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Between 2008 and 2012, more than six million people lost their homes to foreclosure, property values lost almost 40%, and non-distressed home sales fell to all-time lows. It was, without question, the worst real estate market since the great depression. Not surprisingly, the historic dip in the market was followed by a decade-long bull market, the likes of which we have never seen before. Residential real estate is a cyclical market. The strength or weakness of the market is tied to interest rates, affordability, and consumer sentiment. Feast or famine is a fair way to characterize the industry. The cycles are difficult to predict, but one thing is all but certain: the rebound is usually proportional to the dip. The opposite is also true. We’ve had a long run upward, so we should be prepared for a substantial downturn.
So, how bad will this downturn get? Very bad. The spike in interest rates has been sharper than anything we have seen in a long, long time. The market can take a spike in home prices if interest rates are low, and it can take a spike in interest rates if home prices are low, but it can’t take both. When house payments increase by 40% in less than a year, something is going to break. Home prices will continue to fall and transactions will drop substantially. The good news is unemployment is low, and the people who purchased homes in the last few years are now sitting on fixed-rate mortgages with very low interest rates. The likelihood of another foreclosure crisis is minimal. Sorry to disappoint those of you who have been rooting for that to happen. The other thing we have today is that single-family homes have become an asset class for institutional buyers and private equity. A dip in prices may be seen as a buying opportunity for them especially if rents remain high. As they did in 2009, institutional buyers may provide a floor for falling prices in 2023/2024.
In 2020 and 2021, the mortgage business experienced the strongest and most profitable years in history, but with rates more than double what they were a year ago, the industry will likely suffer its toughest stretch in decades. Small lean companies will survive and large lenders with huge servicing portfolios will also make it, but everyone in between will either be forced to merge or go out of business. It will be a bloodbath in the mortgage world.
Agents and companies that own their space will do fine. Those that are known as the best at something will increase their market share in 2023 while the competition shrinks, and they will be poised to make a fortune when the market rebounds. There are too many unknown factors to predict when the market will bounce back, but we can be sure that the sharper and longer the dip, the stronger the rebound will be, so plan accordingly and proceed cautiously. No matter how badass you think you are, now is not the time to flex. Get lean and cut all non-essential expenses. The object of the game is to survive and to live to fight another day.
That said, let me leave you with a positive, albeit, counter-intuitive thought. If you have been thinking about starting your own business; now might be a perfect time. The best time to start a mortgage company in recent history was 2008. Massive layoffs in the mortgage industry made talent available for new companies, and the five years that it usually takes to get a company to scale, positioned the newcos of 2008, perfectly to ride the next wave without the burden of legacy. Some of the same things will be available soon for the right companies.
Now is the time for innovation. When the market is strong, people are too busy making money to focus on innovation, but now is the time. NAHREP is starting an angel investor community and an accelerator program to help incubate the next big thing in our industry and to give our members a chance to invest in some of the more promising companies. If you’re interested in participating in angel investing, you can apply here. Remember, success is a factor of two things: What you know and who you know. Stay connected to your like-minded peers. NAHREP will be working hard in 2023 to make sure our members have what they need to not only survive but thrive in the coming years.
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