How to Detect a Real Estate Recession

“This Is The End… Beautiful Friend.”

The Doors

Play “The End” by The Doors as you read this. It’ll really set the mood!

All joking aside, one man’s down market is another man’s up market. Someone’s always winning. But there’s usually an obvious transition that takes place as Economic Indicators change, and the flow of dollars change pace. Make no mistake about it, there is a way to see it happening in real time without having to wait for major News Outlets to report it.

Key Market Indicators

Supply & Demand determine the market. Period. If Savannah, Georgia has 300 homes on the market but there are 3,000 buyers actively looking in one given day, you can probably bet that multiple offers will be likely. This is just the tip of the iceberg, however. That’s only viewing the market above the water. So what should I pay attention to? Here’s the Summary for those of you that are savvy. But if you wish to dive deeper hoping to gather a potential new perspective, join me by continuing to read.

  1. Number of Mortgage Applications by Month
  2. Median Days on Market
  3. Population Fluctuation
  4. Stock Market Volatility
  5. National Median Household Income
  6. Oil & Gas Prices
  7. Middle Class Spending
  8. Employment Rate

Number of Mortgage Applications By Month

I’m sure you know that the Fed Rate has a critical impact on mortgage and refinance rates. Treasury Yields are also very important.

We recently had the largest Fed Rate increase in 22 years. It has definitely made an impact on the Housing Market overall. It has drastically changed the Housing Affordability Index that depicts how affordable buying a home is for the average American.

Check out this article by Mortgage Bankers of America (MBA) regarding the recent major drop in number of mortgage applications by month in 2022.

When I’m attempting to gain an understanding of the “State of The Union” of the Housing Market, number of mortgage applications by month is a key indicator for Buyer Demand. If there are less Buyers getting approved for mortgages, you can visualize less Buyers on the market as a whole, right? Less Buyers means less offers. Less offers means lower prices at the Median, and more Days On Market.

“But Byron, what about Cash Buyers?”

Excellent question. Most MLS’s give Realtors the ability to view the Terms, or Financing Types of the properties that have Closed in a local market. There were 265 Cash deals that Closed in Nashville between April 1 and April 30 in 2022. There were 866 total closings in Nashville in April, therefore Cash deals made up 30.6% of that market. Pretty huge, right? But there are still 69.4% more buyers out there that are financing, double the number of Cash Buyers.

Since we’re talking about it, check this out:

If you have a hard time viewing this image, hold down Command or Control on your computer and press the “+” button. Using the “-” button next to it will Zoom you back out when you’re finished.

Considering All Variables

I’d like to point out one very important point about this data set. The blue line represents the number of Cash deals closing in the Region. Over that 5 year span, you see that it has a pretty sharp upward trend?

If we were solely focusing on the number of deals Closing with Financing (not Cash), that number of Financed deals would be shrinking, right? Because Cash deals are rising, there’s only 100 total percent to play with, so Financed deals shrink as Cash grows… Are you following?

Can you see how it would be easy to manipulate or misinterpret the market overall?

Another high-emphasis point: Notice how the total number of homes sold (“Total Sold”) fluctuates by month? We have to pay attention to Housing Market Movement and Growth Rate when we consider the data set. April thru June are the hottest months in America for real estate. We know that, so we have to consider that when we hear of a drop in mortgage applications. There’s stable movement.

Now, if we isolate December 2018, December 2019, December, 2020, and December 2021, we see the market was expanding by about 1,000 homes between 2018 and 2020, but plateau’d in 2021. Meanwhile, the number of Cash closings have substantially increased in 2022.

If I only looked at the percentage of Financed Closings, it would look like a sharp 6% drop, right? But if we consider Q1 2021 versus Q1 2022, we see the Cash trend substantially outperforming! So take that into consideration when interpreting an article like this one from Moody’s Analytics, or this one from National Mortgage Professional.

You ALWAYS want to stop and ask yourself, “What other variables could potentially impact this information?”

Median/Average Days On Market (DOM)

Micro versus Macro – remember that. Small markets versus large markets. This data varies no matter what sector of the Economy you’re viewing. Above, you’ll notice Davidson & Williamson Counties Median Days on Market (DOM). Davidson & Williamson make up two of the largest percentages of the population in the Middle Tennessee region. However, in rural markets such as Bedford & Coffee Counties, you see a rise in Median DOM. And there’s more volatility in those counties overall, right? These areas have a smaller population of Buyers on average, and also a smaller density of homes to choose from. You notice that all four lines have typically moved together, however. Let’s Segway…

Remember, Major Suburbs (vs) Rural Areas

Days on Market can vary depending on the local population (as you see above). The market in Winner, South Dakota (that’s a real city) will likely look much different than Atlanta, Georgia. Rural markets have less population movement, less buyers looking on a given day overall, and less homes to choose from overall. So we should expect a higher DOM in the wilderness. That also makes them more susceptible to a Housing Market crash.

You’re looking for uncharacteristic movement (or lack thereof). Instability, or volatility.

If homes for the past two years in March have had an average of 21 Days on Market before going under contract, and that number grows by 80% (37.8 DOM) the following month, when historically the average either stayed roughly the same or only moved a few days up or down, there has to be an underlining to that movement. Right? Uncharacteristic movement, meaning not normal for that particular month.

Population Fluctuation

Population changes play a key role.

Less Buyers equal less demand. When the number of homes on the market begin exceeding (or simply increasing) while the number of Buyers looking in that market stays the same or decreases, what do you think happens? You guessed it. Homes sit on the market for longer, and they usually drop in price until they sell.

We can’t take quality out of the equation, however. So pay attention to the quality of homes hitting the market, with major and cosmetic renovations. These things increase demand, on that particular home and on the area overall. This “desirability” improvement can influence population growth.

If there are 100 people moving into a city per day and only 35 moving out, demand is skyrocketing. If you’re noticing more traffic daily, and I mean way more traffic, there’s an underlining.

The big question is – what is either attracting or harming the population in your local market? Was there a major office complex or new business recently announced that will bring quality jobs to your city? Was there a government benefit or tax break implemented in your state? Does your local school system attract or deter potential new residents? Is there another county near you that severely underperforms at SAT scores, sports, or crime?

It all ties together at some point in time. If you’re fascinated by the topic of Population Flux in cities, check out this amazing 2013 research study by Gilles Duranton, University of Pennsylvania.

Stock Market Volatility

Savvy Investors understand that money sitting in their checking accounts is losing value. Notice, I didn’t say the money was doing nothing – I said it was losing value. Why? Because the purchasing power of a dollar has steadily declined over the last 100 years with inflation. And inflation has increased in opposite fashion. That’s a big deal for us in 2022. You can’t buy candy for a nickel anymore, can you?

Savvy Investors also understand this… Not to let their money sit in a plummeting Stock Account for an extended period of time. Why would you choose to lose when you could be winning with a different hand? That’s why you see massive red numbers accelerate on the Stock Exchange when stocks take a hard dive. Stocks get sold, real estate gets purchased (including other asset types). The cyclical flow of money floats through the Economy.

To make a counterpoint against myself, if a high statistical number of Investors struggle to sell their properties due to market conditions, or if the perception of the real estate market is worse than stocks overall, the American Economy as a whole could likely stagnate and the recovery could be prolonged. If the majority of savvy investors in America have no better option than to dump their cash into Savings, Bonds, or Money Market Accounts instead of more liquid investments (like real estate), it impacts the Housing Market.

That’s the nightmare situation that Dooms Day’ers are shouting about currently in 2022.

National Median Household Income Index

U.S. Median Household Income By Month – YCharts

U.S. Personal Income Per Month – Trading Economics

I try to give you as much “meat on the bone” as possible. In order for us to gather an awareness that will help us predict major market fluctuations, we have to understand what causes them. Don’t you agree? That’s the point of this article, as it relates to real estate – not just to know when to buy or sell, but also what type of behavior to have AS a Buyer or Seller if you’re doing so in a vastly changing Market.

What did the Recession of 2008 teach us?

Disposable Income in America changed negatively with gas price hikes in 2008. That was a major component of that Recession. Every household in America has a “pie of money” that they work with per month. We cut a slice and give it to Uncle Sam (government taxes). We cut a big slice and give it to grocery stores for food and survival items, and another big slice for rent/mortgage. We cut a slice for gas stations every time we fill our vehicles up. Then we cut ANOTHER slice and give it to the rest of our debt collectors for car payments, insurance, you name it. Everybody wants our pie, don’t they? It must be pretty delicious!

When those slices get larger, it leaves us with less money at the end of the month to spend. In turn, we stop visiting restaurants (and tipping well), we stop booking vacations, we slow our spending down basically. Imagine an entire nation doing that simultaneously. I’m sure you can see how that hurts businesses, the same businesses that employ us. This effects THEIR spending on goods and services, thus sending major shockwaves throughout the entire economy. This negatively influences employment which we’ll discuss shortly.

Middle Class Economics

This could be an article on its own, but I’ll keep this short. Imagine me asking you, “When you close your eyes and think of a Middle Class individual, what do they look like? What does their lifestyle look like? What would you think they think about financially on a daily basis?” If you really take a minute to visualize that, especially their lifestyles, I’d bet you could easily come to an understanding of how important they are to the Economy.

I view the Middle Class as a fulcrum. This is the $60-160k (adjusted for inflation) income holders of America. That’s an inflation joke, but they’re in that income range. I visualize a Middle-High to Semi-High Class income earner starting a business that isn’t having success, or is just getting it into profit territory. I think of Lower Class college graduates who are emerging into the workforce but haven’t had time to build their financial portfolios yet. I also think of Small Business Owners in rural America, in towns with less than 50,000 people who are doing well for themselves despite the population. I could further stereotype, but you get the picture.

These people are your spenders. They’re your entrepreneurs (job creators). They live comfortably enough to eat out, shop regularly, and buy things online. This plays a major role in the Circular Flow of Economic Activity in America, further influencing Employment and the creation of new jobs.

That said, we need to be aware of Wealth Distribution and Income Inequality in America and make smart leadership decisions that impact them positively. It is my personal opinion that the accumulation of wealth amongst all Ethnicities and Genders be a top priority for all Americans. There will always be winners and losers, but a wealthier society as a whole gives our Nation the best chance at advancing Human Civilization if we can also manage the psychological and spiritual nature of it. Amen?

If the Middle Class stops spending and traveling, the Economy will begin to recess.

Employment Rate

Here is the National Employment Monthly Update, citing the U.S. Bureau of Labor Statistics.

What are we looking for here? We’re looking for uncharacteristic movement in U.S. Employment, i.e. Unemployment. If people lose jobs, they can’t pay their mortgages. We get that, right? But why would tons of Americans lose jobs? Well, we’re talking about Recession Economics. The theme behind this article is that there are multiple variables that must be negative in order for us to experience a Recession.

We’re also directing it toward the Housing Market.

A sharp spike in Unemployment is fundamentally caused by a lack of profitability. Would you agree? We aren’t referring to one business, we’re referring to the macro-Economy. So it would likely be rooted in profit loss somehow. Some sort of sudden loss in demand. Otherwise, why would thousands of businesses lay people off? It’d likely be due to a change in consumer behavior. With technology advancing, it could be attributed to change in lifestyle? Or supply chain changes. I imagine self-checkout machines replacing store attendants, and Redbox basically ending Blockbuster’s presence in America. Imagine what Artificial Intelligence is going to do to the World Economy!

The quantity and quality of jobs in America influence home buying behavior and housing demand. It also effects Relocation.

From a micro-perspective looking at Employment in the city that you currently live in, what does that look like? When you drive around, do you see Excavators and Dozers moving dirt? Are there cranes in the sky? Are there massive “Going Out Of Business” or “Final Liquidation” banners hanging all over the storefronts? Is a local factory that employs 5,000 people relocating elsewhere? Maybe physically, you can’t see that happening. So how else could you see what’s going on (or isn’t going on) in your town?

Take a look at your City/County Planning Commission government website. Explore it until you find the “Agendas & Minutes” section of the site where it outlines what was presented to the Planning Commission for approval, rezoning, etc. Items that were voted on and approved will be in the outlines. The larger your city, the more detailed these outlines will be and vice versa. This will help you indicate whether jobs are being created in your area or not.

Conclusion

That’s a ton of information. I genuinely hope this article helps you become a better Buyer and Seller in Real Estate. This industry is more complicated than Hollywood makes it seem! But rest assured, there’s a way to make quick, sizable income gains with wise Real Estate decisions. If it weren’t possible, real estate wouldn’t be a key investment choice for today’s millionaires.

Do you feel like I’ve left something extremely important out of this article? Email me! I’d love to hear your feedback.

Best of luck in your real estate endeavors, and God Bless my friends.


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