Falling Home Price Zone
This next cycle is going to be a wakeup call for GenZ and perhaps even for millennials. They have never known a contraction of the economy like this, because the last one was the dot com crash, which was in the last century (gulp!) Tech companies have already been affected. If they or their VCs know how to address market volatility, they’ve already laid off the bottom 10% of their workforces. That goes for Microsoft, Google, Amazon, and Meta, as well as for VC funded startups.
Companies have also sharply curtailed hiring, so there will be fewer jobs out there for new graduates and for people who have preferences about whether they want to go to the office. I’ve already heard that the old line business CEOs have “ordered” their troops back to the office. The financial sector in particular. Jamie Dimon in particular. We’ll see.
And the jobs that are going unfilled are in sectors people no longer want to work in anymore, like retail and hospitality. Airlines in particular.
Everyone who was in Silicon Valley at the turn of the century remembers the shocking memo Sequoia sent out to its portfolio companies, warning them to conserve cash to lengthen their “runways” because there was no more money coming for a while. Many companies who didn’t listen went under, and their employees left the Bay Area in droves. You could see it in the traffic patterns on the 101 and the 280.
Now all this seems to be happening again, and it is only a matter of time before something wicked happens to the housing market in places far-removed from Silicon Valley like Phoenix, where prices have doubled in the past two years because the growth of the tech sector has brought housing prices up with it.
Why has this contraction happened? It’s complicated. Part of the blame rests on Covid, because some people got PPP money and invested in real estate and cars. But now the Federal Reserve Bank has turned off the spigot and free money has gone away.
Why did they do this? Because that’s what they’re supposed to do. They’re supposed to keep us out of inflation. But during the pandemic, when two different administrations felt compelled to send money to taxpayers to help them cope with lockdowns, job losses, and excess mortality, the only way this could happen is through printing money and lowering interest rates. Fiscal conservatives have been saying for years inflation would be the end result. But because of Covid, there was little choice.
So now, several things have come together:
Inflation, for the first time since the late 70s, which has not yet responded to rising interest rates.
Rising interest rates, which hit businesses first and then mortgages. I have a friend in the money business who calls this the end of free money.
Record high home prices and a large cohort of young people at home buying age.
In 1980, I paid 18% interest for a mortgage on a condo in Phoenix. I hardly gave a thought to the rate, because I could afford the monthly payment, and I needed to buy the condo to live in. However, that monthly payment determined the place I was able to buy, because that was all I could afford. Just imagine if homes had started at almost $1m in many major cities, like they do now. Rising interest rates will force first time homebuyers out of the market.
Will prices in the most desirable cities go down? Probably not much, because homebuyers who bought during the pandemic and got 2% interest rates will not be willing to move and go through a new mortgage process only to learn they can’t afford the move up home they wanted.
So it’s not going to be a 50% drop like in 2008. Probably more like 10-20%, depending on where you live. Hang on to your house if you have one. Rent one if you don’t. In my neck of the woods, investors have been buying land to build home communities where the homes are ALL rentals.
Why not? When the roof leaks you can call the landlord.