How to profit from the declining real estate market
So how bad is the real estate market going to get, and is there any way that you can profit from it? Whether you’re a potential home buyer or a home seller, I’m going to answer those questions and more in this blog.
Hey, my name is John Gluch. I am the team leader of the Gluch Group. We’ve got real estate teams in Phoenix, San Diego, and Las Vegas, and we sell hundreds of homes every year. So we’re in the thick of this every single day, and I want to make sure you’re fully informed on what’s happening.
Let me start off with the big picture, what’s happening in the current real estate market cycle. Every day, this is a roller coaster that we go on over and over again in various parts of our economy. And here’s how things have traditionally looked.
Everything was awesome in February and March, and then, in April, things got a little sideways on the roller coaster. We’ve now come to find ourselves in the pit of despair in September and October. That’s right in this place where everyone is terrified, the world is ending, and everything is bad. There are some bad things, no doubt about it, and I’m going to be really clear about that in this blog. But the good news is on the horizon. We’ve got some upside to come, which is exciting. So let me give you the stats, the numbers, and the game plan on what this looks like on the chart.
The Cromford Market Index:
This is the Cromford Market Index (my favorite index). This is a predictor of what’s happening with prices. The Cromford Index is the black line in this chart. When that number and that index are both 100, that’s a normal market, meaning supply and demand are equal. That’s where they should be historically. That’s about a 3% appreciation rate per year, meaning home prices are going to go up about 3% per year. Everything’s kind of in balance.
In 2000, 2004, and 2005, things went much higher on the index. And as a result, following the blue lines (home appreciation) went higher as well. The price of homes went way up. Then the market crashed, the Cromford Market Index got down into the fifties, and prices fell.
So as you can see over time, this index shows what’s happening with pricing, and has predicted the future quite accurately.
Where are we now? Well, you could see the crazy roller coaster on the right hand side of the chart; here is when things went really, really crazy. Covid, right? And then they kind of got a little less crazy, but still hot. Then you can see the crazy fall, in fact, from a much higher high and much more quickly than the crash of 2005 and 2006. It was pretty terrifying. Around the March-April time frame, the index started falling way faster than we’ve ever seen.
And we were like, “Uh oh, how low is this thing going to go?” Well, luckily, you could see they’re on the far right hand side of the chart. It started to trail out. We’ve seen things soften, which is a welcome relief, and you can see that more clearly if you zoom the chart. This year’s index got as high as about 480 and has now leveled off right there around 100. So you can see that right at about a hundred, it started to fall a little bit again. Now, it’s not nearly as fast as it was before, but it has started to creep below that hundred mark. meaning there is downward pressure on pricing, and it’s not much, but a little bit. We don’t know how far that’s going to go. That could go a little bit further. We’re not totally sure. My bet is that it will go down some, but not a lot.
And let me tell you how and why we did see the soft landing.
Cromford supply and demand index
Let’s use this chart, which is supply and demand. This is the Cromford supply and demand index. So you can see that the blue here is the supply and the red is the demand. So you could see that what happened was that demand on the far side of the chart has fallen off a cliff, primarily because of rising interest rates. Interest rates have caused people to pull out of the market because they cannot afford as much home as they would like, and they’re just going to decide to stay and to continue to be renters.
Demand really fell off a cliff, and supply began to increase. Now, supply went from something like 20, which is insanely low, to 30 days supply or 15 days supply of homes. It went up very, very quickly as demand was going down very, very quickly, which is why the index fell so fast. They met in the middle at below average. So now both are below average. What would’ve been tragic is what happened in 2007 and 2008: the supply of homes went through the roof because everybody got foreclosed on. People used these crazy loans, way overpaid for houses, and had all kinds of financing issues. There was a lending crisis not just a real estate market imbalance. There were a million houses on the market, and so supply went through the roof. You can see that in the chart above.
That’s not what’s happening now. If you own a home and have a great interest rate, you’re probably not really interested in selling your home with a 3% interest rate to go buy one at 7%. You’re not alone. I’m in the same boat. Lots of people with rentals are in this situation; I have rental properties that have 3% interest rates.
Why would I sell that?
So lots of people are sitting tight on their beautiful interest rates, and I don’t anticipate supply skyrocketing. It is increasing a little bit right now, but not a ton. Supply is outpacing demand a little bit, but not a ton. So I don’t see a situation where the Cromford index goes down into the fifties and sixties. I just don’t see that happening. What’s much more likely to happen is that interest rates will get better in small increments; they’ll get a little bit better and then a little bit worse, where they’ll continue to go up and down. And as interest rates get better, demand will increase and potentially even supply will increase with it. I think you’ll see this kind of balance tango continue.
Mortgage rates over time
Let’s talk a little bit about interest rates, and what they look like. Okay, here are mortgage rates over time. You can see here that mortgage rates have gotten a lot worse. You probably have a parent or a grandparent, or maybe you remember when interest rates were 18%, right? So yes its always important to put things into historical context, interest rates have been much worse over the years. In fact, historically the average is around 7%. So we’re actually right around the average right now. That being said, it’s pretty painful if you were used to those 3%, 4%, and 5% rates, going to 7% feels like a shock to the system, and that’s really what’s happened here.
What’s helpful is that, as you can see on this chart, interest rates have always fallen during recessions, one hundred percent of the time. Now, there’s no guarantee that’s gonna happen this time, but it’s pretty likely. What’s happening right now is the Fed is trying to put the economy, a little bit of it, into a recession because things got out of control. House prices were going crazy, cars were selling for way more than they should have. Things were very imbalanced. They have had to try and put the brakes on things and their primary mechanism to do that is with interest rates.
This is an oversimplification of the system, but that’s what’s happened. And as soon as things get bad enough, the Fed will stop doing that, and there’ll be a little bit of a recession. Interest rates will very likely go down, as this has happened every single time before. A lot of analysts and economists are raising the alarm and predicting we’re either in a recession or going toward a recession. I think that’s very likely to happen myself. I think interest rates are going to start to fall, and I think those demand numbers will shoot up.
What should buyers do?
Potentially, supply will bump up a little bit as people are kind of okay getting rid of that 3% interest rate to go get maybe a 5% interest rate. So I think we’re kind of in a good spot in terms of housing. I think we’ll see more stability and things will kind of level out a little bit, and I don’t anticipate this big catastrophe; I just don’t really see that happening.
Interest rates feel pretty ugly right now, they’ve gone up a lot lately, but the good news is you can, as we say, date the rate. That is go into mortgage rates with the mentality that you won’t be married to it long term, and at some point in the next few years you will refinance out of the loan. So, if you’re buying a home, I think you should date the rate. Take this approach. Marry the house, and date the rate.
After all, as we discussed above, prices right now are kind of stabilizing, maybe going down a little bit, but not a lot. There’s a lot more selection, and there aren’t as many people fighting over homes. You could see the demand on this curve was really low. There are just so few people in the market fighting over homes, which means you’re getting a better selection of properties. It might not be a bad time to jump in the market, be patience, and let’s go get you a deal.
Now, let’s be clear there a risk in this. Sure, there’s no guarantee that prices or interest rates will go down. However, what’s the alternative? Interest rates go up or stay the same, you’re still no worse off, right? You’re actually better off now that you locked in at 7% instead of 9%. All you have is downside risk; things are going to get better for you, they’re not going to get worse. So I like the idea right now of purchasing, but don’t be in a hurry. You know, you don’t need to run out there and trip over yourself to find a house. Get started, get a really great real estate team like the Gluch Group to help you. That is the approach I would be taking as a buyer right now.
What should sellers do ?
Now, if you’re a seller, what would you do? If you’re a seller, you’re happy, and you don’t have a good reason to sell your house, or a good reason to leave, I would just hang on to your property and sit tight. You’re in a great interest rate, be thankful you got it. Be happy you’ve got all the equity you probably have and consider possibly going out and making an investment in a property.
Now if you need to sell, you’re moving or you need to sell to buy another property, you’re also not in a bad position. If you want to buy a bigger, better property, this might not be a bad time to do that, and it would be potentially a good reason to sell. Sell, capitalize on the equity in your property, and go out again while all those opportunities exist on the buying market to find yourself a deal. Yes, your interest rate’s going to stink, there’s going to be a little bit of a shock there. But there’s this neat buying window right now that exists that may not exist in three to six months. I think what will very likely happen is that those interest rates will drop. There’ll be a lot of buyers who are waiting around for interest rates to drop who jump into the market. You’ll be way ahead of them if you buy now while that’s not happening. And then when those interest rates go down, you just refinance, but you already had a deal, and a property before all those people waiting around jump into the market. This is happening as we speak, we’re seeing that in the data. Every time rates fall by a point or so, we see a big flood of homes go pending. It is happening every single time, and I think that’s going to continue to happen. You want to avoid that time. That’s not really the time to be buying, when everyone else who’s been waiting around jumps into the market to buy a property.
Now we do have solutions for that high interest rate problem, read our blog on: How to get an interest rate 3% lower than the current market rate at no cost to you.
Right now at the time of this post, interest rates are in the 7’s, what we talk about in that post are programs and strategies to get you paying in the 4% interest rate range with potentially no upfront cost. We break down all the pros and cons so be sure to check it out. But they’re a really good option if you’re looking to capitalize on this little window in the market right now I’m talking about. So we could potentially get you kind of the best of both worlds.
And again, as a seller, you might sit tight a little bit, but if you’ve got an opportunity to move up, get a different property, get an investment property, or something like that, selling might make good sense in that scenario.
Please reach out to us. We’d be happy to look at your specific situation, your numbers, your house, all that. Give you a real prediction on today’s exact interest rates, what your home would sell for, and what you might get for your money out there in the marketplace as a buyer. Thanks so much! I hope this has been helpful, and I look forward to talking to you soon.
As always, if you have any questions at all feel free to reach out. You can shoot me an email at email@example.com or give us a call at (480) 378-6700.