When sales stop going through, something may be up.
There are not a lot of houses on the market on our island. This has created an artificial "housing shortage" that has driven up prices in the last year, to astronomical levels. Housing prices have nearly doubled (maybe actually doubled) in the last year or so. It has all the markings of a bubble.
With prices so high, why don't people sell? Aye, there's the rub. Houses are not like stocks or bonds. Cars are pretty much the same way. During the "car shortage" of the pandemic, we all marveled at how the "blue book" value of our cars went up to the point where a three-year-old car was worth more than the sticker price when new, three years prior. It made no sense at all. But everyone I knew said the same thing: "I'd sell my car, but then what do I do? I'd have to buy another one at inflated prices!"
Even people with extra cars (second or third cars) were blasé about it. "Well, with prices going up, I might as well keep it!" they said, not realizing that once assembly lines are roaring again, cars will flood the market. And we are already seeing inventory increasing at local dealer lots. RVs? If there was a shortage of those, it is long gone! RV dealer lots are overflowing with hundreds of rigs, each.
Houses work the same way as cars. Yes, we could sell our house, but then we would be homeless. I suppose if we were smart, we could live in the camper for two years, touring America and then settle down somewhere, buying a house after the market crashes. But this isn't as an attractive a scenario as it seems - we would have to uproot ourselves from our current lifestyle and friends. Mark would have to give up pottery for at least a couple of years. And timing the market - even the real estate market- is tricky.
And it's not like we're desperate for money - just yet. But wait for it...
But like with cars, some folks own more than one house - they bought a vacation home. And having been down that road, I can tell you it is a real money pit. Even with no major repairs, it costs $1000 a month to keep our house, with taxes, insurance, utilities, and so forth. It might not sound like a lot of money compared to rents these days, but that doesn't include a mortgage, which could add $3000 a month to that total. Multiply this times two houses and you can see it gets expensive.
And, like most people it seems, you drop another $100,000 on remodeling, it gets really, really expensive. Ask me how I know this.
On our block fully half of the houses are unoccupied at any given time. Some visit seasonally. Some visit weekly. Some visit hardly at all. One nice house hasn't been occupied for well over a year, after the husband died. Someone approached the widow and asked if they wanted to sell - as she had no plans to use the house. "I'll just keep it!" she said, and there it sits. Another such house went the same way - over 20 years ago. You can imagine what it looks like in that time - there were trees growing inside the house. But the widow refuses to sell, keeping it "for my daughter" who has already expressed that she has no want or desire for a mildew and mold-infested run-down nightmare. Dementia is a bitch and old people do weird shit with real estate.
Another house around the corner has changed hands at least three times in the last decade (or less!). Friends of ours lived there and we thought it was a cool house - all new kitchen and baths and whatnot. The main entrance was a little strange - you entered into a family room and then took a sharp right into the kitchen. It wasn't a large house, and our friends sold and moved down the street to a larger house.
Well, the buyers sold it again within a year or two and the new buyers now have it back on the market without having really ever lived in it. It sold a few years back for $400,000 and now it is on the market for $800,000. What changed in three years to make it double in value? It's not like it went through a major remodel.
Well, there was a contract on it and they put a SOLD sign on it. And today, the SOLD sign is gone and it is back on the market. Cold feet on the part of the seller? Appraisal didn't come through? Bank refused a mortgage? Buyer lost their job or something? Who knows? But it is an interesting sign and it seems that houses are staying on the market longer and longer.
Down the road another house was recently sold when the owner died. A lady from out-of-town bought it sight unseen and paid asking price. When she finally came to see the house in person, she decided she didn't want to live there and put it in long-term rental instead. Pretty silly - buying houses without looking at them in person. Unless you are really familiar with the neighborhood and property values, it is a bad idea. UPDATE: This house is again for sale.
What is interesting, too, is how many of the houses that are occupied appear to be abandoned. We used to see people "out and about" but in recent years, many of those friends have turned the corner on old age and don't leave home as much as they used to. The pandemic certainly didn't help matters any. And a lot of those folks are shuffling off the mortal coil, one by one. The baby boomers are dying off - good news millenials!
But what happens when all that boomer real estate hits the market at once? Who will buy it? Does the next generation have the money to do so? We inherited a vacation home and promptly sold it. (UPDATE: The entire neighborhood was flattened during the recent hurricane). Why? Well, we knew how expensive a vacation home can be, having been down that road with the lake house - and that was not in hurricane-alley either! I suspect a lot of heirs will discover the same math - particularly if they have to split the house with siblings - you either have to buy them out, sell out to them, or work out some sort of time-sharing arrangement. Most smart people just sell and keep the cash.
The plural of anecdote is not "data" of course, but actual data suggests that the market is indeed slowing down. Some optimistic real estate agents argue it is because of a shortage of listings - not much inventory to sell. But I think that is more spin than anything else. Median sales prices went from a high of over $400,000 in January 2022 to $366,000 by December 2022. Think about that for a second - if you bought at $400,000 and put down $40,000 as a down payment, you basically just lost your down payment. If you put down less than that, you are underwater on your mortgage.
But what about vacation homes? Well, the same deal, but when the shit hits the fan, they are more likely to drop in value that primary residences. They are a luxury, like a boat or an RV or a hobby car, and in a recession, luxuries are first on the chopping block. Even for "investor" owners who hoped to make money by renting out properties on AirBnB, the business is slacking off as demand is dropping (vacations being another "first thing" to go when you lose your job) and too many damn people are buying properties with AirBnB riches dancing in their heads. We may see a collapse in this market in 2023, if not already. Hard to feel sorry for these greedy investors who overextended themselves.
But likely, some of these "investors" are indeed over-extended, as they paid top-dollar at the height of the market, and got mortgages based on optimistic AirBnB revenue-based mortgages. It is like the poor bastard who went out and bought a car to drive for Uber and now has to drive for Uber to pay off the note on the car. Modern day debt-slavery!
But with AirBnB owners, I suspect the end-game will be foreclosure, if they cannot service all these mortgages on all of these properties. Some folks own a half-dozen or more - just to rent out on AirBnB! This creates a domino effect as these foreclosure properties hit the market all at once.
And as I noted before, a 1% difference between supply and demand can result in a 10% difference in price - perhaps far more. A 10% difference? That could be a market bubble - or a market crash - depending on which way it is biased.
As the real estate agents were quoted in the article, so said the real estate agents, appraisers, home inspectors, and mortgage brokers that I used to party with in Fr. Lauderdale back in 2005: "let's hope its a soft landing!"
We can hope, but so far, it is looking a little scary.
