What the heck is going on with our real estate market?
This past week I had several conversations that I believe will give you insight as to what is happening here at the beach.
First Insight. I walked into the restaurant that I go to for lunch and the place was dead, so I said to the guy behind the counter, “Geeze it sure is quiet right now, have y’all been busy?” He looked at me and I could see him working through the question in his mind before answering, “No, our numbers are down for the month.” I nodded in understanding and said, “It’s July 15… the heart of the high summer season… it should be crazy busy, but it’s slow… weird.” He handed me my receipt and said, “Yeah, we’re running about half of what we normally do in July.” Again, I nodded in understanding and added, “A lot of folks are saying they’ve had a great first half of the year, but business this summer is slowing down fast.” The conversation went on from there, but I think you get the point I’m going for.
Second Insight. My wife runs Beach Stays Vacations, a vacation rental management company here at the beach and she told me the other day that after July there are a ton of open dates in many of the properties. Way more than usual. I asked her what she is going to do, and she said, “I’m going to have to lower the prices.”
Third Insight. I was sitting at my desk working on a report when I noticed it was unusually quiet in the office, especially for a Friday afternoon. You see, we currently have 45 active listings which means the phones should be buzzing with Buyer Agents calling to schedule showings during the Saturday turn (the time after one guest leaves and before the next checks in). Half-jokingly I asked Katie, our Director of Operations, “Are the phones working?” She said with a too serious edge to her voice, “I know, we’ve only had 1 call for a showing today and it’s already 2:30. It’s strange.”
These are only anecdotal observations for sure and may have no bearing on our real estate market… or they are strong indicators of what is coming next. I tend to believe it’s the latter and that short-term sellers/owners should pay close attention to these, and others ‘tells” like them. In the meantime, let’s look at actual data.
Here’s what we are watching right now… Supply and Demand
When you drill down you will find that this is all a simple supply and demand issue. When supply (inventory) increases at a rate faster than demand, it gets very hard for Sellers to command and capture high prices.
Supply: Trending Up or Down?
I went back to January of this year and pulled the inventory numbers to see what they would tell us about the supply of homes and condos for sale here at the beach. The change is impressive.
In the Destin Area: The supply of condos for sale has increased a whopping 779% since January and with a massive 1,551% jump, the supply of homes is up almost 16 fold from January.
Looking at Panama City Beach we see the supply of condos for sale is also experiencing massive jumps, increasing 2,138%. Homes tell the same story, jumping 2,133%
While this is only one data point it is not good news for current and short term-sellers, and it appears to be good news for buyers who plan to buy and hold.
Demand: Number of Pending Transactions
There are a number of ways to determine demand. We already mentioned anecdotally that we’ve noticed requests for showings have dramatically fallen off and based on the statistics of pending sales (properties that are under contract but haven’t closed yet) since January of this year demand is in fact softening for both condos and houses.
In the Destin Area: The number of condos that went pending in June was down 40% from the number that went pending only six months ago in January. Like with condos, homes are down as well – off 22.81%.
In the Panama City Beach Area: The number of condos that went pending in June was 43% off of what we saw in January. Looking at the pending homes sale in Panama City Beach it looks like they have been holding up so far. If you own a home in Panama City Beach keep an eye on this.
Overall though I believe that it’s going to be difficult to command and capture high sales prices in the near term.
Where is the market going?
It is clear that our real estate market is in a period of increasing supply and decreasing demand. What is causing that? I believe it’s because of many different factors playing out right now: inflation, increasing mortgage rates, and decreasing affordability are the largest influences on how far demand drops and how long it will be before it comes back. I’m not an economist and only can offer my opinion but from where I sit, I believe it will play out like this.
Phase 1: The Fix. Inflation has to come down, it’s too high, and everyone (well, almost everyone) understands this so the politicians are feeling the pressure to bring prices down. The reason inflation is so high is because politicians have been putting pressure on the Fed to increase the money supply (especially during the Covid 19 pandemic) to help our economy keep going. However, they put too much money into the system and created an environment where there are now too many dollars chasing too few goods and services (the definition of inflation) which has led to dramatic price increases. In short, a lot of folks had a lot of money, so they spent it (have you noticed the price of real estate and rental income at the beach?) which caused businesses (sellers and rental managers of real estate at the beach) to increase their prices to a point where affordability is now a problem.
The way to bring inflation down is to take some of the “too many dollars” out of the system. The government does this is by pressuring the Fed to increase the cost of money (quantitative tightening) which typically results raising interest and mortgage rates. This makes it more expensive for people and businesses to borrow/get money and results in them spending fewer dollars which ultimately brings prices down. In short, if folks don’t have enough money to buy stuff it forces businesses (sellers of real estate at the beach) to lower the price of goods and services to make them affordable again.
This is more or less where we are now. The chart below put out by the St. Louis Federal Reserve Bank shows mortgage rates over the last 12 months. Note, what has been going on since January of this year as it relates to the cost of money and affordability. And how it corresponds to the pending sales trends. It’s working – fewer people are spending money on stuff, including houses and condos at the beach. I anticipate that we will see the same start to show up with rental income.
Let’s keep going and look into the future
Phase 2: The Correction. When people start spending less businesses (especially small businesses) see their profits go down and they get pressure from their shareholders, or their own bank accounts to cut costs and bring profits back up. The fastest and easiest way to cut costs is to cut labor. In other words, businesses will start laying off people to shore up their bottom lines. And this is not just hourly people that will be let go, even people with higher paid salaried jobs will feel the pain. We are starting to see this already: BusinessInsider.com is reporting that Peloton has laid of thousands of employees this year, Carvana slashed 12% of its workforce, Tesla laid off 229 people in June, Re/Max announced it will lay off 17% of its workforce by the end of the year, JPMorgan confirmed that it would lay off over 1,000 employees in its home-lending department, on and on. Here’s the thing, these are the people who buy and rent places at the beach, so we need to watch this closely.
Phase 3: Correcting the Correction. When the unemployment rate starts jumping up like it appears to be doing, it generally means the country is headed for a recession and that is a scary thing for politician. So, when faced with a recession, unemployment, and general discontent, the politicians run over to have a chat with their friends at… you guessed it… the Fed. At some point in the not-too-distant future, the politicians will pressure the Fed to make more money available (quantitative easing) so that business start hiring, and people have money to feed themselves, pay their bills and once again… buy stuff. And the whole cycle will start over.
How long will this take and when will our supply start to drop and demand start going up again? These are the questions that all sellers and buyers should be asking themselves for sure. Here is what I can tell you.
1. Over time prices tend to go up.
2. Since the early 1980’s mortgage rates have trended down.
Check out these two graphs put out by the St. Louis Fed. The first shows home sales prices since 1963 and the second shows mortgage rates.
U.S. Home Prices since 1963
Disclosure: I am not a professional Economist and granted this is a pretty simplistic breakdown of our economy but I’m a simple guy and I do believe it explains the basics of what is happening.
What Should You Do?
If you are an investor here at the beach and are considering selling – you need to be careful – there are very strong market forces at play right now. The market has been going up each year since 2009 which means most Realtors have never seen a declining market, and with hundreds of thousands of dollars – even millions of dollars – at risk… do you really want to trust your wealth to a Realtor that has never seen a market with eroding equity? Who you have as your Realtor… matters. I was there in 2004, 05, and 06, when the market corrected, and prices were dropping by the day. We saw how buyers would walk away from earnest money deposits because they could buy a better property at an even lower price somewhere else. We successfully navigated those waters and were able to save or make our clients a ton of money. Whether you are a buyer or a seller of a property here at the beach we, want you to max out your position based on your financial goals and the current market conditions. With this in mind and based on years of experience our advice breaks down as follows:
Short Term Owner (Five years or less): If you plan on owning your property for five years or less, we recommend that you list and sell it now. This allows you to lock in a really high sales price and mitigate all risk of price drops, tax code changes, and any other scenario that would have a negative impact on your profits. Remember, you can’t go broke taking profits.
Long Term Owner (Longer than five years): If you plan on owning the property longer that five years, we recommend that you simply sit back and enjoy the ride. This is because you have time to ride out the crazy ups and downs so they should not have much impact on you. We do suggest though that you look at your rental income and make sure you’re maxing that out. If you would like to get a FREE, No Obligation rental projection for your property we recommend you contact Beach Stays Vacations (beachstaysvacations.com)
Multiple Property Owner: If you own multiple properties, we suggest that you sell and take one or more off the table and protect the equity you’ve built up. Keep your best properties and consider adding new ones when prices drop.
Long Term Buyer (Going to own five years or longer): If you plan on buying a property that you will own for five years or longer, we recommend that you buy now… and hold it – longer the better. This will allow you to lock in a historically low interest rate and take advantage of high rental incomes. In addition, if you hold the property over time prices will go back up. If you do buy, we suggest that you max out your rental income.
If you would like to get a FREE, No Obligation rental projection for your property we recommend you contact Beach Stays Vacations (beachstaysvacations.com)
Short Term Buyer (Going to buy and flip): If you plan is to buy and flip the property, we simply say – be careful. Operating on a short time frame escalates the risk of missing the market – for sure, but we do have people who are doing this and making big money.
Bottom Line
We are wealth builders, so our goal (whether you are buying or selling) is to help you build or protect your wealth – based on your financial goals and the current market conditions. Call us today and let’s talk about how you can max out your position as a buyer, a seller, or as an owner to continue building your family’s wealth well into the future.
Committed to your success,
John Moran – CEO The Smart Beach Investor | Keller Williams Realty AT THE BEACH TEAM Keller Williams Realty – For Your Place at the Beach