baseline against which outlier appraisal values could be detected even if banks and examiners didn't take the time to review the appraisals to determine if the comparables used in the appraisal were true comparables. Most times, the appraisals are taken at face value until the loan goes into default and into special assets for recovery.

When there's a 40% runup in prices in two years time, there's plenty of room for appraised values to inaccurate not to mention that housing prices were obviously influenced by unique QE and economic conditions. Even if the appraisal was somehow accurate for the time and market conditions during which it was made, there's no assurance that the valuation will hold over time when those unique conditions no longer exist.

Then there's the issue of how homes used to appreciate at 5-8% a year, had significant liquidity issues due to the months required to sell, had significant transactional costs, and had drains on yield due to insurance, taxes, utilities and maintenance. Because of these aspects, single family homes were homes rather than speculative financial assets. Arguably, that changed in 2020-2022 due to the rapid runup in prices due to QE. A traditional home appraisal is not the same as the evaluation of a financial asset.

 

[Torvy]

There are certainly pockets where houses are in a bubble. At the end of the day, they are not making any more land. Even though our birthrate population has slowed to negative growth, the influx due to migration continues upward pressure on home values overall.

Like I said, 5.47% is the worst 30 year run in US History. The current 30 year average is much lower. If you really want to compare mortgage interest rates and inflation, you have to do so with that in mind. More sophisticated banks will use modeling that projects future changes, but even then the current bump is short compared to the previous 20-25 years. There is another huge factor in terms of banks making money and that is that 'average' rates are not what a given tranche is holding. There are typically more loans at higher rates which brings the actual revenue rates per tranche comfortably above any long-term inflationary levels.

I agree with you that without changes, we could see even worse inflation as the effects of unchecked spending spiral out of control. My point is that long term interest rates are not so dependent on the short run and definitely are not based on guesses, even educated guesses, about future inflation. The market ultimately drives rates.

 

[ultrarunner]

One problem for many is sharp increases in value often followed by sharp increases in taxes...

I just received notice of value in WA state and now waiting for the impact...

As it is nearly 10 months rent to cover property tax and insurance...

 

[riptides]

Hmmm......Real Estate continues to defy predictions of demise and price cuts in my general area.

Plus, there is an influx of tech influences coming. Lots of data center build outs, warehousing and solar installations.

I guess, we are in the happening area. I am just a few 10k's short of my all time high on Zestimates under Zillow.

 

[2manyrocks]

The Fed is making a correction in measured steps. Fair warning of what is coming was deliberately given at the Jackson Hole conference at the end of August.

One issue with economic predictions is that people hear them and sometimes change their behavior altering the outcome.

 

[ultrarunner]

Is it more than increase interest rates?

 

[CloverKnollFarms]

There is no reason this won’t be as bad as the 70s. In terms of actual policy, and where we are as a nation/world… there is no tangible reason this shouldn’t end up just as bad.

 

[ultrarunner]

With a record number of all cash sales or large down sales it would seem Real Estate is a little better positioned then 2008-12.

All I remember was price controls and hearing the word stagflation and the bank offering 10% or was it 12% cd rates?

This was all tied with energy and double digit property tax increases which resulted in tax payer revolt Prop 13

 

[2manyrocks]

As for what the Fed may be thinking, this chart from the Dallas Fed in March shows what they perceive as exuberance in the current real estate market compared to 1997-2007. The scale of the current exuberance isn't as large based on their chart.

Their assessment in words:

Our evidence points to abnormal U.S. housing market behavior for the first time since the boom of the early 2000s. Reasons for concern are clear in certain economic indicators—the price-to-rent ratio, in particular, and the price-to-income ratio—which show signs that 2021 house prices appear increasingly out of step with fundamentals.

While historically low interest rates are a factor, they do not fully explain housing market developments. Other drivers have played a role, including pandemic-related U.S. fiscal stimulus programs and COVID-19-related supply-chain disruptions and associated policy responses. The resulting fundamental-driven higher house prices may have fueled a fear-of-missing-out wave of exuberance involving new investors and more aggressive speculation among existing investors.

Based on present evidence, there is no expectation that fallout from a housing correction would be comparable to the 2007–09 Global Financial Crisis in terms of magnitude or macroeconomic gravity. Among other things, household balance sheets appear in better shape, and excessive borrowing doesn’t appear to be fueling the housing market boom.

Real-time market monitoring finds signs of brewing U.S. housing bubble

There is growing cause for concern that U.S. house prices are again becoming unhinged from fundamentals.

www.dallasfed.org

I can't let their comments go without opining that while other factors may have partly contributed to the sudden price runup, their sustained QE is at the root of it.

 

[Snobdds]

Hmm, then all of the principles underlying the calculation of net present value of a stream of future payments must be wrong.

Cost of capital is not the same as an interest rate...

two different things.