2023 The Looming Collapse of the Investor Housing Bubble.
January 20, 2023
As a Realtor who started my real estate career in 2005, I know a thing or two about a housing collapse. In response to the 2008 housing collapse, I founded the nation’s largest online professional network dedicated to foreclosure specialists. Now with over 16,000 members from all 50 states, our membership includes; collections specialists, loss mitigation specialists, risk analysts, debt counselors, asset managers, portfolio managers, short sale negotiators, REO agents, automation tech specialists, and many more. My research into a potential 2023 housing collapse is exhaustive and includes a broad spectrum of specialists in the foreclosure (REO) industry. Nonetheless, my opinions are not definitive because the reality is that a potential collapse has too many moving parts for me to give you a definitive prediction. This blog is my opinion, and I will support my claims, but it’s just an opinion.
#1: Mainstream Media is Late: By design, most legacy media or mainstream media uses the S&P/Case-Shiller Home Price Index. As reliable as this index is, it is essential to understand that it is delayed. The delay in Case-Shiller data is a primary reason why most media outlets were doing reports asking if a slowdown was “here” back in June or July. Most of us on the ground, in the trenches, as Realtors could tell you, the slowdown started in March. The public, legacy media, and even less experienced Realtors were talking about how a crash wasn’t possible or how this won’t be 2008 all over again. On the other hand, those with access to real-time data from either having listings we had to make price reductions on or seeing reports coming out from real-time data reporting sources were scratching their heads, wondering what was going on.
#2: The 2008 Crash was Primarily Caused by Small Investors: As controversial as it may sound because it is contrary to media spin, the reality is that investors caused the 2008 crash. The first year I got into liquidating bank-owned property (REO) was in 2009. Almost every foreclosure I visited was a vacant, trashed rental property. I remember closing around 68 properties in my first year, and I don’t remember a single one of them being owner-occupied. Countless times I reported back to my banks that per a deed or tax search, I found that the owner of the subject property had a primary residence and the subject property was used as an investment. Defunct investments became such a huge problem early on city council-men were running to local reporters, standing on soap boxes, and preaching how it was the government’s job to ensure renters didn’t get kicked out when owners stopped paying the mortgage. I remember talking with a local bartender who told me he lived in an apartment but had two rental properties. With a dumbstruck look, I asked him how that was possible; he didn’t have the income. He tells me he didn’t need the income because it was a 12-month interest-only loan with a balloon which he would refinance with positive equity at the end of the 12 months. This sort of lending was happening all over Nashville.
#3: The 2023 Real Estate Crash Will be the Fall of Big Investors: If you do not know the difference between speculation and investing, get ready because you will hear a lot about that in 2023. The last ten years in real estate have genuinely been a bull market. The sky was the limit for most areas, and some neighborhoods in Nashville appreciated 25-30% in a year. The institutional investor fueled this run up the last ten years. They attracted Realtors and offered them i-buyer programs and technology so that these Realtors could make claims like “Guaranteed Offers” or “Instant Cash Offers,” and the public went crazy for it. You’ve all seen the advertisements; they sound something like, “No need to put your home on the market,” how about “Don’t worry about repairs,” or “Get an all cash, guarantee offer today.” I-buyer programs coupled with a restricted inventory, high demand, and historically low-interest rates meant that investors had to compete with owner-occupants for homes. In other words, if an investor wanted to buy a home, he would make an offer only to find out he was competing against 20 other buyers. The days of the investment golden rule to make your money on the purchase were gone. If that investor wanted to stay in business, he had to pay above retail and speculate that when he was ready to sell in 3 months, the market equity would have risen enough to cover his expenses. This strategy is not sustainable; it is speculation or gambling. Here is where we enter the twilight zone. Now, imagine a company that has bought up 20% of all available real estate in your city over the last five years. Now imagine if that same company went from a stock price high of $34.59 in February of 2021 to $1.54 today. Imagine the catastrophe when they are forced to liquidate all assets in bankruptcy to restructure but can’t get back what they spent on these homes, let alone the additional holding, maintenance, or repair cost. Some of you might know what company I’m talking about, and if you don’t, well, you’ve made my point.
#4: Investor Profits are Falling as Fast as 2009: Some of you may think, “who cares, these are investors, they know the risk,” and you are right; they are investors, and they should know the risk. The problem is if hundreds of thousands of middle-class investors go under at once, along with substantial institutional investors, it’s a housing collapse like 2008 all over again. Diana Olick of CNBC published an article on Dec 15, 2022, where she reports that flipping profits fell 18.4% from the previous quarter, according to ATTOM. That is 11.4% year over year. She makes it a point to say, “…the fastest quarterly drop since 2009”. In other words, prices are dropping as fast as they did during the Great Recession, yet there is almost no media coverage. Home prices have declined for at least the last nine months and as fast as 2009, but no one wants to say “housing collapse”?
Our housing market is not “decelerating”; it has not “hit a wall”; it’s in free fall. Like I do every January, I send out updated market analyses for my clients. I have seen broad value reductions on the low end of 11% and the high end of nearly 20% just in 12 months. I have a listing inventory that has to reduce prices every time the fed raises rates, and now some homes are not moving at all. Entrenched inflation, high-interest rates, lingering supply chain issues, stagnated wages, the writing is on the wall; 2023 may be the housing bubble’s collapse for this generation.