2022: Uncharted Territory- The Final Chapter

From the Desk of Bruce Norris:

2022 reminds me of a line in the movie Godfather III. Al Pacino says, “Just when I thought I was out they pull me back in!”  On August 6^th I will give my final timing report. Unfortunately, the title of the report is:

Uncharted Territory: The Final Chapter

2022 will be remembered as the year almost every asset reversed direction and headed south HARD!

In real estate, we’ve been accustomed to low interest rates, multiple offers, grandiose profits and near riskless real estate investments. That has ended.  In the next two years these charts will change the real estate investment game for years and years to come. Sales will go down by half, inventory for sale will explode in months’ supply, unemployment will go way up as will foreclosures.

What will happen to prices? I see three scenarios playing out depending on the policies we implement in the next two years.

Every category we use to determine if peak real estate prices have been reached peaked out at 5% interest.  When interest rates reached %, you already had the fuel for a downturn in price locked and loaded!

I want you to read this next paragraph carefully.

Between 1974 and 1980, interest rates doubled, and prices went up 300% from $34,000 to over $105,000. During those seven years, workers’ wages doubled but they actually lost buying power due to the impact of inflation. It took seven years of all of this to land at an affordability bottom of 17%. What took seven years in the 70s we just accomplished in four months.

The policies implemented by the Fed and this administration will determine just how bad this gets. The Fed could

• Raise rates and reverses course when a recession shows up
• Pursue ever higher interest rates to squash inflation, then we would have a longer journey
• If the administration does nothing to become energy independent in the next few years and prices of fuel continues to soar and create inflation, that sets up the worst-case scenario

The most important thing we face already is the shift of urgency to buy a house. We’ve reached 17% affordability for the fourth time in California. You only get there when you have a euphoric buyer. You never stay at 17% affordability very long {months at best} and you usually don’t get back to 17% affordability for a decade or more!

However, this time it’s different and much more treacherous! Since we first reached 17% affordability in 1980, interest rates have come down over a 40-year period from 17% to 2.6%. We relied on the reduction of interest rates to build back buying power and allow the “mood” of the buyer to recuperate.

That’s not going to happen this time. When your mood shifts about the urgency of buying a home, the “baseline” affordability is no longer 17%. In the min 90s, prices did not recover until we sat at 40% affordability for 5 years. In 2009-2012, we did not recover the “urgency” to buy real estate until affordability was 55%!

There are only a few parts of this equation. Affordability needs to go way up to find a baseline of support and equal the new “mood” of the buyer. That will constantly be impeded by interest rate hikes so prices will continue to drop to accomplish reaching equilibrium…very ugly.

But wait! Does any of this have to happen?  Maybe not.

There are three things that we can do to change the outcome.  There’s also some safeguards in place and even inventory that will fair better because of who the buyer is likely to be.

I can’t wait to share with you, one last time, what I see coming our way.

Sincerely,

Bruce Norris

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