Why will cutting home prices during this market not lead to a housing collapse?
The current price drops are not going to cause a collapse in the housing market. Don’t let this detour you if you are in the market to sell your home. The demand for homes is still strong. Millennials are now at the peak of the home buying age. “The millennials are the second-largest generation since the baby boomers,” Shinoda said.
The past couple of years has been a great place to be for the housing market. Tons of homeowners are gaining quite a bit of equity in their homes.
“I joke that sometimes I wish I was an equities investor because it seems like a much more hopeful place to be,” said Ken Shinoda, a portfolio manager at DoubleLine. “You can always make a case to buy equities all the time, depending on how you spin it. But in the fixed income world, it’s all about protecting the downside.”
Shinoda is a real estate debt investor and knows where the market currently lies at all times. He is part of the bond fund DoubleLine which is worth $122 billion and currently, runs DoubleLine’s mortgage opportunities private funds and co-manages the total return portfolio among others. Shinoda began his career during the housing bubble in the early 2000s.
“My training grounds really were the global financial crisis,” Shinoda said.
The current housing market surpasses the housing bubble of the early 2000s. Today, the average home price is 15% year-over-year and over 58% of homes are selling above the asking price. This market stems from the change in living situations due to the pandemic and the historical low mortgage rates.
The National Association of Realtors’ monthly affordability index is at the lowest it has been in many years. Coupled with this and rising mortgage interest rates, housing affordability is becoming more difficult. According to RedFin, one in five sellers have already dropped their asking price.
“Buyers see that properties are not moving as quickly, so they take a step back expecting prices to go lower,” Shinoda said. “Sellers are going to have to start cutting prices.”
Shinoda says this does not mean there will be a nationwide collapse in the housing market. The dynamic of the market has not changed due to the rising home prices. The rising prices stemmed from the low housing inventory and huge buyers’ demand.
“I think some pockets are definitely going to weaken but on a nationwide basis, especially in the major metros,” Shinoda said. “I think there’s a lack of supply that is extremely supportive of home valuations.”
“Some places may even pull back by 10% in home prices,” Shinoda said. “I mean, if you’re up 40%, 50% over the last 18 months, if you go down 5% to 10%, it’s not the end of the world unless you’ve just bought at the top.”
Don’t let this detour you if you are in the market to sell your home. The demand for homes is still strong. Millennials are now at the peak of the home buying age. “The millennials are the second-largest generation since the baby boomers,” Shinoda said.