Making Sense of the Market

Christian: [0:00] Hello, hello, and welcome to another edition of the Awesome in Seattle podcast. This is your host Christian Awesome of the Awesome Nossum group at Wilson Realty Exchange, Inc, and today we're doing something a little bit different. If you follow the Awesome Nossum group on Instagram, then you know that we go over the latest stats about the Seattle real estate market each and every month. With so much change in the economy and the real estate market, people have a lot of questions right now. In today's episode, we're gonna go over and do a deep dive into some of the questions that we're getting over and over again from clients and potential clients. A couple of the questions that we're gonna answer today are things like if it still makes sense to buy, given that we're in a recession, how do house prices fare during a recession, we're gonna talk about inflation and interest rate increases. Our hope is that this podcast brings you some clarity on what's going on. If these are also big questions that you're worrying about or wondering about, then hopefully we give you some answers. Uh, but before we get into all that, let's say hello to my co-hosts, my friends, the awesome, hardworking agents here at the Awesome Nossum group. First up, we got Reed Watson, the Seattle native. Hello. Hello.

Reed: [1:09] Hey there.

Christian: [1:09] We have Jason Saldarriaga, the data guru.

Jason: [1:12] Do we? Yes,

Christian: [1:14] we do.

Melanie: [1:14] We do.

Jason: [1:15] I'm here.

Christian: [1:16] We have Mel G, Melanie Gadami.

Melanie: [1:19] Hello.

Christian: [1:20] And last but not least, we have Nicholas Toll. Hello, hello. Hello. All right, so welcome, guys. Thanks for joining me on this. This is gonna be a very good one, and I hope we're gonna answer a lot of people's questions. So let's start by going over the current state of the economy.

Melanie: [1:36] All right, so first off, let's define what a recession is. A recession is defined by two consecutive quarters of decline in the GDP, so gross domestic product. Although economists have not yet declared that we're in a recession yet, most people believe that we are. That being said, history has shown that a recession isn't usually declared an actual recession sometimes until 12 to 18 months after it's already happened. This current recession, if we are in one, is so much different from the recession in 2008. That recession was caused by the collapse of the housing market due to lenders giving money to people who shouldn't have even qualified for a loan.

Christian: [2:20] Uh, yeah, that is very true, Mel. Um, I actually became a real estate agent in January of 2005. So I was an agent for about four years before the housing bubble burst at the end of 2008, technically December 2008, and some of the loans that people were getting were literally insane. Uh, you just needed to have a heartbeat in order to get a loan. Uh, you didn't need to have any money. You didn't need to prove that you actually had a job. Uh, you didn't need to really have anything. You didn't even need to have great credit. Greedy banks lent money to any and everyone for any amount that they wanted, and eventually all of that fell apart when home prices started to decline, and people, who often had no money invested in the home, decided to walk away from the house. They literally just gave it back to the bank as a foreclosure. Um, it was a crazy time. This is nothing like today. Today is actually very difficult to get a loan, which is a good thing. It should be hard to prove that you can actually afford the house. That's why it's not the same as back in 2008 and the things that led up to that. But that's, that's enough about that. Let's, let's move on.

Reed: [3:30] So let's talk about inflation. Inflation is defined as a general increase in prices and a fall in the purchasing power of money Inflation can go up and down, and some inflation is good. 2 to 3% is actually a healthy amount of inflation because the Federal Reserve can only add money to the economy. They can't take it away. So with 2 to 3% inflation, they still have a little bit of control. Currently, inflation is a lot higher than that, and I know you guys all read my notes, but I don't know if anybody remembers. Can you guys guess what inflation is at now?

Christian: [4:05] Hmm. Oh,

Reed: [4:06] gosh.

Christian: [4:06] I… It's, like, between 8 or 9%, like, that's what the last thing said.

Reed: [4:10] With your notes in front of me, I would guess it's around 8.5.

Reed: [4:14] You're looking at my notes now. You cheated. Okay. Well, you're right. So inflation is at 8.5%. When inflation is high, the Fed often responds by raising interest rates that banks use to lend money. So when that happens, the cost of borrowing money goes up and the market slows down, like we're seeing right now in 2022. Inflation is expected to reach its peak in October or November, although some people are saying that it may have already peaked. Yep, time will tell.

Reed: [4:44] Yes. Time will certainly tell. So now let's go on and talk a little bit about mortgage interest rates. The Federal Reserve controls the federal funds rate. That federal funds rate is not the same as mortgage interest rates, although they do often go up and down at the same time. They're not directly tied to one another. For instance, when the Fed raised rates recently, mortgage rates actually went down, and that was because the banks assumed that the Fed would be raising rates, which they did. Mortgage lenders increased rates ahead of the Fed's announcement. And when the Fed didn't raise the rate as high as the banks anticipated, the mortgage rates decreased. Mortgage-backed securities come with some risk, making bonds more appealing to investors. That's because mortgage-backed securities come with the foreclosure risk, that people might not be able to continue paying their mortgage, and therefore foreclose Therefore, to keep mortgage-backed securities appealing to investors, rates have to go up so that they provide a higher yield. Right now, people seem to be concerned that rates have gone way up from what they were a year or two years ago, but to really keep things in perspective, rates are actually pretty good historically speaking. The average all-time interest rate is 8.2%, and right now the interest rates are between 5 and 6%, which is clearly lower than the all-time average. In the '80s, ra- rates were all the way up to 18%, so it really depends on what timeframe you're understanding and looking at these mortgage rates within. They are quite a bit lower than they have been in the past, just not the most recent past. People seem to forget that if you buy a house and then rates go down, you can generally refinance into a lower rate, which is a great option.

Jason: [6:34] Yes, it is.

Reed: [6:36] Mm-hmm.

Jason: [6:36] So we are often asked about the impact that recessions have on home prices, um, to the point that we actually have a slide dedicated to that exact topic in our home buying classes. Beersandhomebuying.com (opens in a new tab).

Christian: [6:52] Dun, dun, dun.

Reed: [6:53] Woot, woot. Shameless plug.

Jason: [6:55] Not .biz. I know everyone wants .biz, okay? .com. It's the lesser used. You might be surprised, though, when I tell you this, but generally speaking, home prices don't take a nosedive during recessions. Of the five national recessions we've had since 1980, home prices decreased in two of them, so two of the five. One of them was in the early '90s after the Gulf War. Uh, home prices barely went down, so they went down .9% over, I think it was, like, a six-month period, whereas the GDP was down 1.4% and-

Christian: [7:31] Was that, was that 0.9%?

Jason: [7:33] 0.9%, yep- Okay … for home prices. And, and then keep in mind, home prices appreciated pretty quickly after that, so they made up for lost time very quickly. Um, the other Recession where home prices were down at the end of the recession was the big kahuna, which is, uh, the Great Recession, 2007, 2009, the financial meltdown. So if you look at home prices from December 2007 to June 2009, they were down almost 14% during that period. GDP was down 5.1%. That was a huge collapse in home prices, and it took many years for some markets to recover. I think Chicago, for example. I think Chicago. I might be wrong. It

Christian: [8:20] was Chicago.

Jason: [8:21] Yeah. It took until, like, 2019 for home prices to make it up back to their pre-Great Recession price.

Christian: [8:30] Yeah.

Jason: [8:30] Um, Seattle was much quicker. It didn't take long for us to recover. But keep in mind, that recession was caused by subprime lending standards- paused by mortgages and is really the only recession es- at least in modern history, that is based on home values and the h- the housing market. So, uh, it makes sense that that one would really stand out as an outlier.

Christian: [8:54] Yep, and that's the one that most of us think of. Um, because, you know, a lot of us are younger. I'm probably the oldest. I know I'm the oldest one on this podcast, but it's, that's the most recent history. So we have some recency, recency bias going on in our minds trying to protect us. And when you realize that we've had other recessions and home prices didn't go down in, what'd you say, five of them? And did go down in two of them, and o- one of them it only went down 0.9% and recovered in 13 months.

Jason: [9:24] Yeah. I mean, it runs against what you, you kind of think when you, when you just think of basic supply and demand, right? Because during a recession, un- unemployment generally goes up. Not necessarily in this recession that we're potentially in, but usually unemployment goes up and consumer spending goes down. So then you would think home demand would drop, but, you know, they're, they're just not necessarily directly linked. Uh, it, a, a lot is really based on how long a recession lasts and its underlying causes. For example, the Great Recession, having mortgages as an underlying cause. But as a general statement, uh, real estate is just less volatile. There's a lot of other asset classes. There's a lot more friction with buying and selling a house versus selling a stock, you know? Mm-hmm. And, uh, people need homes. They need other things as well, of course, but they need a home. And, uh, on the other side of the token, uh, if you wanna impact supply by building more homes, that's not something that you go and do in two days. You know, there's permits, zoning, regulations, design reviews. It just, it can take developers years to respond by building more homes, and so there's just less vo- volatility. Um, this is very much simplified, but for y'all listeners out there, that's kind of a very basic overview of how home markets, the housing market can, uh, respond during recessions. You know, like Mark Twain said, history doesn't repeat itself, but it does rhyme. So, uh, recessions are no different. Uh, I'd love to chat really quick about our current situation. And again, putting this in very simple terms, we were hit by the pandemic in 2020. And this really had a wide-reaching impact on society as a whole. We had a whole focus on work from home that had- Dramatic changes in commercial real estate and in travel, gas, the restaurant industry, hospitality industry w- almost collapsed. Energy, as a result of gas and other things, dramatically impacted. Uh, travel, what happened to travel? We'll never know. The response to this was implementation of widespread lockdowns. Remember the good old days? Mm-hmm. Oh, man. Mm-hmm. Um, but this essentially just shut down the economy, and we had a, a short-lived recession, it was about two months long, in 2020 as a result. I mean, society, we shut down the economy. The government then stepped in by moving the federal funds rate to almost zero, and they also poured money into the economy. This included stimulus checks and buying billions and billions of dollars in treasuries and mortgage-backed securities. Thank you, Reed, for explaining mortgage-backed securities to us.

Reed: [12:12] Any time, Jason.

Jason: [12:14] I know. Any time. You, you, you love the, you love the topic. Um- Uh-huh … you dream, dream in MBS.

Reed: [12:19] Mm-hmm.

Jason: [12:20] Um, just to illustrate this, in February 2020, the Fed had $1.4 trillion in mortgage-backed securities, and two years later, any idea what it was? 2.7. It, like, doubled. Wow. Wow. 2.7 trillion. So, um, the, the Fed's goal here was to improve the flow of credit- Um, and one result of that was that mortgage rates dropped to historic lows. So then what happens there the real estate market goes crazy, and we saw just a, a, a really hot market past two years until the last few months. We also saw inflation rates soar to the point that the Fed just had to react, and they did so by raising interest rates, which have pretty much doubled since the beginning of the year. Now, this marks an interesting dynamic because typically interest rates decrease during recessions. After all, the Fed, when a recession hits, the Fed likes to lower interest rates. That's one of their tools they have to lessen the severity of a recession and b- bring the economy back to a solid f- footing. But currently the Fed is actively and aggressively raising interest rates to curb inflation. They stopped purchasing mortgage-backed securities, while at the same time, data is coming in showing that we are likely in a recession or will be soon. So what does this have to do with housing? The federal funds rate, like we already said, doesn't directly impact mortgage rates, but mortgage rates are influenced by outside factors like supply and demand and, and sentiment and that sort of thing. So we've seen mortgage rates dramatically increase this year- Dramatically … though home prices haven't necessarily fallen enough to account for the increased cost of these loans. And as a result, many would-be homebuyers simply can't afford the h- house that they were looking at a few months ago. And builder confidence has declined the most since 2008. New home sales last month were down 30% year over year nationally, and things are looking interesting, I'll say, for the near term. We're gonna extend this a bit and chat about, like, how this impacts buyers and sellers, but it, just, you know, usually it's good for one and maybe not so great for the other. And so it looks like now might be a great time as a buyer if you can buy, you know?

Jason: [14:42] Mm-hmm.

Jason: [14:43] That's the, that's the, the issue. But, you know, prices haven't necessarily plummeted per se. They definitely haven't. But competition seems to have, which is nice as a buyer in Seattle.

Christian: [14:53] Yeah. It's, uh, competition for buyers is almost nonexistent. I know Les had a competitive offer situation last week, but that was the first one I'd seen in a month and a half or so. So real estate is widely held as one of the best hedges against inflation out there, and that's because during inflationary times, you want to purchase assets. The reason why is if you have your cash in the bank and it's not earning as much as inflation is going up, which is, you know, 8 to 9%, and I'm guessing that your bank savings account APY is probably under 1%, maybe if you're really playing the game and paying attention, maybe you're at 2%, but I doubt it. If that's the case, then you are, in essence, losing money each and every month when inflation is that high. Instead, one option that some people are doing is using that cash to purchase real estate that has a fixed interest rate and a fixed monthly payment. But we get it, you know. Not everyone is feeling confident, and some are feeling confused about whether or not now is a good time for them to buy or not. So we want to answer some of these questions and give you some questions to ask yourself or your partner to help you determine if buying now even makes sense for you. So the first big question we want to tackle is, does it make sense for you to buy right now? So let's, we're gonna pretend that, that I am a prospective buyer. Let's pose some questions to me, and I can try and decide if buying makes sense for me.

Melanie: [16:20] Yeah. So I have a question.

Christian: [16:21] Mm-hmm.

Melanie: [16:22] Do you think real estate in Seattle will be worth more or less in 10 years?

Christian: [16:26] I would say it's definitely gonna be more than it is right now. I think that's a no-brainer. Over the last 10 years, real estate's outpaced the S&P 500. And to give you some context, even if you bought at the peak of the real estate bubble bursting in December of 2008, 10 years later, in most cities, especially easily in Seattle, you had a ton of equity and you came out way on top. That's even if you bought at the very, very peak. So the majority of economists also believe that real estate will be worth more in 10 years.

Reed: [16:57] So how long are you planning to live in the house? Are, is it gonna be two years, five years, 30 years?

Christian: [17:04] That's a good question. It's fair. I know normally if you're thinking that you're gonna stay in the house for five-plus years, it's probably a pretty safe bet that you should purchase a house. If you think you're only gonna own the property for maybe two to three years, then it might not be a good idea to buy right now That being said, it's always an option to rent out the property when you move on. It's the easiest way to get an investment property because owner-occupied financing has a lot of benefits. Uh, you get a lower down payment, a better interest rate, all that fun stuff. Um, so if you were to purchase it as your primary residence that you're gonna live in, and then you move out after at least 12 months, and you rent it, and you keep it as an investment property, you can actually keep those owner-occupied financing terms in place. There's also some benefits for living in the house two of the last five years as your primary residence. You don't have to pay capital gains taxes for a portion of that profit. It's currently, if you're single, you can not pay capital gains tax up to $250,000, and if you're married, up to $500,000. So there's definitely some benefits to owning for, if you're gonna own for a long time, um, and then potentially rent it out after the fact. Uh, but in essence, it makes more sense, as long as you're planning to live there for a while, I'd say five-plus years, you should be fine in, in buying a house.

Melanie: [18:30] I have a question for you. Um, if you're thinking about buying a home, can you afford to buy it today?

Christian: [18:36] And that really is the key question. Um, if you don't have the means to buy it, or your job or finances are up in the air, do not buy. Like, it's very clear. Don't buy. Don't do it just because houses are kind of on sale right now. If your job feels stable and you have money for a down payment, then you should definitely look into buying at least. Just look into it. You don't have to do it, for sure, but at least give yourself the opportunity to answer that question for yourself. And remember, you don't need to have a 20% down payment. Most people put 5 to 7% down for their down payment. So you might not need as much cash as you think. If you wanna learn more about down payments, we recently did a podcast all about down payments, so you should definitely check that out. Who else has got a brain buster for me?

Reed: [19:22] I got one. Do you think it'll get easier or harder to buy as time goes on?

Christian: [19:26] I think it's definitely gonna get harder. Some experts are predicting that interest rates are going to go down in the next nine to 12 months, maybe six to 12 months. If that happens, and when that happens, competition is probably going to increase quite a bit, and we might get back into a somewhat competitive market again. So if you can get a house right now- Maybe asking price or even for the asking price, but keep all of your contingencies in place, like your inspection period, your appraisal contingency, your financing. You could possibly even get some seller credits, meaning the seller gives you some cash so that you don't have to take as much out of your pocket for your down payment and your closing costs. Th- this market, the Seattle real estate market, has not been this buyer-friendly in the last four or five years. We are in a market right now where it is much easier and much more… much less competitive for buyers. Um, so keep in mind too, like, if rates do go down, you can always refinance into that lower rate. So you could buy today in the depressed price market and then refinance into a lower interest rate down the road potentially, if they go down. We're not saying that they will for sure, but many economists or many experts are saying that they are expecting it to.

Melanie: [20:50] My question is, what are people really afraid of right now when it comes to buying?

Christian: [20:54] The most common thing that we are hearing is that people think that they are buying at the peak of prices. And if you're planning to be there for longer than five-plus years, it doesn't really matter if prices go down slightly right now, uh, in the short term, because it will even out and most likely be a very good long-term investment. So I don't think you really need to worry too much about that. Another thing people are saying is that they're afraid of buying when rates are too high. Like I just said, you can potentially refinance if rates decrease, which many experts are saying are gonna happen in 6 to 12 months. If you're really afraid of buying when rates are too high, as long as you can afford it at today's rates, do it if it makes sense for you, looking at all your other financial situation. But don't assume that rates will go down and that you're gonna save money down the road. That's, that's how you have regret. We don't want you to regret making a decision like that, so. All right, so long story short, don't be afraid to buy right now if your circumstances make sense for you to buy. Money sitting in the bank isn't gonna do you any favors. During inflationary times. Buy assets like real estate, and right now you can get some incredible deals and some awesome terms on homes. We're seeing them left and right. We're helping a lot of people right now buy, and we're getting some pretty good discounts on some of these homes. So it's, it's a really great time as a buyer. Th- like I said, probably the best time in the last four to five years. Get a house that maybe you couldn't afford just, you know, six months ago, 12 months ago. All right, so I wanted to say thank you to all of you guys, the awesome, awesome agents here on with me right now. You guys put a lot of effort into creating this episode. Great job. I know you guys enjoy sharing all of our knowledge with our listeners, and I hope that this did a good job of doing that. Um, if you, as a listener, want to chat with us a- and go over whether or not buying actually makes sense for you, uh, you can schedule a very no pressure, one-on-one call with us right online, quick Zoom call. They're about a half an hour, give or take. If you don't have as that many questions, it'll be shorter. If you have more, it'll be longer. We can often get a mortgage broker on with us, and you can really get a lot of your questions answered, and you can really figure out, does buying make sense for me? If it's not right now, is it a year from now? Is it two years from now? Is it three years from now? We can also help you come up with a roadmap to follow. So if your credit's not in a great place, if you don't have enough down payment saved up yet, if you need help figuring out how to get these things better, we can help you with that. That's what we're here for. We want to help you. We want to educate you. That's why we do this podcast. That's why we have our homebuyer class. Uh, we wanna make sure that you are informed and can make that informed decision. We never want someone to be regretful that they bought a house, at least on our watch. So that is why we did this episode today. We are here for the long term. We have tons of repeat buyers. We have tons of referrals. Um, and that's because we treat people right. So if you are at all questioning whether or not it makes sense for you to buy, please just reach out. We'd be happy to chat with you. It's, like I said, no pressure at all. You can do that right on our website, AwesomeNossumGroup.com/schedule. It's super easy to do. So that's it for today. Thank you so much for joining us. If you ever have any other questions, do not hesitate to reach out, and feel free to check out the rest of our podcast episodes. We have a lot of really helpful ones out there. And if you liked what you heard today, please leave us a review. Thanks so much, and we'll see you next time.