As 2018 comes to an end watchers and gamblers in the worlds financial markets are finding themselves in one of three basic categories.
1. Bullish
2. Bearish
3. Throughly Confused
Every increase in market volatility adds more people to column number three. Before I throw out some ideas about where this train might be heading let’s take a quick look at how one could potentially arrive at any prediction.
One method that consumers who don’t wake up and watch the markets daily might take is to see what the experts think. Right away this is where we might find ourselves in a bit of a pickle. One can barely look through the top stories of any financial news site at the moment without feeling like we’re watching a soap opera. The emotions are highly intensified.
“The end is nigh! says person who once said this before!”
“Everything is gravy time to get back in! Says person who has never gotten out”
“Fed asked by America Is everything okay? It’s reply “I’m fine”
The tricky thing about consuming news today is that it’s rather hard to keep score, or determine if a consensus even exists. How many opinions have actually stated that prices will fall? How many stated now is still a good time to buy? How strong is the feeling that the fed will continue to raise rates?
Luckily there are some great resources out there that actually do this. Like Pulsenomic’s Home Price Expectations Survey. Which survey’s 100 economists for their predictions. Click the link and look for the “latest panelist’s expectations” to download the spreadsheet. There’s some interesting stuff in there. With individual expert predictions as high as 7% to as low as 0%. Which by the way are probably much more likely to show up in pundit land than The Median 2019 prediction of 4.05% appreciation.
To be clear, I’m not saying we shouldn’t trust the media or that what we’re seeing is “Fake News”. We must simply recognize that the content being put out to the average consumer may in some cases overstate the volatility of the predictions out there. A smart agent who wants to provide objective information on what the experts are saying should use resources like the one above. (Which by the way I found via http://www.keepingcurrentmatters.com in their resources section of their fantastic monthly market reports. <3 those guys)
Method #2 would be to put ourselves in the shoes of one of those surveyed economists, and go digging for the raw data ourselves to draw our own conclusions. I’ve made some half assed attempts to do this myself, and have come away with a few notes of interest that have influenced my own opinion on the matter. Here they are…
Supply & Demand matter equally.
As of this writing 12/19/18 the Fed is preparing to make it’s next announcement, and the market is awaiting impatiently to interpret a statement that is usually designed to be as vague as possible. This announcement is regarding the increase of interest rates. For the real estate world rates have become extremely important, because for the first time in a long time they’ve begun to rise.
Rising rates have an impact on asset prices. They increase the cost of borrowing, and put limits on what people can afford to pay. SO MUCH attention is being paid to this particular aspect right now. That’s probably because a lot of other things are at stake. Like an extremely overheated stock market, a main street economy that’s just begun to show progress, and a bunch of highly leveraged companies who’ve gobbled up their own stock through buybacks; just to name a few.
But what about the supply side? An article that I frequently come back to that was written in a totally different world (6 whole months ago) points out what I find to be an extremely important piece of the supply puzzle. “Over 50% of homeowners have a mortgage rate of less than 3.75%.” That means a lot of people have locked in a historically low rate/payment on an asset that’s appreciated greatly over the last 5 years. The same goes for those institutional investors who gobbled up homes in the 2010-2012 low point with cash.
Rising rates may put a ceiling on the price of demand, but they also stand to perpetuate what has been a real squeeze on home supply. If trading up or sideways continues to be a difficult task for existing sellers then that doesn’t provide much room for prices to come tumbling down. With the equity homeowners have they can afford to stay put, and potentially even remodel to suit their growing needs.
In the same article linked above another important piece of the puzzle is that “Another 26% of the top 100 metropolitan areas were undervalued, while 34% were at value.” 60% of the top metros are at fair or below market value prices. Would a reversion in the mean of the 40% that are overheated be enough to offset the 60% that are not?
In conclusion, I can see why the economists are providing a median response that is just slightly above the 3% avg expected appreciation. The cheap credit party is ending, but the supply issues may not have gone away.
For my own reference I’ll put out a prediction of 3.5% growth with an 80% degree of confidence. (20% accounting for an pending recession which does stand to create supply from dangers such as increased unemployment)
TL;DR
1. Volatility is often overstated in the news.
2. Expert consensus is slightly bullish as of Q4 2018
3. Help Consumers find the median, not the extremes
4. Rate hikes are as influential on supply as they are on demand.
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