The housing market in 2024

Hi there! Is this your first time here? You can read all the previous issues of Graham's Newsletter and subscribe here.

As most of you know, the holidays have a massive impact on the overall market – especially for business owners. Like, I’ve been quietly running my coffee company on the side and the busiest time tends to be the last two months of the year. If you run your own business, you understand how difficult it can be to manage a million things at once. That’s where today’s sponsor, ShipStation can help.

ShipStation is a one-stop software to simplify nearly all of your shipping needs – no matter how big your business grows. They help you manage orders, print labels, compare rates, optimize every shipment, and automate delivery notifications in one dashboard – and they integrate almost everywhere you sell online including Amazon, Etsy, eBay, Shopify, and more. They also get you industry-leading discounted rates from USPS, UPS (up to 89%), DHL, and GlobalPost.

Over 130,000 companies have scaled their eCommerce businesses with ShipStation. 98% of companies that stick with ShipStation are customers for life! If you’re interested, let your customers shop risk-free this holiday. Click here to sign up for a FREE 60-day trial.

Now let's get to today's topic. Here are three pieces of puzzling information:

Mortgage rates are at 8%, affordability is at a record low, and home sales are on pace for the worst year since 1993. Yet, home prices managed to hit a brand-new high in September 2023.
Morgan Stanley thinks the market has hit rock bottom and that prices, rents, and affordability will improve over the next year.
Wells Fargo believes that we’re about to enter a 1980s style housing recession. In the 1980s recession, interest rates were doing this:

So what exactly is going on? Let’s talk about what’s going on with the housing market, what is in store in 2024, how to put yourself in the best position as a buyer, seller, renter – and what I plan to do myself.

Housing and recessions

First, let’s get this out of the way – does an economic recession always bode trouble for the housing market? There have been a number of recessions in the last century, and sometimes, yes… It did go badly for housing.

The most prominent example is the recession of 1929 – The stock market peaked and crashed during the Great Depression, wiping out savings and a number of jobs, but it also led to a 67% crash in value in the housing market. For home prices to return to pre-crash levels, it took more than three decades. Real estate also ran into trouble during the savings and loans crisis in the 1990s, where interest rates rose high, housing construction dropped, and prices remained flat until 1997.

And then there’s the 2008 crisis, which upended so many lives. Readers still keep writing to me with vivid memories of how it changed their life (If you have one to share, do reply to this mail with your story). The crisis was triggered by speculation, easy access to money, and short-term adjustable rate mortgages that allowed anyone to buy a home as long as they made their introductory payments. However, those mortgages often had sudden balloon payments built in, causing the price of the mortgage to go up dramatically after a few years.

When homeowners were unable to pay the mortgage, they started selling their homes. As the market was flooded with inventory, it became more difficult to sell, and people started to default on their loans. Banks which were dependent on these loans couldn’t pay their depositors, causing them to go down – threatening the collapse of the whole financial system. But then, a bailout was put in place in 2008, and now in 2023, we’re back at another all-time high.

But here’s the interesting part – the housing market has been fairly resilient for most of the last century with the exception of the two major crashes in 1929 and 2008, withstanding even most recessions.

After World War 2: Housing prices and construction boomed from a surge in demand.
1970s stagflation: The stock market went down, but real estate prices kept going up due to an increase in inflation.
1980s recession: Real estate saw a 4.5% increase even as inflation stayed high.
1990s savings loans crisis: Some markets dropped, but even the worst-hit markets decreased only by 10%.
The dot-com bubble: As interest rates dropped, the bubble had almost no impact on housing prices. In fact, home sales peaked in 2001.

But now, we now have a different set of challenges that will directly affect the real estate market moving forward.

1980s Redux

Wells Fargo is warning that the “housing market is heading back to a 1980s-style recession.” But they’re also predicting that housing prices will increase in value by 4.4% in 2025. To understand this, let’s look at what happened in the 1980s.

When President Nixon took us off the Gold Standard, it triggered a sequence of events. At first, there was runaway inflation. To combat that, strict policies were put in place to raise interest rates as high as 20% to prevent prices from spiralling out of control. This caused nearly everything to come crashing down. However, the case was different with real estate – because fewer sellers listed their homes, home prices continued to increase at a slower pace.

This is very similar to what’s going on now. Wells Fargo went on record to say that home prices would rise 1.8% by the end of this year, as tracked by Case-Shiller, 2.5% in 2024, and 4.4% in 2025. How is this even possible?

Most people pay attention to nominal home price increases – that is how much a home costs today compared to a year before. But unless you take inflation into account, you don’t get the real increase in home price. By subtracting inflation from the house’s price, you get a much more realistic picture of the house’s price.

As Bill McBride writes in his blog CalculatedRisk, we shouldn’t be looking at the “bubble and bust” model to understand what’s going on in the market currently. He points out that from 1978 to 1982, nominal home prices continued to go higher – but real returns, accounting for inflation – fell by 11% over three years. Home prices went up in terms of dollars, but, because of inflation, the net value declined even though people’s net worths were going up.

For example, if home prices increased by 5% but inflation was 6%, you lost money, even though on paper, you have more. According to the National Case-Schiller Index, the gold standard for real estate, median prices are up 3.9% over the last 12 months during a time when YoY inflation is 3.2%. When you look at that, home prices are really “up” only by 0.7% in 2023. And that’s in line with the historical average. That’s why nominal housing values stay strong even though real returns are slowing down, when you consider inflation.

But some experts have other opinions about what’s going to happen in 2024. Let’s take a look at how it could go from here:

The year ahead

Some analysts think home prices won’t continue to stay strong. Morgan Stanley is on top of this list, and they believe that housing will get more affordable through 2024 – with the first half showing weak home sales, but activity picking up in the second half and continuing into 2025, because of improving affordability. They also expect the Fed will start lowering interest rates, more sellers will begin listing, and buyers will begin taking more affordable mortgages. In fact, they anticipate that rates will be as low as 0.4% by late 2025, predicting a zero interest rate policy in just 2 more years.

This view is also mirrored by the chief economist of Realtor.com who thinks that the 30-year mortgage rate will fall below 7% in the second half of 2024. There’s a catch – None of these associations predicted the massive interest rate increases in 2023 correctly, nor did they predict that housing prices would rise at this rate – and critics point out that their guess is as good as anyone else’s.

Rock bottom

But on one thing, they all agree unanimously – nobody believes that housing prices will see much of a decline in the near future, at least until home sellers outnumber home buyers, which is nowhere close to happening because there’s a perfect balance between low supply and low demand. Prices really have nowhere to go but sideways. So why does RedFin believe that the housing market just hit “rock bottom”?

Well, 2023 has been a “bad” year for the housing market. Sure, prices didn’t crash, but inventory has been at an all-time low, mortgage rates hit a multi-decade high, affordability is near the worst it’s ever been, and according to the CEO of Redfin the only good thing about the housing market is that it can’t get much worse from here.

The reason is that in this market, most homeowners aren’t facing default – unlike 2008, where homeowners faced foreclosure in a race to the bottom. The new inventory is coming from homeowners who need to sell for extra cash. This could be due to job changes, divorces, or other life events. These homeowners can still afford to make their mortgage payments and wait to get the price they want.

So, home sales have hit a rock bottom, because sellers don’t want to give up a historically low rate and buyers can’t afford to bid up the prices. For affordability to fall back to normal, one of three things needs to happen:

The 30-year mortgage rate needs to fall by 4.4 percentage points
The median household income needs to rise by 62%
Home prices need to fall by 38%

In terms of where prices are rising or falling the most: Detroit had the fastest annual home-price growth in the country, at 6.7%, followed by San Diego at 6.5%. The weakest market was Las Vegas where prices fell 1.9% on an annual basis. Since I follow the Vegas market closely, I can confirm that prices do seem to be falling a lot – I’ll be going much deeper into that in a future issue.

Anyway, we’ve got all that out of the way. Now, what’s most likely to happen throughout the next year?

Housing market 2024

Let’s look at the data: Investors overwhelmingly believe that the Fed will begin to lower interest rates in mid 2024. There’s a 52% chance that we’ll see a quarter point reduction by May 2024, along with 4 more rate cuts through the end of next year. In addition, there’s a lot of cash waiting to hit the market – institutions and investors have a record $5.7 Trillion parked in cash-like money-market funds, yielding above 5%. When the market eventually swings towards stocks and real-estate, this cash sitting on the sidelines could act as a catalyst. This tells me that while housing is still extremely unaffordable, there’s no shortage of people willing to bid up low inventory and lock the market into a stalemate where prices aren’t falling.

As someone who’s worked full-time in real estate since 2008, I’ll call it for what it is: I can’t see many situations where buying makes sense in the short term. The fact is, renting is cheaper right now in almost every single market – good deals are really hard to find, and I don’t see many opportunities in a competitive market like this.

So the approach I’m taking is that if I want a place to live in for the next 3-5 years, most likely, I’ll rent until the cost of buying vs renting evens out. I’m still actively looking for potential opportunities on places that I could buy but I just don’t see anything. The returns are way too low for commercial real estate given the risk, comparing it to what I can get risk-free in treasuries. So I’m just going to join a lot of other investors who’re taking the “wait-and-see approach”.

Personally, most real estate predictions seem like totally random guesses, and inevitably a few of them will turn out to be right. If you ask for my guess, I’d say that rates hang higher than people expect for the next year and I’m guessing they’re not going to go down as much as people think.

Over the next few years, the housing market will slowly begin to normalize, but that could take a long time. Commercial real estate on the other hand, could hold a lot of opportunity given that most of these loans are only locked in for 3 to 5 years at a time. I could be totally wrong – and I admit that my guess is as good as anyone else’s.

That's it for this week. I hope you enjoyed this article. Let me know your thoughts by responding to this email - I read every single comment :)

If you found this useful, please forward this to one person who needs to read this!

Stay safe, stay invested and I will see you next week – Graham Stephan.

113 Cherry St #92768, Seattle, WA 98104-2205
Unsubscribe · Preferences