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For the last 16 years, Mike Simonsen, the CEO of Altos Research, has made a career of tracking the housing market, then packaging and publishing the data for real estate professionals. Recently, Jimmy sat down with Mike to discuss the current market and ways this information can be conveyed to buyers and sellers.

How is rising inventory affecting agents?

According to Mike, “buyers who’ve been getting crushed in bidding wars for the last 18 months might now see some opportunities start opening up.” Sellers, meanwhile, have to change their strategy in anticipation of more selection available to buyers. “It’s still a hot market. There’s still buyers buying. Inventory is still super tight, but we can see the signals have been changing, so we need to be wise in this moment.”

As the market starts to stabilize, listing agents and sellers will need to put more effort into marketing. “Anticipate that as an agent you’re going to incur additional costs. With more competition, your margins may be impacted.” Operational efficiency becomes much more important.

A changing market is your chance to be the voice of expertise.

Despite the appearance of cool-off, Mike insists “prices are still at record highs. There hasn’t been any decline. And all of those factors add up to healthy commissions and good volume.” Realtors should just anticipate that in the second half of the year and into next year, they’ll start seeing those longer market times. “You won’t have room to roll the dice and overprice. The agents who land the listings will be the ones with the right strategy.”

Of course, there are challenges when it comes to communicating market changes to consumers. “When the market shifts, and the top end is softer and the median starts coming down, agents tend to think that’s a story consumers don’t want to hear.” However, there really shouldn’t be a fear of talking about the reality of change. “It’s a powerful place to be the voice of expertise,” Mike says. Consumers don’t need optimism. They need realism, and it’s important for the homeowner to know where they stand in the current life cycle of the economy.

The importance of price reductions.

Price reductions are a powerful leading indicator related to the current, active market. It’s an indicator that agents need to take a more nuanced look at. Here, Mike believes some misconceptions exist. “Normally, about a third of listings take a price cut before they sell… And then, when the market heats up, that percentage reduces to twenty-five percent, then twenty-percent… In the hot California market, there might be eighteen percent price reductions.” In recent months we’ve seen the percentage of price reductions drop to much lower-than-typical levels.

The past year, as inventory continued to drop, the percentage of price cuts was exceptionally low. Nationally, it dropped to fifteen percent. Now, finally, that percentage is starting to rise again. “As there’s slightly fewer buyers and [those buyers are] slightly more price sensitive, the homes that are more egregiously overpriced are starting to take their price cuts.” This means “we’re at about twenty percent of US homes currently on the market have had a price cut.” Still far below that typical thirty percent.

“[These price cuts] don’t mean sellers are losing money on their house,” Mike explains. “Rather, they’re only losing a little bit of those giant gains. And it doesn’t mean the market is cold.” This is why providing the consumer with the historical context is so important. The narrative should be that price cuts are “climbing, but still low” when compared to the historical average.

Mike remains long-term bullish on US housing.

“We’ve been in the hottest market ever and at some point that ends,” Mike says. But he remains confident in the future U.S. real estate. “All policy in the U.S. is designed to help the homeowner,” he explains. This is why he thinks arguments for a housing bubble are failing to see how the policy in the U.S. is making sure that doesn’t happen. “We have all the structures in place for long-term growth in housing because that’s what the country wants.”

Any risks we’re not paying attention to?

Mike says the factor he finds most compelling as a potential risk is related to the prevalence of “a lot of money entering the economy.” Now that’s changing as economic policies tighten. It’s a dynamic that’s worth noting and he admits he doesn’t know what the outcome might be.

The other big dynamic is the fact that “in the past decade, eight million homes have been taken from the resale market to be turned into investment properties.” This is why we have fewer homes for sale every year. “On top of that, we’ve had institutional investors buy single family homes for the rental market and builders building homes for the rental market.” Mike muses that if there were ever any large changes in the financial markets that would affect that large class of owners, it would have a huge impact. If that group decides they need to sell, it could flood the market with inventory. “It’s a factor that’s in the market now that wasn’t there in 2008,” he says. “It’s an unknown.

If price reductions climb substantially in certain key cities, then it’s a concern.

Certain markets represent what the rest of the U.S. will look like in the next quarter or two. We could call them the canaries in the coalmine that we can use to make predictions about what’s going to happen in the fall. Mike says that the “big inbound migration investor markets” are more volatile than the rest of the U.S. Agents can look to places like Phoenix, Las Vegas, and Boise and notice early trends in indicators such as price reductions.

If you notice the percentage of price reductions in these areas climbing up to 50%, “it’s significant,” Mike explains. And likely an early indication of moderation coming to the rest of the nation’s housing stock.

The future of zoom towns

Mike has grown increasingly certain that the remote work phenomenon is a trend that’s not only here to stay, but one that “will continue to expand” as companies continue to increase remote work opportunities. This new way of business will increase demand in the so-called pandemic towns, or ‘Zoom towns.’ “For instance, in San Francisco, it seems like half the city moved up to Lake Tahoe to work from home.”

Mike’s observations complement a recent study from Ladders which found that as of January 2022, nearly 20% of all professional jobs are now remote, whereas, prior to the pandemic, only 4% of high paying jobs were remote.

So the remote work trend is here to stay. It’s here to grow. “And that has implications in the design of the property, not just the geography.”

For second home communities like Tahoe or Palm Springs, Mike suggests that there could be a dampening effect with the prevalence of new policies aimed at increasing the price of second home mortgages. Nonetheless, ‘zoom towns’ are likely to continue to grow as remote job opportunities are predicted to rise.

Death of the city?

Go into any major urban center and you’ll see the results of outgoing migration in the form of commercial vacancies and decimated financial districts. As a resident of San Francisco, Mike can’t deny the impact. Home prices in the city have been flat for two years when every other region in the country has risen. “Even the rest of the Bay Area has seen increases in home prices.”

Mike has a hypothesis that “the companies that have a really cool headquarters and office experience will have a hiring advantage over the ones who are 100% remote.” He also foresees a trend of large office buildings being converted to condos—“like what’s being done in LA”—which could remedy the problem of rising rents and unaffordable home prices for people living in the heart of the city.

Trends in new construction.

At present, there are more homes categorized as “currently in construction” than in the recent past. Over the next year, those will start to come to market and add more to inventory, but don’t expect an immediate cooling of the market. The reason so many homes are labeled “currently in construction” is because, Mike says, supply chain issues prevent certain parts and materials from reaching construction sites. Because of this, many homes remain unfinished.

Another issue Mike points to that will continue to keep inventory low and demand high is the lack of land and workers. During the financial crisis, builders sold off their land to raise cash. Those companies then downsized their workers. In recent years, the U.S. has cut off inbound immigration which constitutes a large portion of the home-building workforce. In California, he explains, “40% of the laborers building homes are foreign born”. So without the workers, building companies can’t respond to demand.

Regions that are doing a good job of responding to current needs are Texas and Atlanta where a lot of homes are currently being built in the locations people want to live. However, in the next 3-5 years, millennials will be wanting to buy houses as much as they can and that demand will only be tempered once the population of boomers begins to decline.

The future of companies like Opendoor?

The appeal of being able to sell a house very quickly is appealing to a certain portion of homeowners. But, according to Mike, “it’s not appealing to a big segment of the market.” The evidence of that is in the fact that one third of houses undergo a price cut before their sale because sellers believe that if they don’t take at least one price cut, they underpriced their house. “It’s a strategic decision.” 

“There are people that need to optimize for time and convenience and there are people who need to optimize for dollars. Opendoor is not going to let you optimize for your return.” So, Opendoor’s staying power will come from it fulfilling the need of some sellers who prioritize time and convenience over profit.

Opendoor is, essentially, a financial company. Its innovation, Mike says, is its ability to get access to money in order to solve the worry of some consumers that it’s going to take too long to sell their house. However, Opendoor is “a product of a decade where [companies] had access to infinitely free money. What happens when money isn’t free?” Mike doesn’t know, and he doesn’t have access to the Opendoor books, but he sees a downside if “transactions become too expensive to finance or the extra cost gets passed on to consumers.” 

Certainly, Opendoor is succeeding in addressing a real need. It’s useful to solve the uncertainty for those who have a lot of fear around selling their home.

What happens if interest rates go up to 9%?

If interest rates go up too high, contrary to popular belief, Mike says inventory would actually be reduced. Not only would buyers not be able to afford their new mortgage, but homeowners would opt to stay with their low interest rate rather than give it up in order to move to a different house with a higher interest rate. Even all the equity they might’ve gained so far wouldn’t make the higher monthly payment affordable. Additionally, Mike says, “investor deals would no longer pencil out.”

A 9% interest rate then “wouldn’t lead to the flood of inventory like in 2008 when the bubble previously burst.”

The future of real estate agents.

As we’ve had record commission levels in the last year, we’ve also had record numbers of agents. Mike says, “When the commission pie shrinks, the agent amount shrinks. And we’ll likely see some of that pressure since it’ll be a harder market to sell and there will be more competition for them to get the kind of dollars that they’ve been able to get this year.” He concludes that there will be fewer working agents next year. 

This could mean a huge boon for the really good agents. But staying competitive means they’ll have to not only work hard, but work smart. 

The stock market as it relates to the housing market.

There is a correlation between the stock market and the housing market, Mike explains. Those who’ve acquired wealth with the stock market are able to go out and buy more homes. If the current downward trajectory of the market continues, there’s less wealth available to make these purchases. But with inflation rising, consumers will be looking for places to put their cash. “As they say, the two best hedges against inflation are a 30-year mortgage and a Costco card.”

Additionally, for those with a home that they’re renting out, “rents are climbing in an inflationary world and your costs are fixed.” For many, being a landlord during a time of inflation can mean a very reliable passive income stream.

Interested in learning more about the data available in your local market? Real estate professionals can book a free consultation at altosresearch.com. Mike tweets regularly @mikesimonsen and posts weekly updates on YouTube.

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