A 40+ Year Look Back at The UPSIDE of Down Cycles and Some Historic Lessons for Today

The Fortress Group Total Home Finance - First Friday Roundup

Article by John Ritz Miller, Founder and CEO of The Fortress Group Total Home Finance.

The above photo is from the Time Magazine cover of October 14th 1974, but it readily applies to our situation today. Funny how history repeats itself. Three years after this article was published, I got my Real Estate license in 1977, and the 30 year fixed mortgage rate was 8%. Four years after that rates peaked out at over 18%! It was an extraordinarily challenging time, but people couldn't put their lives on hold indefinitely, so they still started families and had to buy homes. Some wanted to enjoy the fruits of their labor and bought second/vacation houses, and still others saw the longterm cash flow and appreciation aspects of investment properties, and to quote a currently popular phrase, opted to "marry the house and date the rate", knowing that the housing value would likely appreciate, rental income would make it work, and they could refinance as rates came back down. Realtors and Mortgage Professionals that remained focused, lean and driven were able to serve the needs of these buyers, and in so doing, weathered the storm, and ultimately were positioned for brighter times ahead.

Through the "fog of war", it is often difficult to see the upside of a down cycle, but the historical data is crystal clear; every downturn has created tremendous "rebound" opportunities. While I expect a volatile and possibly extended time of industry turmoil, I remain confident that the existing challenges will position us for prosperity ahead, and the current focus needs to simultaneously be on "living to fight another day" while refining our structure for the future.

Let's look at some historical data. The below chart illustrates the last 9 Stockmarket "bear markets", including contributing factors, duration, trough and the 3 year rebound experienced with each. Certainly, anything is possible, and professional guidance from a trusted advisor is always the prudent course, but if history repeats itself, those with both the ability and "stomach" to ride it out could see a strong potential upside. Obviously, this is illustrative of the Stockmarket and not Real Estate, but there are meaningful parallels worth consideration.

So just how bad are mortgage rates from a historical perspective? I alluded to it above, but let's check the data. Current rates range in the high 6's to low 7's depending on the product and borrower qualifications. Regardless of how bad the recent spike feels, as you can see below, we are actually below the 7.76% fifty year historic average. Clearly we need to allow a period of time for consumers to adjust to the current "sticker shock", but again, I believe that once the dust settles, just as in the past, there are people who will opt to move forward with their lives and purchase, knowing they can refi if and when rates drop. I have a favorite saying that my team is likely worn out with, but it applies well; "When there is no wind, you've got to row". Real Estate and Mortgage Professionals who grab the oars with both hands in an aggressive effort to position themselves as the trusted advisors consumers seek out to help them understand and navigate these uncertain waters, will fare far better in the long term than those simply standing by awaiting a sea change.

How good is housing as an investment over time and is now really a good time to buy? Again, let's gain some historical perspective. As with any statistical charting, it is typically a jagged line in either direction and absolute assurances can never be made. If we had that crystal ball, we'd all be retired. The fact is, there have been some sizable dips (most notably in the 2010), but overall, as you can see below, homes continue to increase in value, while providing numerous additional positives, like potential tax deductible interest and other expenses, along with all the often overlooked benefits including pride of ownership, the ability to create generational wealth, the sense of community and more.

If I buy now will I miss a pricing dip like the one that occurred in 2010? Answer: It is possible that you may "miss the bottom" but that is more a matter of luck than skill. A better strategy than "timing the market" for buyers may be to find a house they like and negotiate aggressively for seller concessions to use for closing costs and/or to do temporary rate buy downs. A 3-2-1 buy down could get a borrower into the 3.875 percent range for the first year on certain products for qualified borrowers.

Regarding potential price drops, there are several factors and circumstances that make drastic and sustained price reductions less likely now than those that occurred in 2010. Let's explore a few of them. While the housing inventory has edged up slightly and sales price escalations have stabilized in recent months, as the chart below reflects, there has been a steadily decreasing rental and home ownership vacancy rate over the last decade.

Compounding the Housing Inventory Issue are Continued High Demand and Historically Low New Construction Numbers. Following the events of 2010, single family housing starts pulled aggressively back to roughly half the total for each of the previous 5 decades! Builders who did construct new homes largely targeted higher priced/margin products, adding little inventory in the first time home buyer space/price point.

The "Generation" Factor. As of 2021, The U.S. population share by Generation broke down as shown in the red below graph, and reflected as percentages of the population in the bar chart below that. For the first time, Millennials outranked Boomers as the single largest group. Millennials, who are between 26 and 41 years old, are entering the first time home buying age in mass numbers. When you combine them with Gen X'ers, they represent a massive block of the population that are either currently in, or entering the home buying market (most of whom are looking for homes in the first time buyer price point), which is exacerbating the already tight inventory situation. A somewhat obvious but worth stating item to be gleaned from these stats, is that all of our business strategies should include a significant component that targets Millennials and the younger segment of the population. They approach consumer searches, decisions and interaction differently, and we need to respond accordingly.

"Tethered" Homeowners. An additional factor impacting inventory is that many if not most homeowners are "tethered" to their current homes by the combination of short supply, increased prices, and rates that have essentially doubled in the last 12 months. They cannot find a home that compels them to move, and if they could find one, they would have to pay the inflated price for it, and then finance the purchase with a rate that could be double that of what they are currently sitting on. In summary, current home owners have little incentive to move, New Construction is at historic lows so we will not feel relief there in the near future, and demand, based on the shear numbers of population in the home buying age, should (again, no guarantees), but should, cushion housing from a price crash like we saw in 2010, unless things deteriorate much further and faster than current factors seem to indicate.

What are Some Key Take-Aways? The primary message is that we are in a cyclical industry and if we can navigate the current environment, history points to a worthwhile upside. Second, there are sound reasons for home buyers not to wait for home prices and mortgage rates to fall. Buyers who need or are otherwise compelled to buy now, will likely come out well ahead over time. Rather than wait, they should consider taking advantage of the slightly expanded inventory and newly motivated Sellers, to fund buy downs and other closing costs.

There is absolutely no denying or minimizing the impacts to consumers, and the Real Estate and Mortgage Industries that inflation and the doubling of rates has had. Thousands of wonderful people who are true and dedicated professionals are being displaced, and many feel abandoned by the industry, and often by the companies they love. It is sad. The "short term" pain is real, and it may not be as short term as many think and hope. Still, for those that choose to stay in the game, we must play the hand we are dealt. The Consumers, Families and Communities we serve are counting on us to provide calm, insightful and meaningful guidance, and our Industry Partners are looking to us for the same.

The Big Regional companies and National Lenders will do what they do. They are economic creatures by nature and will make financial decision strictly in their best interest. If you work for or with them, expect it. For the local Realtor, small Lender, Broker shops and individual LO's, here are a few basic reminders of items you likely already know.

Get and Stay Lean. Don't be afraid to invest in your business, but do so very wisely. These times will involve downsizing and cutting costs for many, but exploring ways to cross train roles, modifying rather than eliminating staff hours to trim overall payroll and reduce expenses by sharing work spaces may enable at least a few to be spared. Lean costs help facilitate both competitive pricing and economic sustainability, which are key components right now.

Restructure and refine Margin, Compensation and Profit Expectations. Providing services at a loss is not a sustainable model and hurts the industry overall, but making a modest profit at best may be required to achieve the goal of "living to fight another day". Now is not the time to dig in on holding margin, and trying to maximize return on every transaction will probably backfire.

Maximum Optionality is Critical. In the mortgage space, striving to have a product to meet every possible need enables the organization to maximize on the limited opportunities that present themselves until the market turns. The Broker Model lends itself well to this because we can seek numerous Lender outlets for various products, but small correspondent lenders can also be aggressive with their product development efforts.

Be Aggressive about working both In and On Your Business. A disciplined and structured approach with relentless work ethic is a must now more than ever, and when you are not working in your business, take advantage of this slower time to work on your business. This is a perfect time to re-tool your technology stack, refresh marketing, clean up your CRM, and make use of the lessons learned and weaknesses revealed by the last volume boom, so you are better prepared to more efficiently handle the next one.

Finally, always remember... We are not all in the same boat. Rather, we are all in the same storm. Some are in yachts, some in canoes, and others are drowning. Please be kind and help whoever you can. We are all in this together!

Have a Great November!

John