What should brokers be focusing on with regards to a declining home sales market?
The National Association of Realtors® reported that their Pending homes sales index reflected the fifth month in a row of declining home sales on an annualized basis. Five months of declining pending home sales indicate more than a seasonal flutter.
As with others, I look around and listen to brokerage firms in the Denver area, as well as in other areas. What I’ve heard is that even sky-high markets like Seattle and Denver are seeing increased inventory and a decrease in the aggressiveness of buyers in mid- to upper-price ranges regarding multi-offer situations. We’ve read about this same situation in other markets as well—declining home sale units and increased inventory. The Real Deal and other publications, for instance, are reporting this about the New York City market.
Learning from the Past
Having lived through the build-up to the 1999-2001 stock market crash and the build-up to the 2006-2010 housing market crash, I can share this. Both times, the Federal Reserve Board waited far too long to raise rates to cool off the speculation that was rampant during those times. Further, they had very loose monetary positions, pumping substantial liquidity into the nation’s financial system. Once they started to tighten, both markets reacted suddenly and overwhelmingly.
Possible Reasons for Slowdown
One of the reasons the housing market is showing signs of a slowdown is due to rising rates. It makes owning more expensive, especially impacting first-time homebuyers. But, more likely than not, it also affects move-up buyers in that they are faced with high rates on their new mortgage compared to the ones they got six to eight years ago. That change could be, for instance, from 2.75 percent on their old mortgage to 4.25 percent on their new mortgage. That’s a huge jump for many.
Another reason, of course, is that home prices in most markets have appreciated at far higher rates than the growth in incomes across the country for the last nine years since the recession formally ended. Housing prices rose three times as much as household incomes did since 2009. This varies from market to market, but, overall, this is the case for the entire country. It was only a matter of time when the average-priced home is out of reach for growing numbers of Americans, whether they are first-time buyers or move-up.
What Should a Brokerage Focus on Now?
Having worked with brokerage leaders through four housing market downturns, REAL Trends has observed the following about what the most successful did. They:
o Reduced capital spending wherever possible.
o Reviewed every expense line and removed spending from areas that were not strictly addressing listings, sales and recruiting.
o Shortened up leases for space wherever possible and reduced space.[G9]
o Got credit lines in place.
o Preserved cash.
The Most Important Thing to Do
Most importantly than the above is to get closer to your organization. Spend more organized time with your top agents and key leadership team members. As we said in our white paper, Against all Odds, the stories of REAL Trends 500 companies that grew through the 2006-2010 downturn, they got closer to their people, thought and acted strategically and were intentional in all they did.
What Happens Next?
The Fed has said that they intend to raise rates twice more this year and perhaps three more times in 2019. It’s certainly possible to see mortgage rates above 5 percent before the year is over should the Fed follow through with these plans. The economy seems to be bearing up well with the rate hikes already in place. Unemployment is at an all-time low for almost every demographic group in the country.
As we’ve written before, the percent of households buying a home each year averages about 4.5 percent over the last 40 years. That is where it is right now. While demand remains high due to higher household formations, the lack of inventory has limited the ability of households to buy.
This Isn’t a Bad Thing
A slowdown at this moment is not a bad outcome. Inventory levels are rising, and prices softening are not an adverse outcome. A cooling off of the housing market is not a bad thing.
We’ve seen the alternative. When the Fed raised interest rates too late in an economic cycle, in 1980, 1989 and 2005-2006, the downturn in housing sales was more painful than it had to be. It appears that this time, they said they were going to raise them two years ago, raised them a little last year, several times more this year and have communicated they will continue to do so. While there may be some discomfort in the brokerage industry as we adjust, it may enable us to avoid steep declines in housing sales and economic activity later.