The Housing Market Is In BIG Trouble

Headlines are screaming about a housing market collapse after new home sales just plunged from September to October. But is it really the time to panic? For first-time homebuyers, could this report actually signal good news? In this episode, we're going to unpack what's really happening and why the numbers aren't as scary as they seem. Jeb, it seems as though like every month, probably once a month, we get some sort of data report that comes out that the media is able to spin into a headline, whether it's actual the national news media or our friends here on YouTube that love to talk about crashes and spin data. But this one, this was actually sort of eye-opening. When you first see the raw numbers, what we're talking about is the new home sales report. Not existing homes, not if you buy your neighbor's home or a home that was built in the 50s, a brand new construction home built by a builder and sold to you. We saw a drop from September to October. So October is a one-month lag. That data just came out here in November, a drop of 17% in one month. And if you didn't follow this data and you didn't know how to dig into it and parse it out, you could look at this and go, oh my God, no one is buying homes. A 17% month-over-month drop in home sales is pretty darn big. But when we step back and look at it and take the data apart, look at it region by region, look at what was going on in the country and the economy last month. It's pretty simple and straightforward to see a monthly aberration and very likely to correct over the coming months. We often talk about context, right? Context matters. You can't just read the headline and go and start making lowball offers on properties just because you see a headline. In fact, we're filming this the day after Thanksgiving. It is Black Friday. And I'm getting comments on videos, Josh, that DR Horton, Lennar, two of the biggest builders in the country are doing these Black Friday sales because they can't sell homes, that they're out there basically discounting property, if you will, so that they can actually sell it because otherwise no one would buy it. And if we're being honest, probably couldn't be further from the truth. So let's not only talk about that because I think that's an important headline that people need to understand. Why are they doing deals? Why are they doing a Black Friday deal? And are they even discounting prices, Josh, or is it just the rate? And then talk about what's actually causing this difference in expectations versus reality when it comes to new home sales. Absolutely. So you may be in the market for a new home. You may be looking at DR Horton. You may be looking at Lennar. And the reason why is there about 32, 33, 34% of the housing market in terms of sales right now, which is about four to 5% higher than what we typically see for new homes. So this is an important segment and it's part of why we're talking about it today. And why is it an important segment? Because those homes have to sell. A builder builds a home. There's no, Hey, we've changed our mind. We're going to keep this. Your neighbor across the way may want to move, may like to move, but if it doesn't make sense, if they would have to go from a 2% mortgage rate to a 7% mortgage rate, they can post up and wait. They have a roof over their head. So many buyers, because that is where the available inventory is, has moved in that direction. Then combined with affordability, builders have been able to hold the line on prices while giving up the house in terms of concessions, concessions, primarily in the form of closing costs. So you can get in with just your down payment and a massively subsidized interest rate. So it would be shocking to see new home sales be the leader of where we would see weakness in the housing market. So let's, let's just look really quickly at those numbers and say, why are you and I after one month, zero level of concern over what that report was. We saw a decrease from 738,000 annualized rate of sales in September dropped all the way down to 610 in November. And that was expected to drop to about 678. So it was expected to drop, but the drop was actually September to October, not November, September to October. And that drop was expected to be like a third of the size that it was. So it was expected that we were going to see some weakness. So the biggest reason for this, it's funny, the news cycle, it seems like this was so long ago, but you're from North Carolina, Jeb, North Carolina got hammered by what was the, the first one was Helene, I think is the one that hit North Carolina. And then we had Milton just a few weeks after that hit the Gulf coast. So we have two areas. The South is, has kind of been one of the areas showing the weakness, especially Florida and Southwest Florida that was impacted by, by Milton, one of the weaker areas in terms of sales to begin with. But when you look at, we had the better part of two, three, four weeks where these areas were dealing with flooding, emergencies, all sorts of things, pretty obvious that those folks would be less interested in going out and putting a home under contract at that time. You have the normal seasonality of heading into the holidays. That just sort of put a much heavier foot on the brake there as we were heading into that. And how do we know that it was hurricanes and not just, Hey, this is happening everywhere because they break down the data regionally. And when you go in and you look at this, if you take out the South, the areas that were impacted by the hurricanes month over month was up actually 8%. So could we be wrong? Could this just be a sign of things to come? Could the South be a, the canary in the coal mine? Absolutely possible. That's why we watch the data month after month and, and parse out these details. But as far as right now, when you see all of the country, not affected by hurricanes up 8% and the area that was impacted by hurricanes or the entire number down 17, largely because of the South. So the South was way, way, way down and drug those numbers down. And important to remember, Jeb, in terms of new construction, the South region leads in terms of new construction. That's where there is more land, more affordability, and that's where a lot of that new construction is. And that's why that waiting would pull those numbers down more than other regions. And, and, and as we've discussed, I mean, the, the new home builders have something that no one else has when they sell a home and that's the ability to buy down the rate and still profit off, you know, um, of, of that construction. So they don't want to spend that money to buy down rates per se, but like you said, they're not in the business of keeping property. And so they have to do what they have to do in order to get home sold. And how do they do that? They incentivize buyers by offering credits for, you know, uh, buy downs on interest rates. I mean, the Lennar, the black Friday deal that we were talking about today, I went online and looked it up. It was buying down your interest rate to 4.99%. But keep in mind, nowhere in that, did they say there's a discount on home sales or, or prices rather, it was all about buying down the rate with that prices stay stable. You're just offering a lower monthly payment. And as we know, home buyers, they live in the payment, they don't live in the price of the home. So regardless of what's happening, um, with, with interest rates, I mean, we know based on data from, uh, you know, over the last year and a half interest rates somewhere in that five to five and a half percent starts to move homes. We know that because of home builders, because home builders have been able to get interest rates down, buy them down in those, those, those levels, if you will, that's pushing home sales. So, and we even saw it when interest rates recently dropped again, Josh, when interest weights, interest weights, interest rates went from, you know, the mid to high 6% range down to 6%, some even lower for, for some buyers. What happened? Purchase applications went up, home started to sell. So we know there are people sitting on the sidelines waiting for an opportunity, just a matter of, of, you know, timing of the year. Seasonality is playing a part, interest rates are playing a part, um, natural disasters. All of these things mixed together are, are causing a little bit of slowing in the market. Well, I've got the numbers here, Jeb, because that is, that is the secondary piece. We would, the reason, the reason why besides the seasonality, there was an expectation that sales would have been down last month is just the increase in, in interest rates. And from the lowest part in September per the Freddie Mac primary mortgage market survey, it's not a perfect measure, but at its low, it hits 6.08. By the time we got to the end of October, that was captured in that data, 6.78%. That is a pretty big jump and it's almost an 8% difference in terms of your monthly payment. People do make decisions, like you said, off of living in the payment and builders are really smart. They have the best data, the best marketers, and they're spectacularly rational. So if you're a builder, the one thing you do not want to do is sell Jeb a house for $400,000 and then next month sell that same model to Josh for $390,000. If you give Josh $20,000 of credits to buy down his interest rate, Jeb and Josh paid the same amount. Jeb can't look at the red fan and go, Hey, this guy got his house for 10 grand less than I did. So it's important for them to manage that level, but it's also rational from the perspective of Jeb that if I know for a fact that in two years rates are going to be at 4%, I don't want you to spend your money as a seller buying my rate down. But today, if we're looking at it, and I don't know that to be a fact and none of us do, and most buyers are not really convinced that you're going to have that level of lower interest rate. So when you look at it, if I have $30,000 to incentivize you to buy my house, I'm going to get about a three to one benefit of using that towards buying down interest rate versus just decreasing the price. You're going to drop that price that much more by buying the rate down versus just cutting the price. In addition to the fact that the builders really, really do not want to ever cut price from one phase to the next, from one sale after the previous one. So those are the big things. We've got seasonality here. We've got the hurricanes were kind of a one-off there. Hopefully we don't see too many more of those. And then we've got interest rates. And we have already seen a nice improvement to interest rates. Still look awful relative to where we were in August and September, but much, much better than where we were at the lows. And from, I don't know, from your perspective, you have, let's just talk about what we're seeing. This is anecdotal. I operate out of many states, so I see more statewide or multi-state stuff and you're seeing more local, but this has been a pretty good, I wouldn't call, I almost said robust. That would not be true. Robust would not be true. A robust December or November heading into December, but pretty solid. Pretty solid considering everything that's going on, where interest rates are, the number of home sales. And it really comes back to the fact, Jeb, that for the folks that are watching this, you're watching this, you're most likely somewhere between 30 and 45 years of age, probably looking to buy your first home or you're moving to a new area, looking to buy another home. And that cycle of life, of coupling up, getting established in your career, having children, it leads to wanting to have a home and nothing is going to change that. So we have some headwinds in terms of very few people willing to sell and give up their current ultra low interest rates and high interest rates for those that need to buy in. But nothing's going to change that. We're going to have that. So in terms of a crash, we've had a crash. We had a crash in home sales from over 6 million a year annualized to this year is going to be, if we're lucky, barely over 4 million, the lowest going back 25 years, 30 years to the mid 90s when the population was much, much lower. So when we adjust that for population, it's a far lower number of homes that are selling this year. So make no mistake, there has been a crash. There has not and will not be a crash in home prices. And data like this that people use to scare you, it's just really important that you're able to dig in, look under the hood, check out what's going on and fall back to the fact that all real estate is local. I mean, if you're in Southwest Florida, you probably need to be paying attention to this. If you're looking at buying in Connecticut, probably means absolutely nothing to you. Yeah. No, I mean, people are fearful because of headlines. People have very short memories when it comes to data and just life in general. And so what people remember is the robust, using that word again, ness of the market over the last three to four years. And because things aren't moving as fast or selling as quickly, days on the market are adding up. Price reductions are higher than they were, say, a year ago, it's, oh, well, this must be the top. Not necessarily, guys. There are seasonality. The market is cyclical in many ways. And we're finally starting to see a little bit of that back in the market again, which is completely normal. And honestly, it's warranted, it's needed, it's necessary to have some slowdown in the market for things to sit a little bit longer, for things to catch up and just people to be able to get their grips on what's happening out there. For a long period of time, things were moving so fast, people couldn't even think. And they were making irrational offers and doing crazy things. And a lot of them, quite frankly, they benefited from being able to get in when they did. But now that the market's not moving as fast, it's, oh, well, I told you this was coming. No, this is normal. We've been talking about it for the last two to three years on the podcast, on YouTube. And it's important to know that, hey, there's not a rush for you to go out and buy a home today. But if you're one of those people sitting on the sidelines waiting for things to improve considerably, if things improve considerably, that likely means lower interest rates, which likely means more buyer demand, competition, and probably higher prices. So you just have to weigh what's important and not focus on the things that you can't control, right? You asked me a question, Josh, prior to coming on here, and my answer was, I don't buy, I've never bought a house based off where I thought prices were going to go. I buy housing or I've bought houses off of where I was in my life, where I wanted to be location-wise, what I was comfortable with the payment. That's it. Like, I didn't look back and go, well, I did, I have looked back and go, I'm really glad I made that move. Now, when I initially made some of these moves initially, it was kind of like, ooh, you know, it's maybe a little bit more than I want to pay, but I'm comfortable, I'm in that position. So that's what I would be thinking about right now. You're in a slowdown in the market, spring markets, three to four months, I mean, well, not three to four months at this point, probably two months, two and a half months from now, three months. Things will likely change, especially if interest rates come down. So it'll be interesting. We've talked in the last few episodes, Jeb, just uncertainty, uncertainty causes fear, and there's still uncertainty, mixed messages. Some markets are up, some markets are down. For the most part, it is pretty reasonable to expect much lower levels of appreciation over the next five years than we saw over the last five years. But we've talked about, hey, the perfect time to buy was probably 2013. And many of you listeners go, hey, idiot, I was nine, I was 15, I was 22, I was not in a position to buy a home. Totally understand that. So what matters is not, is this the perfect time to buy a house? Is this a good time to buy a house? And how do I wisely and safely do this? You know, my belief is that if we go forward five years, we're going to have a normalization of interest rates. Normalization doesn't mean back down to COVID 2.75. It means something far lower than where we're at right now. But there's uncertainty. There's no guarantee of that. Smart people disagree and go, hey, we're not going back there. They're going to be 6.5% for the foreseeable future. There's crazy people who tell you they're going to go even higher. But rates, affordability, we talk about this all the time. As time marches forward, wages are going to go up. Interest rates are likely to come down. Home prices will adjust in real terms, not in nominal terms. And the reason for that is we have the strongest cohort of homeowners in American history, meaning they have the most equity at the lowest interest rates with payments a lower level of their income than we've ever seen. There's almost 40% of homes are owned free and clear. So of the 60% that are financed, those people have really low interest rates and lots of equity. It doesn't mean they're immune to financial difficulty. It means they're vaccinated. It doesn't mean you can't get sick after having the vaccine, but you've got a pretty solid vaccine. Maybe a bad example. Hopefully, we didn't trigger it. A terrible example. Hopefully, we didn't trigger it. It's a safe vaccine. It's the old one, not the mRNA new school rolled out in two weeks type of vaccine. From that perspective, when we look at that, what has to happen for a major correction in nominal terms for home prices to come down? You have to have people that have to sell because most people being rational beings do not want to sell an asset for less than they bought it for or even less than it was worth at one point. So people will irrationally hold on to their properties for an extended period of time to avoid what they perceive as a loss, even if it's a gain based off of when they purchased it. But what we have seen, we've absolutely seen corrections in real terms, meaning once you account for inflation, we have home price appreciation less than the rate of inflation, and that's very possible. So I would not buy a home today going, hey, over the last 40 years, home price appreciation has averaged 4.8%. In nine years, I can count on 4.8%. You might only get one and a half percent. You might get two and a half percent. I can show you. We can run the numbers. I've got a beautiful little spreadsheet here that will run those numbers and show you that if we have one and a half percent appreciation over the next seven years and two and a half percent inflation. One and a half percent home price appreciation, two and a half percent inflation. In real terms, you're losing 1% a year. You still would have a 15%, 16% real return on your funds on a three, five, 10% down payment purchase of a home. But like you said, that's not the important part. It means it's not a reason not to buy when you have reached a point in your life where everything else is telling you you should buy. No. So with that, guys, let us know in the comments what you think. And if you're in the market to buy, sell, invest in real estate, you need help on the financial, the mortgage side, or the real estate side, do us a favor, check that link in the description of the video. But for now, we're going to keep this episode short and we will see you next time. Until then, buy right, borrow smart, build wealth. Adios. Amigos.