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IRA Financial Blog

Are we in a Housing Recession? – Episode 351

Adam Talks

In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses the current real estate market and whether or not we’re in a housing recession, and how to best use retirement funds to invest.

Are We in a Housing Recession?

Hey, everyone, Adam Bergman here, tax attorney and founder of IRA Financial. And on today’s Adam Talks, are we officially in a housing recession? So, we’re in a strange and peculiar position, right? Interest rates are going up, no doubt. Unemployment is still low. The stock markets seem to have rebounded somewhat over the last four to five weeks. Housing prices are still holding steady and have even gone up year over year. But, officially, we are in a housing recession, and this is based off builder sentiment that was just released in August, a couple of days ago, showing that we are now in a housing recession.

So, in today’s podcast, I’m going to go through some of that, some of the data, and then we’ll talk about impact of higher interest rates, talk about home prices, and then we’ll even discuss the impact on the Self-Directed IRA marketplace, if we are officially in a housing recession.

So, let’s start with what happened about a month or so ago. So, in mid-July, we learned that home builders broke around on 982,000 single family homes, which was based off June; that’s down from 19% in February and down 16% from the same month in 2021. So, it’s not a disaster, but the trend is going down, and that’s essentially what happens when a housing cycle turns over. You have existing home inventory begin to spike and home builders start to cut back, and that’s kind of where we’re at now.

The direct impact of less homes being built are higher interest rates. And we know interest rates have gone up over the last several months and they potentially could continue to go up at least for a few more cycles, where the Fed has been focused on cooling inflation, right? We saw inflation was down to about 8.5% in July, but still relatively high; higher than it’s been the last 40 years, down from 9.1% the month before, but still high, too high. And the Fed has repeatedly said that they are more focused and concerned about inflation than on a recession. They feel like they have the powers, whether it’s through lowering interest rates at that point to stimulate the economy and fight a recession. They’re more concerned about inflation.

Now, we’re not at the point of Argentina. Prices in Argentina have gone up 90% over the last year. The peso is devalued some 90%. I actually spoke with a friend of mine who lives in Argentina and he’s an accountant, smart guy, relatively successful, and he said he just can’t survive. They do not have any money. Whatever they earn, they spend. Why? Because inflation is literally running at 90%. So, you can’t save. You literally have to go and spend on products or just buy vacations. Right? Put it to the future, because the prices will keep going up. So, you just got to spend, spend, spend. You can’t really save. The market for US dollars is obviously super competitive and robust, and it’s a very scary situation in Argentina. We’re not in that place.

The American economy is still stable. We have still very low unemployment. People are making more money in their jobs. Is it keeping up with inflation? Well, that’s questionable, but people are making money and at this point labor markets tight enough where the employee has the leverage over the employer. Will that change? Potentially. That will have an impact on the home market, but at this point the difference between today and 2018 is stark, right? In 2018, banks were not capitalized well. Mortgages were given to anyone who could breathe. They were not capitalized. There was very little regulation and a very lackadaisical attitude towards compliance, right?

So, now that’s not the case. It’s difficult to get a mortgage; there’s diligence. You have to show W-2, it can’t be made up employment records and they’re going to make sure that you have some equity in the home. So, that is probably one major catalyst for a stop-gap and a cushion in terms of how much the real estate market could drop. Yeah, we will get to in a few minutes where you do have experts thinking that depending on your location, prices could drop anywhere from five to 15 or 20%. But, we’re likely not going to see a 30% to 40% decline as we did in ’08 or ’09.

So, let’s get to some of the mortgage news. So, mortgage rate spiked, we know, the last few months and I mentioned that directly correlates to the slippage in the housing market. And this gives you exactly a reason why. So, if a borrower in December took out a $500,000 mortgage at a 3.1% rate, they’d owe a monthly payment of interest of $2,135. Whereas, if the borrower took out the same $500,000 mortgage today, or over the last few weeks, where mortgage rate is 5.51%, they pay $2,839. That’s over $700 difference. Okay? So that’s considerable amount of money. So that’s around $10,000 a year extra.

And that’s obviously having a major impact on the ability of Americans to go out and buy homes. And that’s going to correlate and it’s going to cause prices to drop too, because it’s all supply and demand. If people just can’t afford prices at a certain clip and they can afford prices a little bit lower than if there are sellers out there that need liquidity and need to sell, they’re going to have to lower their prices.

So, according to the National Association of Home Builders, Wells Fargo housing market, it dropped six points to 49 this month and that’s the 8th straight monthly decline. Anything above 50 is considered positive. Problem is we’re below 50 now. The index has not been in negative territory since COVID and before that it was 2014. So, according to the National Association of Home Builders, we are in a housing recession. This all comes down to higher interest rates and tighter monetary policy, which means increasing interest rates. Of the three components in the index, current sales conditions dropped seven points to 57. Sale expectations in the next six months fell two points to 47. And buyer traffic fell five points to 32.

Despite higher costs for land, labor materials, about one in five builders in August reported lowering prices in the past month in an effort to increase sales or limit cancellations. The average draw reported was 5%. That’s pretty big considering they’re lowering prices and their costs are increasing.

As mentioned, the biggest hurdle is affordability. Buyers are struggling with affordability based off higher interest rates. My example I just gave based off interest rate increases, that $700 a month directly ties into that. Plus, the fact is that there is still the potential for even higher interest rates. So buyers are torn. On one side, they do want to potentially jump on opportunities because they think rates will go up. At the same time, they may not be able to afford what the price is right now and so they may have to just kind of wait and hope prices drop. Or they can try to get sellers to lower their price, but that comes down to inventory. And inventories have stayed pretty consistent, but they’re still historically lower than they used to. And that’s one of the things that are propping the prices of home.

Total volume of single family homes is expected to post a decline in 2022, the first such decrease since 2011. So think about that. The total volume of single family starts will decline in 2022; the last such decrease is 2011. And that’s kind of telling you where we need to be. Prices are still rising, right? The housing market, as I mentioned, is slowing down. But prices have been up. In May, price rose nationally by 19.7%. This is according to Case-Shiller index. Tampa, Miami, Dallas led the way, year over year gains of 36, 34%, 30.8% respectively. So obviously those cities have remained hot.

Sales down, prices are up, right? Sales of existing home fell 5.4% in June, 5th straight monthly decline and they are now 14.2% below a year ago, but prices are still rising, or still at least maintaining their price increases at a good rate. So, that’s interesting, right? Sales are down, should be more inventory, but prices are still up. The issue is inventories are still at very low levels, okay? So, even though there’s less inventory, or I should say more inventory, it’s still historically pretty low.

This is interesting. Several leading housing market economists are projecting a deceleration in home prices, which isn’t to be shocked, right? That’s something I think we all could guess that that’s something that is probably more realistic than not. Housing is at least trending downwards, demand will weaken and you’re going to have interest rate pressure, people just can’t afford the homes that are on the marketplace. There is still low inventory, which is keeping prices up. But, at some point sellers are going to have to lower their price.

This is interesting from Freddie Mac. In a quarterly forecast report issued by the chief economist Sam Katar, he projects “that home buyers’ demand will moderate in the months ahead, resulting in a switch from hot housing market in last two years to a more normal pace of activity.” Freddie Mac projects the home price growth will range average 12.8% in 2022, but will drop to 4% in 2023. By comparison, home price growth was 17.8% in 2021. So, it’s going to be about 12.8% and 2022, and then 4% in ’23. What’s that telling us? Telling us the worst is to come. We’re still treading water. If you think the markets started dropping March or April, it could take six to ten months for the real estate market to follow suit. And that’s what Freddie Mac is saying. Saying ’22 might be okay, not as bad as you think; ’23 is going to be a doozy of a year, and they project only 4% home price growth, okay? That’s scary!

Overall annual mortgage origination levels are expected to be $2.8 trillion in 2022 and $2.3 trillion in ’23. That’s down from $4.8 trillion in 2021. So. ’23 is expected to be half, less than half, of what ’21 is, okay? What’s going to happen? Prices are going down. Will there be a crash? Again, probably not, as I mentioned, because mortgages and banks are much better capitalized, and we learned our lessons of ’08. And the fact is, there is much better underwriting oversight. The diligence involved in underwriting; many of you tried to refinance or get a mortgage last year. It’s not like it was in ’08 or ’07. It’s much more difficult; it’s real. So, there’s legitimate underwriting oversight, and that’s going to hopefully cushion our fall.

Prices will decline meaningful, in meaningful ways. It also depends on where you are. There may be a greater crash in the Arizona, Nevada areas than maybe in Iowa or Nebraska. I’ve read recently, New York City rents are the highest they’ve ever been. Why? I was just in New York City a few days ago. Yeah, it’s back, right? I was walking around midtown. I had dinner there, and it was packed. It felt like 2018, 2019. It was jammed. People are going back to the office and rents are up. Prices are up. But why? Again, people still have confidence in their job. There is very low unemployment. If that shifts, watch out. It could get ugly. And that’s my only concern. I do believe if unemployment stays low, which it probably should, because a lot of people left the workforce, immigration is down, and we need people. There’s not enough Americans that want to work. Two and a half million people left the workforce, and they haven’t been replaced. So, I think employees will remain in the driver’s seat, and that will help cushion any type of housing decrease and help fight inflation, because salaries will have to go up in order to keep people working. So, I think ultimately that will save us from a major real estate crash, like ’08, on top of greater mortgage oversight.

How will that impact Self-Directed IRA investors?

So, I actually called a bunch of some of my more successful IRA investors, people that I’ve known for the last ten plus years, that have killed it in real estate. And this is kind of the sum of the steam of what they’re saying. Bunch are on the sidelines, still waiting for prices to drop. People feel that ’23, they’re going to see a 10% to 20% drop across the board; see if they’re right. So, they got ammunition, they got powder, and they’re ready for prices to drop. Right now they kind of feel like Warren Buffett during  COVID. Prices are too high, I don’t see opportunities, I’m just kind of looking around.

Some of the IRA investors that were looking to gain liquidity and sell, they are still in the marketplace to sell. They haven’t lowered their price yet, and they’re not going to because they are not in a position where they need to sell. Unlike the ’09 or ’09, which is important, people are a lot more capitalized, the assets better capitalized. So, you’re not getting into positions where people are so under the water they just have to sell for any price. Especially, IRA investors that tend to use way more cash than individual investors using personal funds. There’s really no rush to liquidity.

So, people mostly are on the sidelines. The sellers are still in the marketplace. There are buyers out there, some are still waiting. They haven’t been able to reach the price. The people that haven’t gotten their prices, have sold because they are a little bit concerned with ’23.

That’s been the major theme, is that not as concerned about ’22, it’s more about ’23. They feel like there’s a ten to 14 month trail on the equity markets. And even though the equity markets have rebounded slightly, or I’d say considerably, in the last four weeks, it’s still down. Crypto markets are still really down and real estate marketplace is really the only marketplace that stays strong. So, we’ll see what happens.

But, we are heading, recession is a strong word, I think we’re going to have a correction. I don’t think we’re going to see an ’08 40% correction. I think a five to 15% correction, if that’s the worst that happens, it’s healthy. I think some Self-Directed IRA investors that have powder, that have cash and are on the sidelines are excited for a correction because they’re going to be able to jump on some opportunities and with cash, hopefully get the chance and the opportunity to buy a good real estate deal.

Same with flippers. A lot of the home flippers that have been the core of the Self-Directed IRA industry for the last seven, eight years have been on the sidelines the last two years because prices have gone too high. They just haven’t seen the deals and the opportunities that presented themselves prior. They’re hoping that that comes back in ’23, maybe the end of ’22, but ’23, they expect prices to drop, and that’s when I’m going to start looking to get in and buy some homes and flip them or just rent them out because the last theme I wanted to just mention real quick is rental income. That in the past, a lot of these flippers have said, hey, I’m going to get in, in 60 days, I’m out. I’m going to do some landscape and put a pool in, paint the house, do a couple of things. Bang, I’m going to sell it for a nice profit. Now, it’s hey, you know what, I’m going to hold it. The rental income I’m going to get from it, from a percentage standpoint, is too significant to just flip. And that’s what’s happening in New York and other areas where people can’t afford to buy; so they’re renting, and they’re paying an extraordinary amount to rent, far more than they should based on the value of the asset they’re renting.

So, that seems to be the theme is, hey, I’m going to jump on opportunities in ’23, and instead of fixing and flipping, I’m actually going to hold it and rent it and get some good cash flow, and then the appreciation on that asset will be slower than probably in the past. But overall, I’ll have the annual income, plus the appreciation down the road.

So, there you have it. It’s a lot of data and information in one podcast. I’m sorry about that. I just kind of spent the last couple of days researching this and found some really interesting data that I wanted to share because the recession is a big word, and according to the Builders Association, we are in a housing recession. I think that’s a strong word. I think it’s a correction. But, I think because we have lower inventory and very low unemployment that people are still comfortable, they’re confident, and they expect to earn more money. So, they’re still in the marketplace looking for opportunities.

I just had lunch with my wife’s best friend, and she just bought a home in Connecticut a week or so ago and paid market price. And it was for really a beautiful home that wasn’t cheap. So, they’re buyers out there, okay and? There were a bunch of offers on that house too, not to the same degree as ’21 or the beginning of ’22, so it has cooled, but homes are getting sold. But, at the same time, that seller was a little bit more inclined to accept that offer right away, she mentioned she was kind of surprised that the seller accepted so quickly. She was like, hey, did we overpay? But, I think the marketplace has changed a little bit, but not to the point where people are just undercutting by 20, 30% the asking price. People are still paying around the asking price. There’s just less buyers, but not as many sellers as would be required to be in a situation where the buyer would maintain the hierarchy of dominance over the seller.

So, lots to unpack. I thought this was a cool topic because it directly impacts Self-Directed IRA investors. The biggest asset class for Self-Directed IRA investors is real estate and the fix and flippers that have been a catalyst to our industry and a big part of it have been on the sidelines the last two plus years and now they’re expected and waiting patiently to jump back in towards the end of ’22 and definitely they feel in ’23.

So, thank you for listening. If you’re watching on YouTube, really appreciate it. Hope you guys enjoyed today’s podcast and remember to come back next week. This is a weekly podcast. I have been doing this for over 350 episodes, so it’s been a lot of fun. I really appreciate all the support. You guys are awesome and definitely appreciate any feedback. If you do, you can email us at info@irafinancial, just hit Adam Talks in the subject or obviously, reach out on social media, Facebook, Twitter, Instagram, YouTube, whatever, whatever works for you, even LinkedIn. You can hit me up on LinkedIn too. Otherwise, be well, take care and I’ll talk to everyone again next week.


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