There are millions of Americans whose single largest investment is the home they live in. This doesn’t have to be a typical 3 or 4 bedroom home in the city or the suburbs. It could be a townhouse, condo, or a patio home. Because collectibles have matured into an alternative asset class, and because the price of collectibles can be so high now, is your home really no different than a high-end collectible or a hobby?

Some people buy homes to live in for a decade or two (or longer). Some people buy homes to live in and then sell quickly for a profit. That is very similar to the dilemma when collectors have to compete against buyers who are investors just looking to make a profit off the exact same asset. Still, no one lives underneath a baseball card or a comic book, so in that sense a home would not be a collectible.

What about in the sense of a home being most Americans’ greatest asset? It is insured (hopefully). It has to be given attention more than any other asset you own (again, hopefully). And it certainly fits into the notion of being an alternative asset that can accumulate in price over time. Now it has a lot of similarities to collectibles. And what does that mean after a massive price gain?

Regardless of how you classify your home, there are some reasons to believe that those huge price gains seen in 2020 and 2021 are facing some risks. Those risks will be very large in some parts of the country. Other housing markets in the country will be just fine. The United States is a very large place and that means that many markets are working independent of each other.

Collectors Dashboard evaluates collectibles and alternative asset classes in the same light investing in stocks, bonds, mutual funds and so on. If your home values have risen 25% to 40% in a relatively short period of time it may be time to consider that the trend should not be able to continue endlessly. And if you have to live there for another decade or more, maybe all you care about is what rising prices will do to your property taxes.

We have seen commentary and data from multiple sources. Zillow’s fresh exit from the housing market is one. A loose warning from Redfin on higher interest rates is another. Fannie Mae has pointed out some mixed issues in home purchase sentiment. And there is word from Texas Realtors that Texas home sales (one of the better markets) decreased as the median price rose in the third quarter of 2021. CoreLogic may have some concerns as well, even if the overall report remains positive.

ZILLOW’s BLUNDER IS A BIG ADMISSION

Zillow may have rocked the boat when it released its Zillow Offer’s a few years ago. The business and economic history books will use Zillow’s misstep as a classic example of management buying into its own blind ambitions too much. The first report that it was halting activity due to processing times and ability to get the homes ready to sell seemed a bit flat. The admission a week or so late was that Zillow couldn’t forecast prices as well as it thought.

In short, Zillow was admitting that it got way over its ski-tips in homebuying. It also means management has to be very worried they overpaid versus current real prices or that the market is peaking. To prove the point, Zillow’s Homes segment revenue of $1.2 billion was below its own third-quarter mid-point outlook of $1.45 billion, which it blamed as being primarily to renovation and resale capacity constraints. That said, Zillow is also taking a write-down of inventory of approximately $304 million in its Homes segment — “as a result of purchasing homes in Q3 at higher prices than the company’s current estimates of future selling prices.”

To make matters worse, Zillow also expects an additional $240 million to $265 million of losses in the fourth quarter on homes it expects to purchase. It further said that its Homes segment’s third-quarter revenue is below its own outlook range “due to resale capacity constraints that pushed a number of closings into Q4 that were previously expected to close in Q3.”

Zillow Group co-founder and CEO Rich Barton said:

We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility. While we built and learned a tremendous amount operating Zillow Offers, it served only a small portion of our customers. Our core business and brand are strong, and we remain committed to creating an integrated and digital real estate transaction that solves the pain points of buyers and sellers while serving a wider audience.

Zillow is also having to lay off about one-fourth of its employees and that its wind-down is expected to take several quarters. Those homes are reported by Dow Jones to be nearly 9,800 homes owned and another 8,200 in contract to buy that the company will eventually will need to sell. The homes it owns are reportedly worth about $3.8 billion and the interested private equity and investor group buyers are likely to buy these homes to rent out.

REDFIN

Redfin’s 400+ U.S. metro areas, for the 4-week period ending in October 2021, showed that median home sale prices rose by 13% from a year earlier to $357,007. That’s up 30% from the same period in 2019, and it’s up 1.5% since the prior 4-week report.Redfin also pointed out that asking prices of newly listed homes were up 12% from a year earlier and up 27% from the same time in 2019 to a median of $357,381.

Redfin Chief Economist Daryl Fairweather has a warning that higher interest rates ahead and a fear of missing out may be a ket catalyst:

Rising mortgage rates have lit a fire under many homebuyers. Fear of missing out (FOMO) is always a powerful force in this supply-constrained housing market, but especially so today for buyers who weren’t able to snag a home last year before mortgage payments shot up by 15%. With this renewed FOMO, the housing market is heating up from the slight lull a few months ago.

While the data points for time on market and other sales metrics were strong, there are some issues which lend at least some support to the notion that the heat of the last 15 months or so may have some froth. Refin offered these points:

• Seasonally adjusted mortgage purchase applications decreased 2% week over week, even as 30-year mortgage rates fell to 3.09%.
• From January 1 to October 31, home tours were up 0.2% (versus a 9% increase over the same period last year, according to home tour tech provider ShowingTime).
• The Redfin Homebuyer Demand Index fell 2.2 points during the week ending October 31 but was up 14% from a year earlier.

FANNIE MAE

The Fannie Mae (FNMA) Home Purchase Sentiment Index rose by 1 point to 75.5 in October (2021) — “as consumers once again reported mixed feelings about homebuying and home-selling conditions, as well as increased pessimism regarding the larger economy.’

Fannie Mae noted that 4 of its 6 index components rose month over month. It also noted that a slightly greater shares of consumers reported that it’s a good time to buy a home and sell a home in October, with those numbers now sitting at 30% and 77%, respectively. That was versus 28% and 74% a month earlier.

On mortgage rates, Fannie Mae’s report showed that consumers also reported even stronger expectations that mortgage rates will increase over the next 12 months.

The full index from Fannie Mae is down 6.2 points year over year. That said, most of the economic and sentiment notes were still positive.

TEXAS REALTORS

The 2021-Q3 Texas Quarterly Housing Report released by Texas Realtors on November 2, 2021 signals that the strong Texas housing market slowed slightly after a strong summer sales season. Their report showed that the number of homes sold across the state declined 3.5% in the third quarter of 2021 versus the previous year. The group warned that this was the first time quarterly homes sales in Texas have decreased versus the prior year’s period since Q2-2020. Still, the median sales price of $310,000 was a 16.9% increase versus Q3-2020.

Lower on-market housing inventory may prevent any serious price concerns. Texas Realtors noted that housing inventory fell to just 1.6 months in Q3-2021 versus an already low 2.3 months in Q3-2020. The representation for a balanced market is when supply and demand has between 6.0 and 6.5 months of inventory.

Luis Torres, Ph.D., who is research economist with the Texas Real Estate Research Center at Texas A&M University, said of the report:

The housing frenzy due to the pandemic has possibly peaked. Home prices and homes sales are beginning to slow. In addition, months of inventory and home listings have reached a trough and are now increasing. Still, for the remainder of 2021, the housing market will be characterized by strong demand with low inventories accompanied by strong price growth, albeit at a slower rate.

CORELOGIC’s IMBALANCES

CoreLogic has a one-month look-back, but it reported that U.S. annual home price growth rose 18% in September of 2021. Their view is that supply and demand imbalances intensified as tech hubs across the U.S. and the Western region have continued to rise. The group also reported that as supply and demand pressures converge it is creating barriers to entry for first-time home buyers.

CoreLogic noted that home price gains are projected to slow to a 1.9% increase by September 2022. The group noted that ongoing housing affordability challenges will deter some potential buyers. Its report said:

Demand for homebuying remained strong through the end of the summer. However, the ongoing housing supply shortage has continued to drive up prices, which increased 18% year over year in September, to record highs creating additional challenges for entry into the homebuying market. High demand and low supply levels for entry-level homes, in particular, are sidelining many would-be first-time buyers.

*************

If you are inside the real estate market or are considering buying or selling your home, the reality is that the market still looks and feels quite strong. That doesn’t mean that the boom of the last 15 months or so will be able to continue at the same rate over the next 15 months. Eventually, at least in most assets, high prices cure high prices just like low prices cure low prices. Then again, home buying often involves emotions and personal needs more than traditional economics would explain.