29/12/2022
You might ask which cities would suffer the most once the Case Schiller index turns over
and home values start to fall across the country.
Everyone is aware of the regional nature of the real estate industry and its history of
crashes.
Take 2008, the biggest real estate crash in our lifetimes, as an example of how the severity
varied greatly depending on the area.
To put it in perspective, a property that cost $250,000 during the height of the boom
will now cost 182,000.
Back then, prices nationwide fell by 27.3%.
All Things Considered, there was a significant discount following the crash, but it wasn't
something you would consider fatal Because this figure represented the national
average, when people think of the OA crisis, they see prices plummeting considerably more
drastically than that.
The actual Carnage that was taking on in a number of significant American cities was
not adequately depicted.
Many of our localities had even worse collapses in 2008 than this.
Las Vegas is the best example to use as an extreme because prices there increased by
233% between January 2000 and July 2006, making it a popular destination in the early 2000s.
Even though we're talking about the past at this point—and I realise that—the market
started to tumble after what seemed like a whole year of parabolic expansion at this
exact time.
As soon as the crash began, it would keep falling until March 2012.
We finally struck a bottom after almost six years of price reductions, which caused that
particular Market to drop by 62 percent.
That indicates that the same 250,000 house at peak level we previously discussed would
cost 95,000 after the crash.
a significant deviation from the national average.
This circumstance and historical example demonstrate what happens when we examine individual inflated
markets during a downturn.
Things might fluctuate greatly from place to city, and the national average just provides
a glimpse into the genuine picture.
story now taking place.
Let's take a look at the present accident now that we know that the crash can appear
extremely differently depending on where you're looking.
We are aware that investors are currently in a difficult situation, the FED is engaged
in an aggressive phase of monetary tightening, and Bank of America has forecast stock returns
of zero percent for the upcoming year.
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Returning to the housing market, we can see how each city's market is unique.
Even if the Case Shiller index is only down approximately 2.3 percent overall, we can
already see these significant variations in a wide range of US markets.
These cities are what many refer to as the "Post 2020 Boom Town," where an ideal storm
of factors conspired to drive prices through the roof.
As things start to change, we are already observing a significant divergence from the
national average, similar to what was seen in 2008.
Seattle is currently in the lead, and it was generally known that the city was filled with
speculators and rapid price increases.
Home values there increased by 316 percent after the 2008 financial crisis.
With growth already out of control before 2020, as you just showed with that scenario,
the buyer who purchased in February 2012 for 200,000 might have sold their home earlier
this year for almost 632,000.
As you can see, the lion appears to be climbing straight up as the chart simply goes parabolic.
In fact, costs increased by 20% between May 2022 and October 2021.
This is simply unheard of in the real estate industry, and the mix of extraordinary demand
and titanatory is a major factor.
A brief glance at the reference statistics reveals that the median time a house in Seattle
was listed for sale after February 2020 was seven days.
These are some of the lowest figures in the nation, and if you take a look at inventory
levels, it becomes clear why homes were selling so quickly.
Simply put, there weren't enough items for sale.
Prior to reaching a bottom in January 2022, the numbers fell to historic lows.
The lack of available inventory was substantial across the country, but in Seattle, it was
record-breaking from top to bottom, with an 85% decrease in the number of homes for sale.
As always, basic economics teaches us that price is a function of supply and demand. Upon hearing this, you could think, "Well, this doesn't sound like a bubble; it sounds
legitimate."
While it's partially true that market conditions drove the Seattle region up in a way that
reflected a genuine demand generated by actual people and cheap loan rates, the main reality
is that the Seattle housing market bubble followed another bubble.
The Seattle Tech Bubble, as we all know, occurred after 2020 when the stock values of many of
the high-flying tech companies with headquarters or at least presence in this area skyrocketed,
greatly enriching many employees who owned equity through employee ESPP plans or speciality
incentives.
The majority of these IT giants are currently downsizing to the point where they are laying
off employees, which is having an impact on housing demand in a way that we haven't seen
since 2008.
According to local news sources, the number of layoffs at tech companies in the Seattle
area this year is approaching levels during the Great Recession around 2008, which is
consistent with the value declines we are currently witnessing.
The same type of activity is occurring in other Tech cities as well, with inventory
levels spiking back up and price reductions among listings becoming commonplace.
Inventory levels in San Francisco have increased by 51% year over year.
Phoenix increased by 175%, Portland by 75%, and Austin, Texas, by 160%.
The list is endless and the pattern is obvious.
In costly cities, particularly those with significant tech presence, there is a large
influx of inventory, which historically is exactly what you see before significant downturns.
According to Bill McBride's research, the inventory reveals the story in almost every
historical occurrence.
Without boring you to death, he created this graph that examines the relationship between
prices and supply.
It looks like this.
Prices have a tendency to decline as the supply of properties for sale, which is represented
on the left y-axis, increases.
For instance, if you have 12 months of inventory, which is almost record-breaking, what often
happens is that the Case Schiller index, which tracks prices nationally, experiences significant
declines.
The issue that many analysts run into is that they utilise this chart with too much optimism.
This is because this chart is beginning to lose credibility as we go closer to 2020,
the Fed's actions, and the events that followed.
Now that we are observing more extreme movements that deviate from Historic Norms, we are crashing
harder and more quickly than was previously thought to be conceivable.
Here's how I know this: As of right now, our home inventory level is 3.3 months, according
to the same statistics Bill McBride uses.
The following report will probably reveal a brand-new figure of about 3.5.
Therefore, using that information, we go to Bill's chart and check across that 3.5 historically
since 1999.
We notice that prices have never ever decreased while inventory levels were at this level.
However, the Case Shiller index is already declining.
For the month of September, it fell by 1%, and it is predicted that for the October number,
it will fall by a similar, if not greater, percentage.
This indicates that the following print will produce absurd outliers on this graph.
All of this is to imply that even though inventory levels seem to be low, there have been sharp
price decreases across.
This has never happened before, and according to my theory, the market is moving so quickly
that the numbers recorded by the Case Schiller index and the National Association of Realtors
are unable to keep up with and accurately reflect what is taking place locally.
And if this kind of downturn is apparent on a national scale, just think of the carnage
taking place in the previously mentioned overdeveloped cities.
The previous recession taught us that, in some markets, things can actually get considerably
worse than what is indicated by national data.
This is already happening in many of the markets we covered today, and as more data comes in,
we'll get a fuller picture later this year and maybe be able to predict how terrible
things will get.
As always, thank you for watching.
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