Former Goldman Sachs executive, Joshua Pollard, sent a “sobering” letter to the White House on September 17, in which he warned of another serious downturn in the economy—one that would send us back into a recession. Was he right?
Will we face another economic downturn?
Although I’m not an economist or a market strategist, what Pollard says in his letter about the near future and the housing market surely does seem to make a lot of sense. Here are three reasons why I do not see home values increasing in the coming years:
- Supply vs. demand. Absorption rates indicate that supply and demand has changed. In spring of 2013, many parts of the United States measured absorption rate in days and weeks and not months. Now, 18 months later, we are trending toward a buyer’s market (and in some parts of the U.S., we are already there). Market times are now measured in months, and inventory has increased. With more on the market, motivated sellers are decreasing their prices—thus bringing down market values across the board.
- More listings still to come. The Los Angeles Times reported in August that home equity line defaults are likely to rise. Homeowners will face shock when their interest only payments cease. As home equity lines mature, many borrowers will have increased (and often not affordable) monthly payments. According to the article, waves of potential defaults are anticipated in the next 24 months. Likely owners may list their properties for sale, thus further increasing the inventory and decreasing current property values.
- 7% of borrowers still have negative equity. According to the CoreLogic Equity Report that came out at the end of the second quarter of 2014, 5.3 million homes still have negative equity. According to the same report, 1.0 million properties will regain their equity if home prices rise another 5 percent. Sadly, that’s probably not going to happen, given the increase in supply and also recognizing that the Barclays predicts that home values will likely only rise 3% in 2015.
Can you function in a recession?
So, what does this mean for the real estate professional? Is it gloom and doom all over again?
Of course not. We’ve been through this before, and we can get through it again. Not only are we better educated on how to address underwater property issues, but the lenders now have processes in place to help our sellers if they need it—much better and more efficient processes than they did just 6 years ago.
The other thing that we need to recognize is that for the real estate professional, it shouldn’t be about the market or about what the competition is doing. If you focus on your daily processes—the daily activities that generate home buyer and home seller leads— and you quit sweating the small stuff, you’ll be able continue closing no matter the market.
Given this information and the fact that it is almost the end of the year, it seems like it would be smart to start generating a business plan for 2015. Make it a business plan that embraces all markets and focuses on processes and activities that will bring in the business—no matter the market.