Don’t Panic: We’ve Entered a National Housing Correction Episode #365

We have been hearing for months that the housing market is slowing down. But let's be honest, it's not just slowing down anymore. The housing correction is here. And I've been saying this for a few months now, but I think it's time that we dive into the topic thoroughly. What is a correction? Could it get worse? How long will it last? What does this mean for your investments? Today we're facing the facts and figuring out how to address them head on. Hey everyone, it's Dave. Welcome to On The Market. I know I started this episode talking about a housing correction, and that is what we're getting into today. But it's not because I am trying to be a downer. It's because my job is to tell you what is actually going on in the housing market, not to mask the realities of the market. Now, I've been trying to do this for as long as we've had this show. I told you a year ago, two years ago, that I didn't think rates would be coming down as much as people thought. I told you that I thought prices would be flat this year. And now I'm telling you that we are in a national housing correction. And I've been saying that casually in episodes the last couple of weeks or months, actually. But I think it's time that we actually just talk about what that is. Because I know when I say that it can sound scary, but it doesn't have to be. The market and what's going on in the market is not your enemy. It's actually just your guide. And if you know what's happening with the market, you can be guided to make the right adjustments and still make profits and still do great deals in real estate. So in today's episode, that's what we're going to focus on. We'll start with a conversation about what is a correction in the first place. And is it a bad thing? We'll talk about how different regions of the country are performing. We'll talk about why we're in a correction and how long it might last. And of course, we will talk about what you should do about it. Because corrections, they sound scary, but they're actually often the best time to buy. You just need to buy right. And we'll get into that as well. Let's get to it. So first up, what is a correction? What is a crash? What is the difference in the first place? Now, I understand in the media these days that it is impossible to tell the difference because it seems like any time prices go down in any market, there are people calling it a crash. Housing market goes down 2%. It's a crash. Stock market's down 4%. It's a crash. I don't really think that's true. I think we need to be a little more disciplined about our definitions here. To me, a crash is rapid, widespread declines. So this would have to see prices drop, not just over the course of several years, but relatively quickly. And I think you have to see at least 10% nominal declines. I can even argue 15%, but it has to be at least double digits to represent a crash in my mind. For example, in the 2008-2009 crash, prices dropped 20%. So that was very significant. To me, the correction is different. It is a period of slower growth and more modest declines in pricing that is basically normalizing prices after a period of overvaluation or lower affordability. So a typical correction, right? You might see 3%, 5%, 10% pullback on prices over the course of several quarters. It could even be over the course of several years in certain instances, but it's not this kind of like in a year prices drop 10% to 20%. To me, that's what a crash is. So that's the difference between a crash and a correction. It's the speed and the depth of the decline. Now, the reason this distinction is so important is because a crash really is an unhealthy and unusual thing that should happen, especially in the housing market. Crashes happen more commonly in the stock market, in cryptocurrency, but in the housing market, if you look back 100 years to the Great Depression, there's been exactly one crash that actually defines a crash. That was the Great Financial Crisis, 2006 to 2009-ish period. Now, when we talk about a correction, this is actually normal. It's not everyone's favorite part of the business cycle, but it is part of a normal business cycle. When I say a business cycle in capitalist economies, in free markets, basically what we see is there are periods of expansions. Those are the good times, right? Then there's this peak period where things are a little frothy. They're a little bit hot and the peak isn't one moment. It can be a couple of years. Then you have a correction where things go back from their frothy peak into a normal pattern. It bottoms out and things start growing again. Those are the four normal stages of a business cycle. When you look at a correction, I think it helps to understand that it's not necessarily something to be scared of. It is something to be aware of because it is a normal part of the economic cycle. You can think of a correction as a normalization, right? We all know things got too hot. It benefited people who owned real estate, but we know this, right? Real estate market got too hot. So seeing a correction where things are normalizing in terms of pricing is actually a good thing. That is what is supposed to happen in a market that is overheated. I also think it's really important to note that it is far better than the alternative, right? Because if you have an overheated market like we knew we had, affordability is too low right now, you basically have two options for getting back to a normal market. One is a correction, which is a slow, gradual decline of prices back to normal levels of affordability and valuation, or you can have a crash. So if you're asking me which I would rather have, I would clearly rather have a correction because that is a situation we as investors, we can deal with that. You can still invest in during a correction. During a crash, it's a little scary. It's a little harder to navigate that, but correction, totally normal part of the business cycle that you can invest around. And like I said earlier, and we'll talk about later, can be one of, if not the best part of the business cycle actually to buy in. So that's something really important to remember. And like I said, even though we've been talking about this for a while, I just think it's high time that we just discuss it, name it, and start working around it. So when you're looking at a correction or a crash, the main thing that you're looking at is prices, right? Are prices going up or down or are they flat? And it's actually not so simple to answer that question. I think that's why some people are saying we're in a correction like I am, people are saying, Oh, prices are still up. Both of those things are kind of true. And I think I can help make sense of this. Or just give me a minute to explain the difference between nominal and real home prices. I know it sounds super nerdy, but it's important for you as an investor to understand this. There's two different ways of measuring home prices. One nominal means that it is not adjusted for inflation. If you need a little trick to remember this nominal starts with N O not adjusted for inflation. So again, that's when you go on Zillow, Redfin, the number that you see, the number that you actually pay, those are nominal prices. But there's an actually really important thing that we as investors need to track as well, which is what we call quote unquote real prices. And whenever you hear people say real prices, real wages, that just basically means that it's adjusted for inflation. So those are the two things we got. We got nominal prices, we got real prices. Let's look at what's happening with both of them. First up nominal prices, those are still up. So this is probably what you're hearing or reading about in the headlines because most media outlets, most people, most people in the industry talk about nominal prices. There's nothing wrong with that. That is the actual number that you're paying. And they're up about 1.7% this year. If you look at the Case-Shiller index, if you look at Redfin, they're up about 2%. Zillow says they're closer to flat, but most people agree nominally things are actually up. And I think this is the reason people are saying, oh, there's not a correction. Prices are actually still going up. But when you look at real prices, they are down, right? Because I just said Case-Shiller, Redfin are up 2%, right? The most recent inflation data that we have shows that inflation is about 3%. So when you subtract inflation from that 2%, you get negative 1%. Prices are down in a real sense. And I know this isn't the most intuitive thing, but it is really important as investors to understand when property prices are actually growing, when you're actually getting a quote-unquote real inflation-adjusted return, or are the prices just going up on your homes because prices of everything are going up? That's basically just inflation. Both things help investors, right? Because it is valuable to buy real estate to be an inflation hedge. But I think it's hard to argue that the market is doing well when prices aren't even keeping up with inflation, which is what's happening right now. So that's reason number one that I believe we're in a correction, is that real prices are negative right now. And I actually personally think that's going to get a little bit worse. Number two is that basically all regions are trending down. And one of the reasons at the beginning of the year, I didn't say we were in a correction. I think a lot of people agreed with that. It's because we saw this totally split market, where some regions of the country, in the Northeast, in the Midwest, they were doing pretty well on a nominal basis, on a real basis. It was doing fine. But there were other ones, Austin, Florida, these markets that we all know about, were not doing well. And so you said, you know, we're not really in a correction. There's certain markets in a correction. And that headline is still true. There still are markets that are up, same regions, Midwest, Northeast. There are markets that are still down. But the thing that has shifted in the last couple of months, that to me solidifies the fact that we're in a correction, is that the appreciation rate is going down in pretty much every market in the country. Meaning that even if you're in Philadelphia or Providence, Rhode Island, or Detroit, that still have positive appreciation numbers, even in real terms, they're far down from where they were last year. So places like Milwaukee were 11% year over year growth last year. Now they're down to like 4%, right? That's still up. That is still up in real terms. But everything is sliding down, right? We don't see any markets heating up right now. And to me, that is another definition of a correction, is that we have widespread cooling across almost every region, even if some markets are still positive. Let's take a minute and talk about those regions just for a minute. I'm just pulling this data from Zillow, but the trends are pretty similar everywhere. What you see is in the majority of the country, a lot of the major markets have turned flat or negative. So Florida, we know about this, but it's Texas. We see a lot of markets in California, Arizona, Colorado, New Mexico, Utah, most of the Southwest, in Washington and Oregon, we're seeing it. Most of these markets are flat to negative. And so all of them in correction. The markets that are still doing well, like Rochester, New York and Hartford, Connecticut and Detroit and Milwaukee are still up, but they're up 4% year over year. They're up 3% year over year. And so basically, if you look at these in real terms, right? Even the best performing markets, pretty close to even, right? Detroit, one of the hottest markets right now, 4% year over year. It's really 1% in real returns. So you really need to look at this in this inflation adjusted way. And when you do, you see most of these markets are flat to negative, even though some of them are still just mildly positive. There's one other nuance besides regional differences that I did dig into here that I want to talk about, which is just different price tiers. Because sometimes when I say we're in a correction, some people say, oh, it's just low priced homes. Upper tier homes are still selling well, or, you know, starter homes are still selling well. So I did look into that in preparation for this episode. And what I found is somewhat similar to what's going on in a regional level. Yes, it is true. Upper priced homes are still positive year over year, but they're up just 0.6%. Whereas a year ago, they were up 5%. So that's a really big difference, right? It went from 0.5 to 0.6. The trend is very clear. Whereas low priced homes are doing worse. They're at about 4.5%. Now they're negative 1%. Mid priced homes came from 4.7 down to 0.2%. So the same thing is happening here too. So this is why I'm not panicking, but I'm saying when you slice and dice it different ways, you look at different regions, you look at different tiers, you look at it on a national level, everything is cooling down. Again, this is a normal part of the business cycle, but it's important. Let's call a spade a spade and say we're in a housing correction. Of course, we can't just stop there. We can't just say we're in a housing correction and then get out of here. We got to figure out why this is happening and what we're going to do about it. And we're going to talk about what this means for your investments in just a minute. But I think it's important to remind everyone why this is happening. I told you it's a normal part of the business cycle, but we need to just sort of talk about how that functions logistically. Like what is actually happening in the market? Because that's going to lead us to what you can actually do about it. So in the housing market, like I said, there's basically four periods in the business cycle. You have an expansion, you have a peak, you have a correction, and then you have a bottom. In the housing market, the way it works is normally during an expansion, you have relative balance between buyers and sellers. You probably have a little bit more buyers than you have sellers, but you have relatively stable inventory. Prices go up at least at the pace of inflation, maybe just a little bit higher than that. So you maybe get 3%, 3.5% appreciation every year and inflation's at 2%, right? Something like that is a normal expansion. So if you're anchoring yourself to what happened during COVID, where appreciation was 10% or 20%, nah, that's not a normal period. A normal expansion, which is what we should be anchoring ourselves to, is 3% or 4% annualized appreciation. Then at a certain point, like people start seeing, hey, real estate's doing really well. So more buyers tend to jump into the market. That creates a mismatch in inventory and pushes prices up. And that's how we sort of get to this peak point, right? Where people are competing for less inventory. There's more demand and less supply. People are competing for that. That pushes prices up to a point where it no longer is affordable for demand and demand starts to fall off. And that's basically the point where we're at, right? We've been at this peak period, honestly, for a couple of years now. And I know nominal prices have gone up a little bit, but real prices have been pretty stagnant because houses just are no longer affordable. And so what we need to happen, what this correction needs to bring us, because again, the market is not our enemy. It's actually doing something healthy for the market. What it needs to do is restore affordability back to the market. And that can happen in a couple of different ways. It can happen from mortgage rates coming down. It can happen from wages going up, or it could happen from prices going down as well. Now I've said it before, I'll do an episode on this in the next couple of weeks, but I think it's going to happen from some, hopefully, combination of all three of those things. But the key is either prices do need to come down or if they're going to stay somewhat flat or go up a little bit nominally, what we need to see is mortgage rates come down and we need to see wages go up. That's what the correction is doing. That's its job in the business cycle is to restore affordability to the market. And we just haven't seen that yet. And that's why we sort of need this correction to come through and restore some health to the housing market. And we'll get back to that in a minute because I want to talk about how long this might take and we'll get there. But what this actually means on the ground, you're probably seeing this if you're an investor or if you're in the industry, is that inventory is up, right? Demand has actually stayed somewhat steady, but more people are trying to sell. So we have active listings up about 20, 25% year over year, depending on who you ask. We have new listings up eight to 10% year over year. And if you're in the market buying or selling like I am, what you see is that it's just a slower market. People are being much more patient. We're not at these days where people were putting everything under contract in a week or two. It's just a little bit slower because affordability hasn't been restored. And I think a lot of people generally have been hesitant to talk about what's going on in the housing market or call this a correction because they were hoping that mortgage rates would come back down and solve that affordability problem for us. But that hasn't happened, right? We still have mortgage rates. They're at like 6.35%, which is better than where we started the year. We were at like 7.15. So they've come down 80 basis points. That's not bad. In a normal year, you'd be pretty stoked about that. But it hasn't really gotten us to the affordability level that we need. It's just, there is a wall of affordability and that's where this correction pressure starts and where it's going to continue to be applied. Now, of course, what I'm saying here that there's more inventory is a good thing for investors, right? Like that is a benefit. Obviously you have to offset the risk of falling prices, but like just calling out, because we're going to come back to this in a little bit, that there are some good parts of being in a correction and that rising inventory is there. Now I do want to address the elephant in the room because I understand we talked about the difference between a correction and a crash, but I just want to reiterate for everyone here why I think it's likely to stay a correction and not turn into a crash. As of right now, the data really suggests that we're in a correction and not a crash. There's a couple of reasons for this. First and foremost, in the housing market, you really don't get a crash until there's something called forced selling. Basically, most homeowners, most sellers, if they are facing the option of selling into an adverse market, like the one they're in, they're just going to choose not to sell. And that means inventory doesn't spiral out of control and it sort of sets a floor for the correction, right? If there is a scenario where people are no longer paying their mortgages because maybe unemployment rises or something like that, where all of a sudden we're seeing delinquency rates go up and foreclosure rates go up, then it could turn into a crash. But as of right now, I've done entire episodes on this. You can go check them out over the last couple of weeks. Foreclosures and delinquencies are not up in any meaningful way. There are some slight upticks in FHA and VA loans. Those are only about 15% of the market. I'm not personally super concerned about that yet. If we see unemployment rates spike, sure, that could change. But as of right now, it is not a big concern. That's reason number one that I think it's going to be a correction, not a crash. The second thing is even though the inventory is rising, it's pretty manageable. Like we still have more choice. We're actually in what I would call more of a balanced or close to a neutral market for most markets and not systemic oversupply. Just as an example, like one of the houses I am trying to sell right now, it's been sitting on the market for a little bit of a while, but it's not because there's like a flood of inventory on the market. It's just because people are moving slowly. That's still not great for me. It's not the situation I want, but there is a critical difference there. It's not because the market is getting flooded with inventory. We have seen over the last year inventory go up, which is what you would expect because it was artificially low for the last five years because of COVID, right? So we are approaching in most markets 2019 levels, but in many, we haven't reached there yet. So in many ways, like I said, this is a normal correction. It's a reversion to the mean in a lot of places. And actually the interesting thing is that if you look at the markets with the deepest corrections, talking about Florida and Louisiana and places like this, you actually see that their new listings, the amount of people who are listing their property for sale is actually starting to go down. Think about that. That actually makes sense, right? Because all of a sudden the people who would sell, they're saying, oh man, prices are down 10% in Cape Coral, Florida. I'm not going to sell. I'm just going to hold on to this property right now. And that is a sign of actually a healthy, normal housing market. Like I said before, you don't get a crash until those sellers who are choosing not to sell right now are forced to sell because they're going to default on their mortgage. But the fact that less people are listing their properties for sale is a sign that they do not need to sell, that they can service their mortgage and they are going to continue servicing their mortgage, which sort of puts a cap on how much inventory can grow. That's another reason we are likely in a correction and not a crash. The third one is we're just not seeing any panic selling. Again, that's just kind of a reiteration of the second thing is no one's like, oh my God, my housing price is going to go down 20%. I better list it for market today. There is no evidence that that's really happening either. So my overall feeling is, could there be a crash? Of course, as a data analyst, I will never say something is impossible to happen, but I think it's a relatively low probability unless we see a huge spike in unemployment, right? A lot of people start losing their jobs or if we start to see rates go back up. And I know that's not what most people are thinking about. They're wishing rates will go down and waiting for rates to go down, which is probably the more likely case. But if inflation goes back up again, there's a good chance we'll get higher rates. And if that happens, maybe it turns into a crash. Again, no evidence of that right now, but I'm just trying to paint for you the picture of how that could happen. Now, hopefully that provides a little context for you to understand sort of where we are and the risk of crash remaining relatively low. But I'm sure most people are wondering, how long is this going to last, right? Like we're in a correction, fine, but I want to get back to growth. When's that going to happen? Now, I've done some research into this. And again, I think it's really helpful to look at real prices here, because if you look at nominal prices, just the price on paper, it can be a little confusing. There's a little bit of noise in there that I think is cleaned up. If you look at real housing prices, what the data shows is that when you have a period of rapid price appreciation, like we did during COVID, it can take somewhere between five to nine, sometimes 10 years. That long for real home prices to start growing again, to reach their previous peak or to go up again. Now, what we've seen in the market recently is that real home prices actually peaked in 2022. Like I said, they've been relatively flat. They're down a little bit right now, but like for all intents and purposes, they're relatively flat. We don't need a trifle over, you know, minuscule differences. That was already 38 months ago. So we're already three years into this real home price correction that we're in on a national level. And so my guess is that we still have years to go. Like as of right now, you're asking me, I'm recording this in the middle of October, 2025. I don't think we're going to see meaningful real price growth for a couple more years. Now I'll make more specific projections towards the end of this year. And I could be wrong because I think there's a chance that, you know, something crazy happens and mortgage rates do drop to 5%, in which case we might see that happen. But as of right now, my read on mortgage rates is they're probably not going to move at least for six months. And even if they do, absent the Fed doing something a little bit aggressive and I think maybe crazy, like buying mortgage-backed securities, which I don't see them doing anytime soon, unless that happens, I think mortgage rates are staying in the sixes, maybe into the high fives, right? And so I don't think affordability is going to get better all that soon. I think it's going to be a couple of years of real home prices staying stagnant or declining a little bit. We have mortgage rates coming down a little bit and we have wages hopefully continuing to go up. Though we'll see what AI does to the job market. And so for me, I think we're entering this kind of stall period. I've called it before the great stall because I think that's the most likely course for the housing market. Now there are markets and there are years in this that you might see nominal home price growth. But I encourage you to think, as a sophisticated investor would, to look at this in real terms and think about when are your returns going to be outpacing the rate of inflation? Because those are the good returns. Those are the things that we want. It's not just being defensive and hedging against inflation. That's when you're actually getting outsized gains and that's what we have to look forward to. Now it's important to know, I could be wrong about these things. I just think this is the most probable scenario. Like as an investor, right? My job, I'm not going to tell you definitely what's going to happen. I'm just telling you what I think is most likely. And I think this stall is the most likely. But regardless of whether you believe me, if you think prices are going to go up, fine, that's okay. But I would, if I were you, still prepare for the stall. I would still prepare for prices to be somewhat stagnant for the last couple of years because I think that's just the conservative prudent thing to do when there's as much uncertainty in the housing market as there is today. So that's my highest level advice. But next week, because, you know, every market is going to be facing something like this, in the next couple of months, we're going to have the full panel on. Kathy, Henry, James are all coming. We're going to talk about what they're doing to prepare for this reality. But before that happens, because in those sessions, I usually are interviewing them. I just wanted to give you a couple pieces of advice or the things, just tell you some of the things that I'm personally doing. First things first, I think this is a time to be precise. This is a period where you need to focus on precision. That means only buying the best deals. And I think there are going to be better deals, right? Like that is the trade-off here is there's going to be good deals, but you really have to look for the best deals. So you need to be precise, not just in your acquisition and your buy box, but also in your underwriting. I know people say, don't be scared. I think the opposite right now. I think you should assume flat appreciation rates. I would assume slightly flat rent growth. We talked about that in the last episode. I think rent growth, probably not picking up in 2026 in any meaningful way. So you just need to keep those things in mind. If you can find deals that work, given those assumptions, you could go buy them because a correction is the time where you focus on buying great assets in a great location at a great price. If you can do that, that makes sense in any business cycle, but it has to cashflow. So you can hold onto it through this cycle and you only want to buy the cream of the crop. The key here in these types of markets is to take what the market is giving you. That is more inventory. That means probably better cashflow, right? Because if prices are going to start coming down a little bit and rent stays steady, because that's normally what happens, even during a correction, even during a recession, you usually see rent state steady. Your cashflow potential is likely going to get better. And so think about what's going on right now. And three years ago, three years ago, you had to be super competitive. You couldn't be precise. You had to be aggressive, do the opposite. Be patient, be precise. These are the things that the market is allowing us as investors to do right now. And it is on you and all of us to take those advantages and use them in every deal that we do. Now, one other piece of advice I just want to give here is for those of you who are active investors already, you may see the value of your property on paper go down and different people react to that differently. I think if you have a great asset and you see it go down a little bit, for the most part, I can't give advice to every single person individually, but for the most part, that is what we call a paper loss. That basically means it's gone down on paper, but you're not actually losing any money, right? You only lose money in those situations if you sell. Now, if you have a property that has tons of deferred maintenance, it's in a bad neighborhood and you have a lot of fear about how it's going to perform and you can sell it and do something better with your money, maybe you do want to sell. It depends on your market dynamics, but I would not just sell automatically because we are entering one of these periods. I am holding the majority of my properties right now because these are good assets that I want to hold onto for a long time. And remember, a correction is a normal part of the business cycle. And if you're cash flowing and doing the business right, then you have no reason to fear, right? If you're still generating cash flow, you're going to do that in a correction. And one day, we don't know when, but I am very sure that prices are going to pick up again one day and you want to be in the game to benefit from that inevitable shift in the business cycle from the correction to the bottom, which will hit at some point to the next expansion, which you want to be a part of. Timing that market is very difficult. So why give up great assets that you already have if you can hold onto them and they're cash flowing? That's what I'm doing. That's my advice for people who own existing properties. So just to wrap up here, remember the correction is real, but it is a normal part of the business cycle. And what it's trying to do for us as investors in the housing market and homeowners is restore some affordability to a market that is at 40-year lows for affordability. So this just needs to happen. And a gradual return to normalcy to me is something as an investor I feel perfectly comfortable working around and I think you should too. Remember, there's no reason right now to panic. The risk of a crash remain low, but there is a very high likelihood that in many markets, we will see prices come down for sure in real terms and probably in many on nominal terms as well. Remember next week, we're going to go beyond just the sort of the theory and the data and the strategy. And we're going to talk tactics. We're going to talk about what you should literally do about buying homes, about selling homes in this kind of correcting market. We'll have the full panel of James Daynard, Henry Washington, and Kathy Fetke there to discuss that with me next week to make sure to come back and check out that episode. For now, that's what we got for you. Thank you all so much for listening to this episode of On The Market. I'm Dave Meyer. See you next time.