June 9, 2022
State of the Real Estate Market
with Kirk Pugh, Broker/Realtor®
Program presented at the Keller Williams – INNOVATE Market Center, Wilmington North Carolina
Kirk: There’s a lot of science behind what’s happening in the real estate market and why it is where it is today.
The pandemic, surprisingly for our business, the real estate business, was sort of a non-thing, right? It happened. We all got scared for a minute.
We went through a lot of internal planning at KBT. What are we going to do? What are we going to do? The real estate market is going to stop.
And it went like that.
No. Biggest, biggest difference, and if anybody was around, if you were in the real estate business back in 2004, 05, 06 and 07, you could walk into a bank, breathe on a mirror, and they would give you money?
Not only would they give you money, a lot of them were giving you 120% of the purchase price so that you could go buy the fence or the new car or take your wife on vacation. So money was free and free-flowing.
So a whole different environment back in 2005-6, leading into 07 and ultimately 08, when we had a financial crisis that led to a housing crisis.
Back in 2008-11 people were borrowing 120% of their purchase price.
And then the market fell out from under them. And all of a sudden, they didn’t owe 120%. They were leveraged 160 and 170 percent. So their home was worth half of what it would bring on the open market.
There was a huge backlog. I can remember back in the day when I was going to the Clerk of Court’s office and buying distressed property, there were sometimes as many as 20 or 30 new substitution trustee filings at the clerk’s office a day. And that’s just New Hanover County. Today, you go down there, and there’s one or two.
There are far fewer buyers in the market today than there were five months ago, simply because of interest rate rise and home price appreciation.
If they were in the market for a $350,000 home, now they can only afford a $280,000 home. So $350,000 home today is actually a $270,000 home two years ago.
And interest rates have upped, so now they qualify for even less.
My opinion is, What’s happened? Builders two and a half years ago, two years ago, 18 months ago, contracted with Fred here to build him a house for $350,000.
COVID hit, lumber went through the roof, up 350%. You couldn’t get asphalt product. What’s made of oil? Shingles, carpet, vinyl. Everything that has anything to do with oil costs more. And you can’t get it. You can’t get glass. For some reason, garage doors are nonexistent.
So now Fred’s ready to close on his house that he’s under contract for $350,000.
Guess how much it cost the builder to build that thing over the course of that time? Probably cost him 350 plus plus.
So the builders have been taking it on the chin for a couple of years now, closing stuff that they sold at a price that was less than what it actually cost them to build a darn house.
Who’s afraid of a housing market slowdown or a recession?
I’m not. I don’t want there to be a recession.
Actually. I do kind of want the housing market to slow down a little bit. I’d like there to be something to sell the buyers that are climbing all over the rafters and out of the windows saying, I want to buy, I want to buy, I want to buy.
And there’s nothing to sell them.
So I would like to see our resale inventory rise and I would like to see our new home inventory get sort of more robust in our area so that we have more opportunity to sell. But I would also like to see those new homes come down a little bit in price.
Since last fall, interest rates have steadily risen. Obviously, we know interest rates for mortgage is not 4.9% now, it’s five and a half percent as of this morning.
Still, even during the rise and the very rapid rise in interest rates, we’re still on a seasonally adjusted pace to sell $5.6 million in homes in 2022.
So 5.5% is not terrible. I mean, somebody that’s been six months ago, twelve months ago, and they were reading about 2.75% and 3%, three and a quarter percent, they’re going, Oh my God, five and a half percent.
That sounds like a lot.
And it is only because prices have gone up so much also. So they’re buying power is so much less than it was. But that 5.5% is still historically really low interest rates.
If you bought in 2008 and now you own in 21, 22, you’ve averaged slightly better than 4% over the last 14 years.
Now, if you bought in 2018, you’re doing great, but if you’ve owned your house for 12, 14, 15 years, you’re about average.
The growth in prices has not really gone historically out of the normal. We just had this wonky time during the late ’20s, and now we’ve had a couple of years where things have been a little nutty.
The number of starts that builders didn’t do, created an inventory shortage today of millions of homes. And Gary [Keller, Keller Williams Realty] said a couple of weeks ago that the shortage is still somewhere in the neighborhood of two and a half to 3 million units.
It will still take between five and seven years for builders to catch up to the pent up demand that we don’t have the inventory for. But we’re in a housing shortage and think about who’s buying houses.
My conversation six weeks ago was all about setting expectations. You need to be prepared to offer a full price, or better, you need to be prepared to offer a substantial amount of due diligence, money, skin-in-the-game.
And if you don’t do that, then you’re not going to be competitive and you won’t buy the house.
I have people now that are saying we’re thinking about buying in the fall and I’m going, that’s awesome because the market is going to change. There will be more inventory available and you might see better opportunity in the new home market at better prices than you will today.
A year ago, we were saying the average days on market is 90 to 120 days.
And now I’m telling clients in that $250 to $350 price range that we’re going to put it on the market on Thursday. I want you to leave town Friday morning, come back on Sunday, and we’ll review offers. One day of showings, highest-and-best by noon on Sunday.
And last one we put on the market like that, we had nine offers.
We’re going to start to see the home price appreciation level out and maybe even the average, maybe even home price appreciation, which has not declined in more than two years – it’s been going up and up and up – we may actually see a decline in appreciation where home prices actually retract.
I don’t think it’s going to happen in the resale market. I think it’ll happen in the new home market.
Major metropolitan areas New York, San Francisco, Atlanta, Detroit, Dallas, Austin, all of the major, highly densely populated areas in the country are having population losses. New York City, I read a week or so ago, lost 350,000 people in the first quarter of the year.
And all those people are going somewhere and they’re going to less densely populated areas like Wilmington, like Leland, like Charleston, anywhere in the Southeast.
Our areas, mid Atlantic, Southeast, are still experiencing very strong markets because we have an exodus of people from the big cities who want to come and live in a place that’s not so compact.