High Inflation and Rising Interest Rates Signal That a Recession May Be Coming Soon
You know, we've all been seeing what's been going on in the economy. The stock market has dropped dramatically this year. The bond market is down, the crypto market is down. The big question everybody's been asking, what's going to happen to real estate? That seems to be the one major area of the investment world that has been resistant, if not outright immune from the market's declines.
But it looks like real estate is now weakening, heading toward a recession of its own. The median sales price of existing homes has hit $430,000, but now has since fallen from that. And real estate prices are now down $10,000 since June. They're still nearing the highest price since records began being stored in 1999. But it looks like the party is over in terms of prices. Existing home sales have fallen for six months in a row, and it's because of a housing affordability. It isn't. The housing affordability index is the worst since 1989. Even though housing prices have started to come down in the past couple of months, they are still up 40% over the past two years.
Home prices have risen so much faster than wages that people are literally being priced out of the market. You add on to that the fact that mortgage rates are now at a 13 year high. The result is that people can't afford to pay the monthly rate, the monthly payment on a 30-year mortgage based on the sales price of the house coupled with the high mortgage cost, there's no way they can afford it and they're priced out of the market. As a result, nearly 20% of the houses that are on the market available for sale, they've cut their prices more than 10%, as homeowners are beginning to realize the market is drying up and they can't sell their houses for as much as they could have, say, four or five months ago.
By the way, this is not just an American issue. Prices are down in Canada, 8%. They're down in New Zealand, Brazil, Chile, Spain, Finland, South Africa, India. Prices are down everywhere across the world. In Canada, housing prices are down 25% from a year ago. It's not that bad here in the United States, at least not yet, but it is a problem.
Walking Away from Your Dream Home Deal
I mentioned that home buyers are canceling their deals to buy homes. That is happening now as well. Not only are homeowners lowering the prices of their houses, but people also who have already signed contracts to buy a house are canceling those contracts at the highest rate since any time since the beginning of the pandemic. 15% of all the sales contracts have been cancelled.
People are walking away from their earnest money on the attitude that… “I signed a contract to pay $430,000 for this house. That house is no longer worth $430,000 or the mortgage rate just went up and I can no longer afford the payment. I therefore have no choice but to walk away from the contract…”
This is leaving the sellers stuck with the houses that they're trying to sell. This is a bit of a problem. Not only do we have the challenge of housing prices and housing affordability, but we also have home builders facing a problem. Housing starts have fallen dramatically, and builder confidence is falling with it. The builder confidence index has fallen for seven straight months. It's now at the lowest level in two years.
So we are seeing a weakening across the board in real estate with the number of homes being built declining, the number of people willing or able to buy homes declining. We're beginning naturally to see an equal decline in the price of houses. If you're thinking of buying a house, you might want to wait as prices are likely going to fall further. If you're thinking of selling a house, you might want to hurry up and sell it before those price declines get more real.
Do You Want to Become a Real Estate Agent Too?
Meanwhile, there is one aspect of the real estate marketplace that is skyrocketing. The number of people who have become real estate agents. Membership in the NAR, the National Association of Realtors, is at an all-time high. 1.6 million people are real estate agents. Now, that's a record - an 82% increase in the number of new agents compared to a year ago. And historically, that is always a sign of a market top.
Why do people want to become a real estate agent? Well, think about it. If housing prices are skyrocketing, the value of a house is up 40% over the past two years, and the commission is 6% on a $400,000 house. We're talking about a $25,000 commission. You get half of it. Now you're talking about a $12,000 commission for selling a single house. Wow. We're talking about easy money, isn't it?
Well, not so easy at all. According to the National Association of Realtors, realtors who have 16 years of experience, have average incomes of $85,000 a year. Good income, but it isn't setting the world on fire. More importantly, real estate agents who have less than two years of experience, their average income, $8,800. Why? Because they only sold one house. Whose house did they sell? Their girlfriend's or a good neighbor down the street who they just play tennis with and who happens to be selling their house.
“Sure, you can sell my house for me…” And that's the only house they managed to sell. And they earn an average of an $8,800 commission.
So you need to recognize that getting your real estate license and deciding to hang out your shingle as a real estate agent isn't necessarily going to be the path to high income. Especially now that we're beginning to see the likelihood of a real estate recession - fewer homes being sold and at lower prices. It means that the compensation for real estate agents is probably going to come down.
Now, of course, all real estate is local, and this is going to vary dramatically all across the country. And given cities and given communities within given cities, depending on the types of properties you tend to focus on.
The bottom line is with more real estate agents than ever and fewer houses available to sell. It means there's increased competition and you'll begin to see offers of cuts in commission rates. Hey, I'll sell your house for a 5% commission in order to win the deal and cutting your comp as a result. So that's what we can expect in the short-term future for the rest of this year, probably into 2023 as well, about residential real estate.
Ric Speaks at the Future of Crypto and Blockchain Event
You know that I spend a lot of time on crypto education. Normally, I talk to a lot of financial advisors and members of the public. But I recently did an event with the Bipartisan Policy Center called The Future of Crypto and Blockchain. This event was for members of Congress and their staffs, as well as public policy officials from the executive branch. We had dozens at the event. Thousands viewed the recording as well.
We're working hard to improve the level of crypto knowledge and education among members of Congress and the executive branch because we need more legislation and regulation to create the rules of the road, making crypto safer and more readily available to all investors across the country.
So I was really excited to be the keynote speaker at the BPC event in September. If you miss any part of this broadcast, it's also a podcast. In fact, it's also a video cast. The long form version of this program is available to you for free at TheTruthAYF.com. All of that plus lots of articles and a lot of other content helping you with your personal finance and the five subjects that matter most. All of it for free at TheTruthAYF.com.