Holmes on Homes

The State of Real Estate Economics of 2023

In this edition of Holmes on Homes we’re going to share some of the research and economics that we study to provide our insights and predictions on the market. We recently had the opportunity to spend time with Gary Keller at an event in Los Angeles and these are the key economics we felt impacted our market. If you’re a stat-geek like me, you’ll enjoy. If not, feel free to jump ahead to Tanner & Parker making the most amazing chocolate cake on page 12.

WHAT ARE WE LOOKING AT?

This is the number of homes (in millions) sold annually in the US for the last 32 years.

MY TAKEAWAY

The total number of homes sold has been above average since 2013 and went crazy the last couple of years. From ’21 to ’22 we dropped almost 20% in sales and that trend will continue this year. The only question is how much. We see indicators that it could be 15% or so. January of ’22 to January of ’23the 7-county metro dropped 30% in sales! We’re not going to jump to conclusions on the whole year based on January but something for us to watch!

WHAT ARE WE LOOKING AT?

This is a chart of home prices for the last 32 years.

MY TAKEAWAY

Long-term trends have always been 4%. You can go back 50+ years and this is the same chart. This is as steady as it gets everybody! The big takeaway is the “above trend” of the recent couple of years really isn’t out of line. Yes, home values were above the trendline of the last couple of years. However, if you’re a buyer waiting for the bottom to dropout, you might have better luck getting tickets for the next Prince show at First Ave. Projections for this year are a flat year but lets face it, the trend line will keep going up – forever.

WHAT ARE WE LOOKING AT?

This chart shows a combination of inventory mixed with appreciation over segments of time.

MY TAKEAWAY

We’ve been slipping on inventory for about 10 year running now. You’ve heard my soap box of price = supply + demand. This sums it up just about perfectly. Going back to the last chart of the 4% long-term trend.. this is a great example of why pricing won’t be tanking anytime soon. Does anybody want to guess what happened 10 years ago to knock out our inventory? That’s right.. another soapbox of mine: builders stopped building after the ’08 bust. Not by their own fault of course, as most went out of business. More on this a bit later.

WHAT ARE WE LOOKING AT?

This is a chart of historical mortgage rates for the past 50 years!

MY TAKEAWAY

Love this chart! My take is simple.. we’ve had it easy for so long on interest rates that we have forgotten what’s normal. If you bought a house in the last 10 years, the rate was cheap! This shows the perspective on why we’ll never see 3% again and the reality of how good rates at 6% actually are. Rates are currently 5.875% as I type this (March 1st) and we should see rates in the 5%-6% range all year.

WHAT ARE WE LOOKING AT?

This is the Affordability Index of housing as a percentage of income. Avg income vs. avg home price.

MY TAKEAWAY

We’ve been spoiled over the last 10 years with home values lower than the long-term trend line AND rates well below the 50 year average. It’s been the perfect storm of home buying and affordability. This is going to correct as you can see what happened in ’22 with rates going up. Buckle up ladies and gentlemen, we’re in for some market changes!

WHAT ARE WE LOOKING AT?

This chart rocks.. this is annual inflation info for the last 34 years.

MY TAKEAWAY

It’s obvious that inflation really sucked over the last few years. Of course it did, that’s what happens when we print free money! We can see this balancing out through the year. TBD of course on how long the correction will take but we should be balanced on inflation sometime through ’23.

WHAT ARE WE LOOKING AT?

Love this one too.. this is inflation as a perspective of affordability across different industries.

MY TAKEAWAY

Wow.. you’re screwed if you’re unhealthy AND paying for college tuition!! Those industries went nuts in affordability over the last 22 years. My takeaway on housing is that it’s coming in lower than the inflation of the average hourly wage and overall housing remains affordable. That aligns with the affordability chart we went over as well.

WHAT ARE WE LOOKING AT?

Underwater homes on average for the last 12 years.

MY TAKEAWAY

The historical average is 6% of homes are underwater and we won’t see that for a long time. If you’re in panic mode after the buying rush of the last 2 years; take a deep breath. You’re going to be ok. Go back to the historical home value trends increasing 4% per year and remind yourself of how awesome that 3% rate is!

WHAT ARE WE LOOKING AT?

Home starts since 2005..“Home Starts” meaning new construction.

MY TAKEAWAY

We’ve been on this info for a few years now. One of the reasons that we have such low inventory today is because builders dropped off the face of the earth after the ’08 bust. We didn’t get back to normal new construction starts until 2019 or 2020. That’s a lot of homes that didn’t get built and quite frankly we could use a few. Let’s go builders!!! Time to shine!