Natural Market Regression
If you have been hiding under a rock for the last five years, you’ve probably missed what’s been going on. Heck, it’s been happening since about 2012. In June of 2012, there were around 2,000 sales in the greater Nashville area, with a median sales price of $182,000. In June of 2019, there were 3,529 sales with a median price of $319,990. From a macro point of view, that’s just over a 40% increase in sales price. What makes that number even stronger is that in 2012 there were about 11,000 homes on the market with only 2,000 converting to actual sales. This past year, there were just over 8,000 homes in inventory and converted to those 3,500 sales. A much higher conversion rate. All of these numbers point to one thing- the Nashville housing market is freakin insane right now, has been for a couple of years, and will probably be so for the near future. But every Negative Nancy and “I’m smarter than everyone else” loves to say that they just don’t see it holding on and the bubble is going to burst. Sure, that’s probably going to happen at some point. But I want to go through some factors that lean against there being another 2008 in the next few years.
First, if you are like myself and were in high school in 2006-2008 and didn’t really need or want to care about housing or mortgage issues, here is some education on what happened and why it all went to crap. In the early 2000’s, subprime lending was a hot commodity. In layman’s terms, banks were allowing people to refinance below the going market rate by pushing adjustable rate mortgages (ARMs), meaning if the going rate on a conventional 30 year mortgage was 6%, banks were pushing 5% ARMs that were fixed for 5 years and then would conform to prime after those five years. While this was, obviously, very attractive to consumers, banks and mortgage backed securities holders behind the scenes were questioning this being the most common practice due to the uncertainty that so many ARMs were causing by not fixing and locking in rates over a longer term. Too many people were relying on a complete unknown of what the future market would be, and banks are in the business of doing the exact opposite; doing their best to predict risk and to mitigate how that risk could negatively affect their business. Another issue was that the amount of investor-owned properties in the U.S. rose to 35% in 2006, and investors were much more likely to take a loss and sell at a lower price than a owner that lived in the home. In 2006, as home prices plummeted, and ARMs started to rise to prime (and mortgage payments went up) delinquencies shot through the roof, meaning the banks that assumed this risk weren’t getting paid. Securities backed by mortgages weren’t getting bought anymore, causing rates to increase even more, and everything snowballed into the greatest recession since the 1930s.
Whew. Man…that’s pretty depressing for a real estate agent to think about and makes me glad I was in high school at the time. I can only imagine the devastating reaction that social media would have today to make it even worse. Twitter blows up when Khloe Kardashian releases a new lipstick; imagine what it would do during a major housing crash. On to the good news as to why I think that’s not going to happen again- at least for a long while.
The first reason…go to Google and type in “Will there be another recession” and see what the results are. What you will see are articles written over the span of the last five years saying “Beware, a recession is coming! Here’s how to prepare.” And guess what? Here we are with the strongest stock market, housing market, mortgage market, and consumerism period in recent memory. Every month I look at current rates and think that there is no possible way that they get lower, and they continue to creep down. (I’m actually somewhat hoping that they do level off and hold at a strong number for a bit, especially through the winter.) In fact, I saw a report this morning that said they are down a full percentage point year to date compared to 2018. That is mind-boggling and can save people three figures a month on a mortgage. Incomes are holding steady, jobs are continually on the rise, and government regulations hold banks more accountable in providing information to people getting mortgages. That was part of the problem in 2006. All of these people were refinancing into ARMs and not fully realizing what they were really getting themselves into. Now, with more information presented to borrowers on the front end, people are more aware- and know if they need to get out before locking in a mortgage.
That increase in information from lenders to consumers goes hand-in-hand with the ease of access that we currently have to information that we have at our fingertips at all times. At any second of any day, I can get on Twitter and search for absolutely anything and find something on it written by a news organization. Now, it’s your job to have the due diligence to make sure that it’s a trustworthy source, but information is everywhere. In 2006, there were so many things behind the scenes with the stock and mortgage market, that the public was basically unaware of the problem up to the point of the crisis beginning and no one being able to do anything about it. In 2019, with a more informed populace (and one more willing to call bluffs and things kept in the dark brought to light), I think that the public would have a heavier hand in making sure that something like this doesn’t happen. With a strong housing market and stock market, it allows investors to feel confident in their investments. More confidence from investors equals less wavering come hard times. As I’ve been saying, I think that those hard times are far off.
So the question then becomes- what does that mean for 2020, 2021, and beyond? Well, Nashville’s appreciation rate is about 9% over the last couple of years, with certain neighborhoods booming over that number, and some hanging out a bit below. Ignoring the possibility of major market shifts based on elections and legislation, I think that will hold pretty steady for the next couple of years. With the non-owner occupied short-term rental ban coming in 2021, I think we will see a bit of regression on those value hikes, as investors are less incentivized when the only way for them to make money throughout the year is going through the process of finding long-term renters. The positive side of this is that it will provide a bit more stability in not only the market, but in neighborhoods. Go on any neighborhood-specific Facebook page and you will see someone complaining about their neighbor’s AirBnB customers. Home sales will reflect sellers that live here, and buyers that live here as well. That stability will help buoy the market as investors buy less. In my opinion, Nashville over the next five years will regress to about a 5% year-over-year appreciation, which is still a good number and based on the paying down of mortgages combined with equity rising, still gives homeowners that 10% per year appreciation. As someone in the business of selling homes, I wouldn’t mind a bit to be wrong and values to continue to rise at the rates they are. However, I don’t think that some regression to the mean is a bad thing whatsoever.