It’s not every day that the chief economist for the National Association of Realtors®, Lawrence Yun, openly declares, “We’re in a housing recession.” Coming on the heels of two months of home sales declining at a double-digit pace year-over-year, the proclamation reverberated. Indeed, the pace of sales nationally has tumbled from an annualized rate of 6.5 million units in January to 4.8 million in July. Inventories, still exceedingly low by historical standards, are once again building. It was bound to happen.
Coming off the sugar highs of 2020 and 2021, the pace of real estate sales is returning to levels comparable to 2019. Not at all a bad year for real estate. Yet for those who became accustomed to lines down the driveways for open houses or ten offers for every listing, the return to real estate reality is proving a shock to the system. Others who’ve been around the block, however, may view current circumstances as an appropriate rebalancing needed to restore a sense of sanity.
Not only is the market returning to reality, but also the fundamental economics of the brokerage industry. The last few years have witnessed an explosion of new companies and business models purporting to transform the real estate business and provide real estate professionals with unprecedented incentives. Many were fueled by funds raised in public offerings with investors all salivating at the chance to capture their share of the immense dollars generated by the buying and selling of homes. In many cases, these companies rode the crest of a time when sheer growth was rewarded in valuations with little need to demonstrate a path to profitability. It reminds one of the quotes about if you’re losing money each time you sell something, just sell more.
Over these last months, publicly owned companies in the real estate space have seen their overinflated stock values plummet an average of 75-80%. Many had never once in their history produced a profit, nor had even demonstrated a feasible path to do so. What does that matter when you could raise another round of nine-digit funding to burn through as you capture market share? Today, the cracks are being revealed with massive layoffs becoming the norm and statements from CEOs about changing expectations and strategy. In some cases, the very model on which the firms were founded is now shifting as rebates are no longer provided to buyers or big checks are no longer stuck to lure a top agent. Gravity may only be ignored for so long.
The next few months will prove uncomfortable in real estate due to the overarching macro-environment, higher interest rates, and fewer buyers than the prior year. It is temporary, as the fundamental drivers of real estate are undeniably present, and we live in a market where so many others wish they did as well. I, for one, remain totally bullish on real estate in the long run regardless of the current respite. What is more enduring are the amazing gains in home values and equity for owners, as well as a return to the old-fashioned expectation that economic sustainability is table stakes for existence – a good thing in the long run for any industry.
Budge Huskey is chief executive officer of Premier Sotheby’s International Realty.