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The Housing Market is about to Drop, Man.

Published September 15, 2022
Mark Twain wrote, "history doesn't repeat itself, but it often rhymes." The same could be said of the real estate market's reaction to the Federal Reserve interest rate policy, albeit much less entertaining that a Mark Twain story.

Mark Twain wrote, “history doesn’t repeat itself, but it often rhymes.” The same could be said of the real estate market’s reaction to the Federal Reserve interest rate policy, albeit much less entertaining that a Mark Twain story.

To briefly review, the Fed’s monetary policy indirectly affects lending rates by implementing policies that heavily influence the price of credit. This either boosts the economy or tightens the money supply, and slows the economy down.

So what does this have to do with Mark Twain? In 1980, the Fed’s spiked the

Federal Funds rate to 20% in an effort to combat double digit YoY inflation [1]. Needless to say, this rate broke the ‘sticky’ inflation of the early 80s, but induced a recession that broke in July 0f 1982. I think we find ourselves on the brink of something similar: rising interest rates ‘encouraging’ a recession.

But how does this effect us as real estate investors? Fortunately, real estate markets are local, not national. So when someone says, “the housing market is about to drop, man” I always ask, “which housing market?” A market in the heartland could continue seeing price jumps, while coastal cities see price cuts.

Nationally though, it’s looking like we are moving from an extreme seller’s market, to a much more balanced one. The metrics I use to judge just how much an area is cooling off is active listings and DoM (Days on Market). Further analysis includes comparing those numbers to 2019 numbers (Pre-Covid) in order to get a good picture of what ‘normal’ looks like.

A tale of two cities: San Francisco, CA and San Antonio, TX [2]. When comparing June 2022 to June 2019, SF active listings have increased by 90.7%, while DoM are now higher than they were pre-Covid. San Antonio on the other hand is still staying resilient. SFH active listings are still down ~30% while homes are on the market only 0.3 days longer than in June of 2019.

It’s critical to note that the metrics above analyze the short-medium term trends of a market. To effectively evaluate a market on a longer-term basis, I suggest looking at macroeconomic conditions like wage growth, unemployment, population growth, and economic growth!

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