Are We Heading into a Recession?

The familiar red flags of a pending recession have arrived: an inverted yield curve and rising interest rates on the back of ultra-high inflation.

The central bank hiked interest rates by a whopping 75 basis points in the US last week, which was the biggest rate increase since 1994. The Fed is attempting to raise the cost to borrow money to slow the economy and bring down the skyrocketing inflation. Last year, Fed officials deemed inflation as “transitory” because of the pandemic reopening, but due to a mix of strong consumer demand, supply-chain bottlenecks, Covid lockdowns in China, and the war in Ukraine, prices keep going up despite the rate hikes.

What will happen next? More rate increases. The Fed projects it will hike rates by another 175 bps by the end of the year. Raising interest rates this much, this fast, will be painful for the economy and put some people out of work.

I’m sure you’ve heard that Compass and Redfin collectively laid off almost 1000 employees last week citing “turbulent times”. This created a fear in the industry that widespread layoffs are imminent. That’s not the case. These companies were losing money during the best housing market in history. Compass’s stock price is down over 70% and Redfin’s stock price is down over 85% in the past year. Let’s be realistic… the layoffs are not due to “turbulent times”, they are due to flat-lining stock prices. Another thing to consider is that companies like Compass and eXp that offer stock-based compensation to agents as part of their commission will become less attractive as their stocks lose value.

It is no secret the stock market has been volatile in the past few months. Of the 17 times the S&P has dropped more than 15% since 1950, on 11 of those occasions stocks bottomed out only when the Fed began to signal a loosening of monetary policy. But in the current downturn, the Fed is planning to hike rates into next year, not lower them.

Jerome Powell, chair of the Federal Reserve, said that the central bank MIGHT be able to lower inflation without tipping us into a painful downturn, but he cautioned that pulling it off would be “very challenging” and that a recession is “certainly a possibility.” If the Fed is not able to pull off a soft landing, then housing market could suffer long term.

An analyst with Real Data Strategies recently said that in his 30-plus years as an analyst, his firm has never documented this serious and fast a correction in the market. Yet, very few agents are talking about it with their clients. In uncertain times, you need to communicate MORE with your clients, not less.

While recessions are normal, and at times they can be healthy for an overheated economy like the one we’ve been experiencing, for the average person the word “recession” causes fear. When people lose confidence, they stop making big-ticket purchases. Your job during this time is to give your clients the confidence that it is still a good time to buy or sell.

If we do enter a recession, and I emphasize the word “if”, then what can we expect?

• Stock markets inevitably take a hit during a recession, so people with investments will see their portfolio values come down. On the flip side, when stocks crash, investors flock to real estate as a sound investment. Over time, real estate has always outperformed the stock market. Real estate has always been a slow way to make a lot of money.
• House prices fall during a recession. This will be a great opportunity for buyers who may finally be able to afford to buy. However, for sellers, they will need to tone down their expectations.
• Where the Fed usually lowers interest rates during a recession, that likely won’t happen this time around until they see inflation come down.

HOW DO YOU TALK TO SELLERS RIGHT NOW?

Let’s delve into the mind of the seller. Most are ignoring the news and pretending the market that was, still is. They see what their neighbors got a few months ago and they want the same or more. Their expectations are often out of line with the current market conditions. It is your responsibility to educate them to help them make wise decisions.

If you want someone to sell what they have, you must connect them to what they want. If they want the next house and the want is powerful, then their resistance to reduce the price of their current house will be less. The mistake most agents make is that they focus on selling the house. What they forget to focus on is WHY they are selling the house. Remind them of what their motivations are (cut down on the commute time, have a staycation backyard, have more room for a growing family, etc.) Whatever it is they want in the next house, that’s what you need to focus on.

Remind them that in the current market, they may accept less for their house, but the next house will also be less, and the selection will be greater.

What if they want to wait for the market to go back up again before they sell? The market WILL go up again in time, but if their house goes up, so will the next house they are buying.

As the selection increases, it is attractive when they are buying, but it increases their competition when they are selling. Prepare your sellers that they will need to be more flexible on things like closing and accepting conditional offers. Let them know that it is taking longer to sell houses now than it did a few months ago, but don’t let that worry them.

You also want to let them know that you have adjusted the comps you used in your CMA to reflect the change in interest rates from the time the comparable properties went under contract to now. Let me give you an example:

• A $500,000 house with a $100,000 down payment at a 4.5% mortgage with a 30-year amortization would cost about $2900 per month.
• If rates are now at 6%, that buyer would need to purchase that same house for $450,000 with $100,000 down payment to have the same $2900 payment.
• As rates increase, buyers lose purchasing power. That 1.5% interest rate hike is the equivalent of a $50,000 reduction on the purchase price to come out with the same monthly payment. Most agents don’t think this way when they are researching and adjusting their comps.

HOW DO YOU TALK TO BUYERS RIGHT NOW?

Let’s delve into the mind of the buyer. Most are closely watching the news and are thinking one of two things:

1. Either they see the interest rates rising and figure they can’t afford to buy right now, or
2. They see prices starting to come down and they figure they will wait to buy until the market bottoms out.

The buyers who are still looking are getting a sense that they have the upper hand in negotiations since the market is cooling off. But you need to remind them that we are still in a sellers’ market, not a buyers’ market, so they need to compromise.

Over the past 24 months you likely worked with several buyer prospects who got frustrated with the market and hit the pause button. Now that the market is slowing down and inventory is increasing, you should reach out to update them on what’s happening in the market because it might be a good time to start house hunting again.

If they are worried about rates, yes, rates have gone up, but 6% mortgages are still a good deal. Sure, it is more than they would have paid last year, but relatively speaking it is still reasonable. If they were to lock in now, they can always refinance if rates come down in a few years. Rates are forecasted to continue to rise for the foreseeable future, so they are better to buy now before they go up even more.

If you have buyers who want to wait until the market bottoms out, here is what I recommend you say: “Everyone wants to get a good deal, but it is only a good deal if you love what you buy. We won’t know that until we go out and look. If you find the perfect house and you can afford it, then it is a good deal. No-one can time the real estate market. We all thought when the pandemic started that house prices would plummet, and they did the exact opposite. Even the economists can’t agree on how to forecast the market right now because there are too many variables.”

If your buyers are worried about buying now and their house being worth less next year, tell them not to worry. The only time the value of a house matters is when they sell. If they are not planning to sell in the next year or two, then what the market does doesn’t matter. Even if it goes down, real estate always comes back up over time.

Given the shifting market, you must keep a close eye on your market data because the market is changing almost daily. Some areas are seeing 25-35% of their active listings taking price reductions, and inventory is rising. When you look at comps on properties, it is very important for you to adjust for time. What were the interest rates when the property sold compared to interest rates now and how does that affect a buyer’s purchasing power?

If you need help navigating these uncertain times, reach out to us to talk about agent coaching. Partnering with a seasoned mentor will help you navigate challenges and continue to grow while others are stuck in neutral.

Chris Leader
President
Leader’s Edge Training