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Is there a recession looming on the horizon? Will prices and mortgage costs improve? Why is obtaining home insurance rapidly becoming a deal breaker? What’s happening in the foreclosure and investment markets?
Whether you’re a brand new agent or a 40-year veteran, market intelligence expert Rick Sharga has the answers you need to cope with what’s ahead as we approach the spring selling market.
Rick Sharga, the CEO of Market Intelligence Company CJ Patrick, is a long-time real estate veteran with deep experience in the data and foreclosure side of the business. I recently sat down with Sharga for his take on the trends and data you need to know to be better prepared as you confront the challenges ahead this spring.
Is a recession ahead?
Is there a recession ahead? Sharga said if you look back over the last eight recessions, there’s one specific factor they all had in common: a “yield curve inversion.”
According to Investopedia, “A yield curve inversion occurs when short-term debt instruments have higher yields than long-term instruments with the same credit risk profile. The inverted curve has been a reliable indicator of a recession.”
In term of Sharga’s take on this issue, “The Federal Reserve has raised the Fed Funds Rate 12 times now, to try and get inflation under control,” he said.
“Eleven of those 12 times, we’ve seen them overcorrect and cause a recession. This feels a whole lot like an overcorrection.”
A second factor that could play into a recession is the Federal Reserve’s decision on Jan. 31, 2024, to keep its current benchmark interest rate unchanged at 5.4 percent. This means the earliest we would be likely to see a significant drop in mortgage interest rates would be in May or June of 2024.
On the other hand, Sharga said that the delinquency rate on mortgages has not increased. Couple this with strong consumer spending, job creation, low unemployment rates and productivity still being strong, and “any recession we may have will be short, mild and have little effect on the housing market.”
Sharga’s conservative estimate is that mortgage interest rates will be down to about six percent by the end of the year and perhaps even as low as 5.75 percent.
Red flag issues that can negatively impact the spring housing market
Sharga pointed to two red flags that have a high probability of impacting the housing market as we move into the spring selling season.
For the first time ever, consumer credit card debt exceeded $1 trillion in the third quarter of 2023 and increased in Q4 of 2023 to a record-breaking $1.3 trillion.
At the same time, the new credit card rate increased to 25 percent,” Sharga said.
“For many economists, the red flag concern with these high credit card interest rates is whether these households are tapping into their credit lines trying to make ends meet, but they can’t because the cost of living has gone up so much.”
The other red flag from Sharga’s perspective is that personal savings rates are just barely above their all-time lows in contrast to the all-time high savings rate we had during the pandemic.
Inventory remains tight as prices increase between 4% and 6% per year nationally
Despite the Federal Reserve “throwing ice water on a white-hot housing market, if you look at almost any of the price indices from 2023, they’re all going to show positive growth nationally four, five, or six percent year over year,” Sharga said.
Furthermore, “because the mortgage rates went so high after being at all-time lows, we have this rate lock effect, where a homeowner with a three percent mortgage simply can’t afford to sell their house and buy another one because their payments would double.”
Because of this, Sharga believes that we will not see a lot of new listings coming on the market.
“People will be competing for fewer properties, and this will keep prices from falling. The supply and demand imbalance will continue to exist,” Sharga said.
Silver Tsunami or steady stream?
According to the most recent NAR Profile of Home Buyers and Sellers, approximately 65 percent of the homes in the U.S. are owned by people aged 55 and older. With the average life expectancy for men in the U.S. in 2024 at 76.1 years, the boomers are finally starting to age out of their properties.
Given those facts, you would expect the silver tsunami to hit sometime soon. Sharga made the following arguments as to why this is unlikely to happen any time soon.
- When boomers move out of their large houses, they’re not selling: Instead, they’re tapping into their equity to buy or rent a new property and renting out their current home. The reason? It makes economic sense because their home is either paid off or has a very low-interest rate.
- Unlike the dinosaurs, boomers won’t die off all at once: People have been talking about the so-called silver tsunami for over a decade. Instead of moving out, many boomers have modified their current homes to make them more livable. In many cases, adult children have moved back in with them or may do so in the future.
- Boomers will be a source of future inventory, but don’t expect a tsunami: Sharga foresees a gradual increase in boomers listing their homes for sale. Also, increased new home permits coupled with increased new housing starts suggest that the new home market could help to bridge the inventory gap as boomers sell their current homes and move into newer properties.
- The overall inventory will not loosen up until rates drop to around 5.5 percent: Because 70 percent of homeowners have a mortgage interest rate of four percent or less, Sharga doesn’t expect average homeowners to start listing their homes for sale until mortgage rates fall below 5.5 percent. At that point, a homeowner with a 4 percent mortgage interest rate can start to rationalize being able to sell. “The delta between 3 [percent] to 3.5 percent to 6 [percent] to 7 percent is just too much of a financial hit for most homeowners to take,” Sharga explained.
Why homeowner’s insurance is rapidly becoming a potential deal breaker
A major issue that is already causing transactions to fall apart in certain areas is the cost of homeowner’s insurance. Sharga believes that this is a problem that will get worse before it gets better.
“If you’re in a state like California, where insurance premiums have been soaring because of wildfire risk, or in Florida, where they’ve been going crazy because of hurricanes and water damage, or in Texas, which turns out to apparently be the hailstorm capital of the United States where hundreds of millions of dollars of damage are caused by these severe hail events, it’s becoming difficult to get insurance or the costs have become so prohibitive that buyers can’t qualify to get a mortgage,” Sharga said.
Couple this with high interest rates and higher prices, and then add insurance premiums that “have doubled, tripled, or even quadrupled over the last few years, this is going to become a broader problem in more than just those states.”
Sobering results for the investment market
Sharga’s company, CJ Patrick, recently completed a survey for RCN Capital, a large private lender that makes investment loans. The survey looked at what was on investor’s minds. Sharga said the results were sobering.
“About 69 percent of the respondents said that rising insurance costs or the inability to get insurance was becoming a factor in their in their decision about whether to buy and sell real estate, and about 63 percent said it was hampering their ability to buy or sell real estate.”
Sharga then shared his own experience when California reconfigured risk zones for wildfires. He had been with the same insurance company for 22 years, he had never filed a claim or missed a payment, and there had never been a wildfire near where he lived. Nevertheless, his insurance arbitrarily notified him that his policy was canceled.
Sharga believes the reason his insurance company decided to stop offering policies in California was due to a combination of increased risk, skyrocketing prices, and state laws and regulations that make it difficult for insurers to raise premiums enough to cover those increased costs.
“In some cases, state governments are providing state-funded insurance. The net effect for me as a homeowner has been that in the last few years, my insurance rates have doubled for less coverage than I had before,” Sharga said.
“It’s a story that I wish it was just me, but it’s across this state, it’s across Florida, it’s across Texas, and it will continue to be a problem across the country.”
To make sure that you’re prepared to cope with this situation, take the following steps regardless of whether you’re representing a residential seller, buyer, or investor:
- Make sure that you investigate the availability of homeowner’s insurance (as well as flood insurance) for any property you represent prior to taking a listing or writing an offer.
- It’s absolutely crucial for both agents and lenders to obtain accurate information about the actual cost of homeowner’s insurance when they’re calculating whether a borrower will qualify for a mortgage on the property.
- Investors must also take insurance costs into account as they evaluate cash flow and which properties they want to purchase.
What’s particularly alarming is that insurance costs are so high in some areas that it can make purchasing a first or move-up home for many people prohibitively expensive. This situation may become even more dire if buyers have to start paying their own commissions.
If you’re in an area where insurance rates have soared, warn your past clients and sphere
Sharga shared some interesting anecdotal information about how insurance rates are impacting mortgage payments for existing homeowners. Several mortgage servicers that he has talked with shared examples about some of their customers who recently missed a payment but then got caught up over the next couple of months.
“When the servicers talked to those borrowers, they found that when some of the homeowners got their annual insurance bill, they didn’t anticipate the cost would be as high as it was, forcing them to decide whether to pay their mortgage or their insurance,” Sharga said.
“It’s a bit of a catch-22 because if you let your insurance expire, your mortgage company is going to slap their own insurance on you, which typically is more expensive.”
If you’re working in one of those areas where insurance costs are soaring and a past client or someone in your sphere is considering not paying their homeowner’s insurance, they need to know that if they fail to pay their insurance, their mortgage servicer will slap a more expensive policy on their home or may even cancel their mortgage.
Stop telling buyers, ‘Your payments will be the same for the next 30 years’
Sharga said this statement is incorrect, and here’s why. Many homeowners have an escrow account attached to their loan where the mortgage servicer collects the mortgage payment, PMI, taxes, insurance and/or HOA fees monthly.
While the borrower may have a fixed rate where their mortgage payment stays the same, taxes, insurance and HOA fees almost always increase over time.
Is there a ‘foreclosure tsunami’ on the horizon?
Sharga had this advice about the so-called YouTube “experts” who claim we will soon be facing a foreclosure tsunami, especially those who are trying to sell you course.
“Run, run away from these people as fast as you can!”
Here are Sharga’s key takeaways about what is really happening with the foreclosure market.
- Foreclosure activity has increased by about 10 percent on a year-over-year basis, but this is coming off historically low levels of foreclosure activity. Foreclosure activity in 2023 was 30 percent lower overall as compared to 2019. The earliest we can expect to see levels comparable to 2019 would be at the end of 2024.
- While increases in the early stages of foreclosure are expected, homeowners have an absurd amount of $31 trillion in equity. According to Attom Data, 80 percent of the homeowners in foreclosure have more than 20 percent equity in their homes.
- When homeowners get into trouble and receive their first Notice of Default, rather than risking losing all their equity in a foreclosure sale, they’re selling their property, pocketing the equity and moving on.
- While there may be more foreclosure starts in 2024, we’re seeing fewer auctions and we’re seeing far fewer bank repossessions and REOs.
“Anyone expecting to see a flood of distressed properties this year, it’s probably not going to happen,” Sharga said. “I’m forecasting foreclosure activity goes up less than 10 percent overall this year, and almost all of that will be in the early stages of foreclosure.”
A shift in investor behavior
In two of the three last investor sentiment surveys Sharga’s company has conducted, there has been an increase in the number of respondents who are buying properties and holding them as rentals.
“In the most recent survey, about 46 percent of the respondents were buying properties and renting them and about 32 percent were fixing and flipping them,” Sharga said.
“This tracks with other industry data we have seen. Third quarter 2023 was the third consecutive quarter where we have seen fewer properties flipped nationally, way down from what we saw a year ago.”
Sharga attributed part of this shift to the limited amount of inventory available for investors to purchase, coupled with prices not rising as rapidly as in previous quarters.
“So, people that are investing are increasingly moving towards a longer horizon buy-and-hold- strategy,” Sharga said.
A new twist to wholesaling
Sharga has spotted a growing trend — the emergence of local wholesale investors who find properties that look like good investments, secure the rights to sell those properties, but never actually take title to the property.
“They will sign a contract that allows them to sell the property, often to another investor,” Sharga explained.
“About 22 percent of the respondents in our most recent survey said they were wholesaling — that’s probably the highest we’ve seen, so it’s a growing part of the business.”
What makes this different from the big national companies that wholesale large portfolios of properties, is that these wholesalers tend to be local investors who can meet face-to-face with the homeowner and get the papers signed.
“They also know who the local investors are,” Sharga said. “So, in a lot of ways, they become a scout for other investors and provide them with inventory they are looking to buy.”
Sharga’s overall prediction for what’s ahead as we enter spring selling season
Sharga sees a “boring year” ahead for the housing market for the rest of 2024.
“Sales activity for both existing and new homes will increase year over year, probably not to 2022 levels, prices will go up a little bit, foreclosures will be at a minimum, and it will be a couple of years while the market resets,” Sharga predicted.
“Patience is probably the buzzword for 2024.”
Bernice Ross, president and CEO of BrokerageUP and RealEstateC
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