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Josh Enomoto

Don’t Be Misled: A Real Estate Crash Can Still Materialize

How many times have you heard this statement? While housing prices may slow down, they won’t collapse. Fundamentally, the economy – despite struggling during the initial impact of the COVID-19 crisis – is robust. In particular, the labor market has printed red-hot numbers. If anything, housing prices might even rise due to the pressing supply demand equation.

According to Wall Street Journal contributor Neil Barsky, rather than worry about a potential bubble in real estate, we should be talking about the “…serious housing shortage and housing affordability crisis.” Barsky goes onto explain as follows:

Despite robust construction, unsold inventory stands at four months, well below its 25-year average. Private builders complain they can't get land permitted to meet demand. Low-income housing advocates complain housing prices are out of reach for many Americans, and that government subsidies have been slashed.

Several other publications have repeated the author’s main sentiments. Basically, the underlying fundamentals don’t support the idea of a housing crash. Indeed, Barsky poured cold water on other experts who sounded the alarm. “The reality is this: There is no housing bubble in this country. Our strong housing market is a function of myriad factors with real economic underpinnings.”

The thing is, this op-ed was published on July 28, 2005.

Naysayers Have a Point

Naturally, critics will quickly state that the circumstances between the current housing cycle and the one prior to the Great Recession are different. And to be completely transparent, they have good points to raise. Fundamentally, the people who own homes today stand on far better financial ground. Indeed, policymakers pushed for changes to prevent the cynical lending practices that led to the 2000s-decade housing crash.

Therefore, as my colleague Will Ashworth pointed out, it’s possible based on available data that housing prices might move higher. Maybe not in a decisive blast but the “paper” stats do look compelling for real estate speculators. Perhaps most convincingly, the economy added 339,000 jobs in May, well exceeding analysts’ expectations.

What it comes down to is that if you want a job, you can get a job. So, there’s no risk of a housing crash, right?

Personally, I disagree with the mitigated downside argument that tends to downplay the risk of an implosion. Granted, I’m not calling for a housing crash nor do I have a target range of when and by how much the real estate sector could correct. At the same time – and the point of this article – is that both prospective homebuyers and investors shouldn’t outright dismiss the possibility of a crash just because of a more resilient consumer base.

If a respected op-ed writer for The Wall Street Journal could be wrong about one of the key catalysts of the Great Recession, contemporary experts – broadcasting almost-identical talking points – could be just as wrong today.

Not Likely Perhaps But Not Impossible

To be sure, disseminating concerns about a steep real estate downcycle runs against both prevailing consensus and market performance. For example, sector brokerages like Redfin (RDFN) have vastly outperformed the broader market, in this case gaining nearly 147% since the January opener. What’s more, even beleaguered iBuyer specialists such as Opendoor (OPEN) have delivered impressive gains.

In the open market, OPEN stock shot up just over 179% since the beginning of this year. In addition, Opendoor represented a highlight in Barchart’s screener for unusual stock options volume following the June 20 close, with call volume outpacing put volume by over three-fold.

Conventional wisdom suggests that OPEN stock and its ilk can keep marching higher. However, investors should be careful. For one thing, consumer debt soared since the pandemic, which may indicate that the underlying economy is not as strong as publicly advertised. For example, last year, I warned that U.S. credit card debt hit an all-time high of $930 billion. This year, circumstances have only worsened.

In one study, 46% of people are carrying debt from one month to the next, up from 39% in 2022. Further, a poll by The Associated Press-NORC Center for Public Affairs Research discovered that 35% of U.S. adults stated that their household debt is higher than it was a year ago. Only 17% reported that debt decreased.

Second, the backdrop of a robust labor market isn’t guaranteed to sustain itself. Indeed, the Federal Reserve’s efforts to curb inflation would necessarily involve slowing the labor force. Combined with mass layoffs, American households can quickly find themselves heaping on their indebtedness with joblessness.

To clarify, I’m not calling for a real estate collapse because I just don’t know. However, I don’t think it’s wise given the evidence that this possibility should be dismissed outright.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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