Last week I signed up to go to Real Estate Trends Talk presented by the Richmond Association of Realtors. Having never been to something like this in Richmond, I decided to go to see what they had to say. The event had three speakers for the presentation: Dr. Lawrence Yun, the National Association of Realtors Chief Economist, Dr. Lisa Sturtevant, Virginia Association of Realtors Chief Economist, and Crystal Washington, a Texas Based Technology Strategist. Think of the event as an Economic State of the Union Address with less fluff or showmanship. I really think the real name of this talk should have been: The R-Word??? Maybe... Possibly… Probably Not…But still, we don’t know.
The R-word if you aren’t familiar is “Recession.” I think everyone in our industry and in the business sector has this in the back of their minds. The majority of the talk was based around this overwhelming fear of another economic slowdown. Dr. Yun was the first speaker and had a few points he really wanted to stress: We are in the longest economic expansion ever experienced in the United States. This scares people as the saying of what goes up must go down. However, he pointed out that Australia has experienced a much longer expansion than the US has and is still going. He reminded the audience that there must be a catalyst to cause change. Remember in 2007 the change happened when we economically over-borrowed on subprime loans. It is not simply a timepiece, but an event or series of events that must occur for things to change. After explaining what the GDP was, yes he explained this, cue eye roll. He said it has moved from 3% to 2% within the last year. The global economy is also slowing down at about the same rate. Consumer confidence is still extremely high, which is a good economic indicator for a continuingly strong economy. Additionally, the after-tax corporate profits are still rising at what he considers to be a very healthy level indicating healthy growth.
He then went on about how good REALTORS® Political Action Committee (RPAC), a lobby group in Washington whose main goal is to promote homeownership and how good the National Association of Realtors (NAR) are. This basically justified his job and the work RPAC does. Was this a political move? Of course, if we contribute and are happy; he has a job. This point was probably lost on most people, however, it is always important to know where people’s loyalties lie. He said that the uncertainty lies with China. All of his predictions are contingent on whether we end up having a trade war or come to an agreement with China. He was certain that a trade war would absolutely cause a recession.
Then he explained that other indicators may not be as valid as they used to be. When people look at the 10 year Federal Loan Notes, an inversion of rates is an indicator of a recession. This is actually happening now. However, with mortgage rates being the lowest they have been in recent memory at some point when rates are this close to zero this indicator loses its validity. Additionally, mortgage applications are up from last year. Mortgage loans are all on solid footing and people are borrowing the correct amount of money that they can appropriately payback, i.e. people are not over-borrowing and over-purchasing. With a lack of inventory, he urged the need for a push in homebuilding. If there is a recession, he thinks people will not buy. Building new homes equals a buffer to a recession. Which at this point I am so sick of hearing this, I had to tune him out for this part. The problem with this train of thought is that all people want new builds. If we look at Richmond, people want to be in a specific location regardless of the build quality or period in which the house is built. So building more homes in Hallsley isn’t going to help people who want to live in Ashland or the city center. Next Lisa Sturtevant was introduced. She focused more on the economy in Virginia. Job growth is slowing down and mirroring the national trend. With lots of people looking to hire, younger people are looking to where housing is more obtainable. This seems like more good news for Richmond being a smaller city with major companies within its borders. She went on to say that housing inventory was down 10% from this time last year and explained that low-interest rates keep inventory down since money is very cheap to borrow. Interestingly, she made the point that people are refi-ing to build additions to the houses that they already have. Since people are unable to find the exact house they want to buy. They find it easier to pull equity out of their current house to build additions and update the properties rather than selling and buying a larger or more updated home. At this point, I must have blacked out, or temporarily died from boredom. I missed how she got her numbers but her outlook was similar to the first speaker. She continued on the same theme of people not moving because of a lack of inventory. Older homeowners are not moving out of homes and are over-housed. Meaning that a family where all the kids have moved out still owns the 5 bedroom house in the neighborhood. They would downsize but there is just nothing to buy. When I came to, her points were summed up with the following: The Good: Millennials and first time home buyers are entering the market. Wage/income brother is more widespread. Interest rates are at historic lows. A downturn would likely be mild. The federal government and Amazon can insulate against a downturn. The Risks: Job growth in the state has slowed somewhat. Affordability and lack of supply is a growing concern. Low-interest rates have encouraged high rates of refinancing. Economic uncertainties could continue to spill over to cloud consumer confidence. The best part of the entire night was when she made a joke about Economic Analysts not knowing anything and push enough data to hedge their bets.
At the end of the day here are my takeaways:
Confidence is strong.
Rates are stupid low.
People are over-qualified to borrow.
Nothing to buy so people build additions.
No Recession unless there is a trade war.
It seems to me that everyone is afraid of a recession. At the end of the day, if it happens, we are looking at a slow down but not a full-fledged recession. Nothing, as we saw in 2007-2009, could happen because we just have so many over-qualified people trying to buy homes. This makes a lot of sense to me. As buyers come into our office, we are seeing that they have forgone their first house because they did not feel confident to buy. Now they are more confident and have more savings. Younger buyers are also hesitant to buy at the top of their budget, and for the most part, are only going to about 80% of the potential budget that they qualify for. This is by no means a bad thing. I think the younger generations are much smarter about buying than our parents. Furthermore, to very well qualified buyers, lenders aren’t taking any chances on loans. The process has become so much more stringent. More protections put into place by lenders plus more qualified buyers equals fewer foreclosures. Trade with China is the only real question that could cause a massive slow down. The upcoming election doesn’t seem to me to be a true indicator of the health of the nation. People just do not know what will happen next, and with that question unanswered, people do not want to take risks. With the last Recession still fresh in people’s minds and still hurting their credit scores and wallets, I completely understand. Although, if you see what these economists are saying, we should be alright. If it hits the fan, people will just see house prices hold steady and not drop anywhere as low as they did in the last one. This might end up turning our market into a much more seasonal industry rather than the boom and bust type market. At the end of the day, someone is going to ask me, "Well, would you buy in this market?” Yes. I have, and I will. This doesn’t scare me. I really think if you are qualified and want to buy, you shouldn’t let this kind of talk scare you. People aren’t going to make $30 grand on an investment property in a year like they have in the past, but they also aren’t going to have the crazy ups and downs of past markets. At the end of the day, no one really knows what the heck is going on, but that is fine. There is no crystal ball, and if there is, whoever owns it isn’t letting the rest of us see it.