These are unprecedented times. COVID-19 has disrupted lives with health concerns, financial struggles, and restrictions on activities. Amidst this uncertainty, real estate professionals, buyers, sellers, landlords, tenants, and investors are trying to figure out the best course forward. Here, Texas REALTOR® magazine presents the views of two longtime industry experts.
Mark Dotzour and Steve Murray are known as straight shooters. The views expressed here are their own. Their observations and opinions are presented for the benefit of Texas REALTORS® members to consider as you formulate your plans for dealing with present and future challenges caused by the coronavirus crisis.
Mark Dotzour: If you’ve ever attended one of my presentations, you know that I’m happily unafraid to tell people when the market is good and happily unafraid to tell people when it’s a challenge. Well, it’s challenging right now. I’m concerned, but I’m also confident that the American people will overcome this situation just like they overcame 9/11.
You Can’t Generalize
One of the most frequent questions I’m getting right now is what kind of recovery is this going to be—V-shaped, a U, L, or a W? That’s not a helpful question, because a national average or even a statewide average is meaningless. What’s going on in Laredo is not relevant to REALTORS® in Amarillo. It’s different for people out in El Paso than for people in Austin. So you have to be smart about that.
But What Will Happen To Home Sales Volume?
Three things increase home sales volume: job growth, cheap mortgage money, and home price appreciation. We’ve had positive job growth for 11 years; we’ve had cheap mortgage money for about the same time; and we’ve had home price appreciation for more than that. But as we sit here today, there’s so much uncertainty right now—so it’s kind of hard to know.
We’re going to have cheap mortgage money for a long time. Mortgage rates have been low for a decade, and they’re going even lower—possibly for quite a while.
The government and Federal Reserve will make these low rates happen, because they know that’s how we got out of the last recession in 2008.
As recently as February, I thought our next recession wouldn’t happen until two years from now. But we’re in a recession now. And the Federal Reserve is doing everything they can to get mortgage rates down. You can print money and give everyone twelve hundred bucks, but that only lasts a month. But when people can refinance a 3.75% mortgage to 2.5%, that’s a pay raise they get for a long time, and it really doesn’t cost the government anything.
So sales volume may depend on job growth. Job growth is going to be damaged for a while. It’s going to come back, but in lumps. Jobs will come back faster in some cities than others. Houston and Midland, with oil and gas—they’re going to struggle. Other cities with other types of jobs could be different.
Home prices don’t fall just because the national media says they will … they don’t fall unless you have too much home supply in the market. Mark Dotzour
So you can see how it’s more complicated than whether we’re going to have a V-shaped recovery or a W or an L—it’s going to vary from city to city and even from neighborhood to neighborhood. For example, in Houston, it’s going to be hard on a sizable part of Houston, but there’s a medical district and other parts of town where jobs clustered in certain industries are not going to be affected the same way oil and gas is going to be.
How To Talk With Clients About Home Prices
I don’t see any reason why home prices need to fall. Home prices don’t fall just because the national media says they will; they don’t fall unless you have too much home supply in the market.
The demand for homes before the virus had been relentless, and we’ve been underbuilding homes for a decade. We’ve been in an inventory shortage for eight years. If you live in a town that’s had two and a half months of inventory, and the number of home sales are cut in half, that moves you up to five months of inventory. That’s still below the magic number of six and a half months that we say is a balanced market. You need the context.
This situation regarding the virus will unwind, and when it does, we’re going to be right back in the same boat—without enough houses for all this growth, so people are going to bid the prices up. I see the supply continuing to be constrained.
I’m guessing home prices will be a lot higher four years from now. Could prices go lower for a few months—the first few sales by people who are under duress? That’s possible.
I think houses at the bottom price range of the market may be affordable—due to lower mortgage rates—for more people for about a year, but those home prices are going to get bid up again. Think about this: If you’re looking at a $250,000 house that’s just out of your reach with a 3.75% mortgage, when you get the signal to go out the door and you can find a mortgage at 2.5% to 3%, that house is suddenly not out of range.
So I can’t visualize homes in the bottom third of the price range—even in Midland or Houston—going down in value that much, let alone some place like Austin or San Angelo or El Paso or Laredo. The demand is just too strong.
Months of inventory is a crucial number when you’re talking to people about price trends. When talking to a client, it would be best to have not just the overall number for your city but also the subgroups of various price ranges. The months of inventory in the bottom third of the market might be one month, while the months inventory at the top third of the market could be 12 or 14 months.
This is a new environment, so old statistical models may not hold, but as a general rule, when you had six and a half months inventory, that was a “normal” market, where home prices went up about 2.5% a year. Months inventory has to get up to nine, 10, or 11 months before prices really start to fall. So if clients ask you if prices are going to fall, the real answer is that it depends on the months inventory in a particular price range. That would lead to a very informed discussion. It might be different depending on price range.
I feel like higher-priced homes could see decreased demand and increased supply, which could lead to a significant price decline in the short term. The middle-priced market could see some decline as well. What happens when a market is kind of frozen like it is right now, the first transactions happen under duress, like with divorces or deaths. These are hyper-motivated sellers, so you could see prices dropping. But if you see some marked drawdowns in price early on, I would not assume that means the market is collapsing in price.
Investments Could Move To Real Estate
For people who don’t understand the stock market, buying a house near the one they live in is one of the best investments they can make. Why? Because they understand owning a home in a way they don’t understand stocks. Stock market volatility will remind people what 2008 was like. They may say, “You know what? Maybe owning a house or a duplex in my town is a better deal than owning a stock that I don’t know if it’s going to be worth zero in another three weeks.” So I’m bullish on the investment side of real estate.
Moving Away From The Urban Core
The urban vibe just isn’t what it used to be. I feel like a lot of people are going to want to move to the suburbs. And when millennials start getting married and having children, all of a sudden living on the 20th story of a high-rise downtown just isn’t what it used to be.
The suburban market is going to have a lot more demand than we’ve seen in the last decade. The same is true for communities within 40 minutes of a major urban area. As managers and business owners have gotten comfortable with remote work, there’s more opportunities for people to live 40 minutes away and come into work for staff meetings, as long as they can be monitored that they are doing their jobs.
The Bottom Line
How many people think a house someone buys today is going to be less expensive a decade from now? I don’t.
Even if we have continued bad news about the virus, people are going to want to buy homes. There’s an underlying demand.
I always say that clients have two goals, and it’s true whether everything going’s fine or things are difficult: One goal is that they are pursuing a dream of some kind, and the other goal is that they need to solve a problem. Helping clients achieve those goals is what real estate professionals do. People are sidelined for a little bit right now, but we’ll get back to normal. Get out there and serve your clients!
Steve Murray: I love this industry. It’s been my home for 44 years now. In my time, there have been three significant recessions and one minor one.
While today’s market is unprecedented, the history of housing recessions gives us some insights. For instance, the U.S. housing market peaked at nearly 4 million unit sales in 1979 before crashing to 1.9 million in 1982, a 50% drop in two years. The next peak was in 1988 when the industry had 3.6 million closed unit sales. Notice we still didn’t get back to 4 million units even though the number of total households had increased by about 10 million during that period.
The next trough came in 1991 at 3.1 million units sold and then climbed to 5.2 million in 1999—the next peak. After a small decline in 2000, the market for housing unit sales shot to 7 million in 2005. It then crashed to a trough of 4.1 million in 2008.
Think about that: In 2008, the country experienced a nearly 50% increase in the number of households (117 million in 2008 vs. 81 million in 1980), yet, at the trough, with 36 million more households, we sold only approximately 100,000 more homes.
We climbed out of the 2008 low to achieve a peak of 5.5 million unit sales in 2017 and have been slightly less than that in the last two years. As of 2019, we had 5.3 million housing unit sales—33% above the totals of 1979. Total households climbed over 55% in that same time frame.
One other interesting fact: The industry hit 4 million-unit sales in 1979 and did not reach that number again until 1996—nearly 17 years later. The peak of 1999 at 5.2 million was only slightly exceeded by the peak of 2017 at 5.5 million-unit sales—that’s in 18 years. One must make an exception for the burst of housing sales from 2003–2006 based on the excess of mortgage laxness, which we are all too aware of today.
Once the shock has been incorporated into our thinking, the majority of Americans will want to get back to the things that give our lives meaning and enjoyment. Steve Murray
I would love to think that this will be the first V-shaped housing recovery in the last 40 years (which didn’t have funny money mortgages involved). History indicates otherwise. Recessionary shocks to the entire economy typically unnerve consumers, especially when it comes to housing. The history of the last 40 years instructs us that recoveries are often drawn out over years, not months.
Is This An Anomaly?
I share this with some reluctance because it has far-reaching implications for every brokerage and agent in the country. I’m also reluctant because, of course, this could be the exception to the last 40 years of brokerage sales history. Why?
First, I recall the experience of living through 9/11, when housing sales in New York City and elsewhere shuddered for three to four months, then took off on a tear.
Second, it occurs to me that once the shock of the medical and employment waves have been incorporated into our thinking and our lives, a majority of Americans will want to get back to living. They’ll want to do all the things that we enjoy doing, whether that means going out for dinner, taking a trip to the beach, going to the movies, worship services, and sporting events—the things that give our lives meaning and enjoyment.
In short, once this shock wave has passed, will Americans yearn to get back to a life that many enjoyed fully?
I think we will. And despite what the long-term track record of housing recoveries shows, this time will likely be different. After all, there are incredibly low-interest rates, and those with stable jobs may see this as an opportunity to grab a great house when others are on the sidelines.
The Outlook For Brokerage Firms
Each time the brokerage business has gone through a recession, significant changes occurred in the structure of brokerage firms.
Here are some examples:
After the 1980-82 recession, brokerage firms began to increase the size of their offices in terms of the number of agents; stopped offering programs to buy homes from sellers when the home wouldn’t sell (yes, leading brokerage firms in the late 1970s and early 1980s were iBuyers). The trend towards franchising in our industry experienced significant growth.
After the 1988-1991 housing recession, brokerage firms started the process of cross-marketing mortgage, title insurance, escrow, and other services. The move towards national brands became more pronounced. The early 1990s were some of the most significant growth years for Coldwell Banker, Prudential, and RE/MAX.
After the 2006-2010 recession, brokerage firms finally stopped using classified advertising. Even as late as 2007, classified advertising in newspapers was still the largest line item in many firms’ advertising budgets. It took the recession to kill that idea for most brokerage firms once and for all.
What Might Happen To Incumbent Brokerage Firms Now?
Fewer, smaller offices would seem to be at the top of the list. Occupancy costs range from 22% to 32% of gross margin for many traditional brokerage firms. That ranks only behind employment costs as the most expensive segment of overhead. With gross margins coming down from 22% to 14% over the past six years (the national average among all brokerage firms), the trend toward fewer and smaller offices was already becoming evident. Now that brokerage firms and their agents are doing most of their work from home offices, some brokerage firms may use the next few years to reduce the size and number of offices.
Short term, there is a movement to the rural and exurban markets—will it continue? REAL Trends has spoken to the leaders of two major rural, farm and ranch property brokerages that report their website traffic has grown in the past month, and they see measurable increases in purchases of rural property. Tied with the reported flow of families from major metro areas to suburban and rural markets, this seems to indicate that, at least for the short term, families are seeking shelter outside of major metropolitan areas. Is there an opportunity for metro brokerage firms to expand their offerings into the countryside to follow this shift?
Capitalizing On Existing Technology
Brokerage firms and their agents will, at last, start building their business practices around available technology platforms rather than trying to make technology fit their existing business practices.
Many brokerage firms and agents sought to build technology to support their existing business processes and practices. The recession in the housing market, no matter how long or deep, is likely to drive the brokerage community to rethink that approach. Evidence that we’ve seen from Adwerx and leading CRM providers shows a direct correlation between the full use of these existing platforms (and others) and increased productivity and retention factors. As brokerage firms rethink their approach to technology, they will also take advantage of the information that systems can provide to deliver more useful insights for their firms.
What About Newer Brokerage Firms and Real Estate Portals?
Zillow, Redfin, eXp, and Compass (and their investors) will get to discover that they are in the residential brokerage business and are thus affected like everyone else.
I think these firms will make the adjustments necessary to survive—different than they may have guessed—but each should become stronger and more focused than before this downturn started. This also goes for firms like Open Door and OfferPad.
While iBuyer activity seems to have cooled off for the time being, these programs will pick up again once a new floor of housing sales has been determined and what damage, if any, has been done to housing values.
For firms like Zillow and realtor.com, the decline in housing sales will affect how much agents and brokerage firms spend on online advertising. For firms like Redfin and Compass, the decline in sales will negatively affect their revenues and profit and loss statements. In the case of Zillow and Redfin, the loss of growth from iBuyer activity will have a significant impact on their growth.
It’s funny that at exactly the time iBuyer activity would seem to be a real winning strategy (no need for showings, etc.), many of the leaders in the segment pulled back.
As with previous recessions, we will only know for sure how these scenarios play out when we can look back and study the outcomes.