Real Estate

Ken Johnson on the 2022 COVID real estate market

The year 2021 is ending with the news that COVID infections are once again on the rise nationally. What this means for real estate is more of the same, said Ken Johnson, a real estate economist at Florida Atlantic University, and that’s not a good thing.

On this episode of HousingWire Daily, Senior Real Estate Reporter Matthew Blake interviews Johnson about how the COVID response from both the public and the government could mitigate plans to increase mortgage interest rates, and whether it affects the construction of new housing inventory.

The continued trends hurt real estate agents and homebuyers, Johnson said, while further “overheating” several markets. The home-price appreciation music will eventually stop, the economist asserted, and that will hurt the economic health of communities in a few specific places.

Here is a small preview of the interview, which has been lightly edited for length and clarity:

Matthew Blake: When you said catastrophic results, you mentioned Detroit, Michigan, and Mongtomery, Alabama. Catastrophic results for whom? Who will be hurt when home prices start to fall? 

Ken Johnson: Well, you could see a loss in value of 15-20% and who’s going to be hurt by that is obviously homeowners, who are going to see a major loss in value. It’s no different than a 15-20% loss in stock value. 

And that’s going to hurt whole communities, and unlike in 2006, 2007, there’s going to be a divergent set of outcomes between communities. 

HousingWire Daily examines the most compelling articles reported across HW Media. Each afternoon, we provide our listeners with a deeper look into the stories coming across our newsrooms that are helping Move Markets Forward. Hosted by the HW team and produced by Alcynna Lloyd and Elissa Branch.

If you have a pitch or an inquiry relating to podcasts, you can reach our team at ebranch@housingwire.com.

Below is the transcription of the interview. These transcriptions, powered by Speechpad, have been lightly edited and may contain small errors from reproduction:

Matthew Blake: Hello. My name is Matthew Blake, real estate reporter for HousingWire, and this is “Houses in Motion,” part of the HousingWire Daily podcast feed. I’m hoping that the following episode will be something of a time capsule a year or months from now, when the pandemic has somehow, some way ended.

My guest on the show, Ken Johnson of Florida Atlantic University, had to record from home, because he said there was a COVID outbreak on his campus. And Ken and I discussed how changes we’re expecting to see in the upcoming year, higher mortgage rates, homes coming onto market due to more construction, are now again being set to the side, as the number of COVID cases escalate across the country. I tried to suss out with Ken who is affected by the possible [inaudible 00:00:55] of the housing market. Is there a way, for example, for agents to benefit?

Ken and I also discuss the biggest stories of 2021, and what to expect in 2022, including Zillow’s possible resurrection. If you have thoughts, including ideas for guests, please email me at mblake@housingwire.com. That’s M-B-L-A-K-E at housingwire.com.

Hello, and welcome to “Houses in Motion,” part of the HousingWire Daily podcast feed. I am Matthew Blake, real estate reporter with HousingWire, and I am here with Ken Johnson, economist at Florida Atlantic University. Ken, how’s it going?

Ken Johnson: Good morning. Doing well. Glad to talk again.

Matthew Blake: Great. Thanks a lot for being on, and as I understand, we were saying, before I started recording, that there is a COVID outbreak at Florida Atlantic, and I’m sorry to hear that. And I guess I wanted to start in that vein, with the Omicron variant, and it’s been dominating the news, dominating people’s lives. Definitely has here in Chicago, where I’m recording this from. How do you feel that this new strain of COVID, or just sort of the rising number of COVID cases is affecting the real estate market right now?

Ken Johnson: I think the result of Omicron is gonna be a little bit counterintuitive, because one of the things that seems to be going on early in this process, as the new variant spreads rapidly across the U.S., is the concern for how it will impact the economy. So, we’re having a number of people flee to the side…a number of investors flee to the sidelines, in terms of, you know, do they want to be in more risky equities, or are they going to go for perhaps a safer haven, in 10-year treasuries, which, that appears the choice a lot to be making, and that’s probably driven mostly by Omicron, Omicron, however you want to say it. That’s driven mostly there, so what’s happening is is the demand for 10-year treasuries is increasing rapidly here in the first few days of this rapid spread, which is driving down the yield on 10-year treasuries, which is ironically going to drive the yield, at least short-term, on mortgage rates, long-term mortgage rates, 15- and 30-year mortgages.

So, if anything, I don’t see this making housing prices surge any more than they have, but we have been predicting, myself and a number of housing economists around the country, have been predicting that with Chairman Powell’s latest stance on tapering and rate hikes in 2022, that we would see mortgage rates rise. But in fact, I think we’re gonna see a reprieve, probably about the length of the duration of Omicron, and we’ll see lower rates, and perhaps a stability in prices. So, the demise of the housing market isn’t quite yet.

Matthew Blake: So, does that mean kind of more of the same? I mean, if the mortgage rates stay this… Mortgage rates are not my area of specialty, but, you know, if the mortgage rates stay the same, and the Federal Reserve, and, you know, actors that can make important decisions such as that, you know, kind of decide to, you know, keep interest rates at what they are, does that mean that we’re going to continue to see the kind of high-demand market that we’ve been seeing throughout most of the pandemic? I mean, is there any sort of shift in sight, so long as the pandemic is sort of of top of mind for most people?

Ken Johnson: Not as long as Omicron is top of mind. I think you’re gonna see lower rates, or stable rates, instead of rising rates. So I don’t think we’re going to see housing prices flatten out, or the flattening out of housing prices, or the downturn in housing prices, it’s not gonna happen while Omicron is going through the U.S. housing market. It’s just not. Just gonna push rates down. That’s gonna keep demand relatively high, but prices are high, and people bargaining aggressively.

So I think, in the grand scheme of things, what will come out is prices just aren’t perhaps going to rise as fast in the next month, but once this passes, I think you’re going to see rising interest rates, and then you’re going to have a flattening in housing markets. Some will fare better than others when rates start to rise again. This is a short-term reprieve for the housing market, brought on by, oddly enough, the new variant, and as it spreads across the U.S.

Matthew Blake: And to be somewhat crass about it, like, who are the winners and losers of the housing market kind of continuing as it is right now? Like, who benefits from this, and who loses out from this?

Ken Johnson: Well, fewer and fewer people benefit from this, I would say. Perhaps some clear winners would be people that are selling at the top of the market and then moving to either downsize, or moving out of high-demand markets. For example, I live in southeast Florida, so someone right now in southeast Florida might want to sell, because we’re probably near the peak for the current housing cycle. And then if they went and moved to a less in-demand area in Florida… Can’t call off the top of my head where that might be, but just, say, north of Palm Beach County, where the demand is not as high, then you’re going to sell high and be able to buy in at a reasonable price, or rent at a reasonable price. But that’s gonna be few and far between.

Losers will be pretty much everybody. Right now, we’re all in a market of rising rents, rising house prices. The debate is over which one’s rising faster. Well, you know what? The real problem is there’s just not enough housing. So, the longer these incredibly low interest rates and this high demand cycle keeps up, it only keeps pushing us to a higher and higher boiling point, and that’s not good in the long run. Some parts of the country are not as overheated as they were 15 years ago. Others are more so. It would be nice to see a little bit of increase in rates, and slowly take the steam out of the housing market. We don’t want crashes. We would like to just see a slowdown in demand.

Matthew Blake: And, in terms of winners and losers, how should real estate agents be thinking about the housing market persisting in the high-demand, low-inventory way that it is right now? How is this good or bad for them?

Ken Johnson: Sure. I see two things coming out of this. As a former broker, this is always very interesting to me. Number one, I would tell brokers that now more than ever, you should be looking to specialize in the listings. The more you list property, the easier it is to control your commission flow for the year, so you’re gonna wanna specialize more and more in listings. And you’re seeing that right now amongst the National Association of Realtors members, where the brokers that are seemingly having the best commission years or those that are specializing more and more and more in listings, as opposed to driving people around.

That’s not surprising. That always happens when we get near the peak. That’s another sign of being near the peak of a housing cycle. It’s not causal. It’s a result of being near the peak of a current housing cycle. You want listings, as opposed to driving folks around. I think about it, on a Saturday afternoon, if you have 10 listings, you could possibly have 10 sales. If you have 10 potential buyers, you can only make one happy by driving them around, on, say, that Sunday afternoon. Another thing that I think we’re going to see more and more, that I encourage brokers to do, because housing is a cycle, and our cycles are now greater in magnitude. This one is not as bad as the last time, nowhere near as bad, in most parts of the country. So, as a practicing broker, I would encourage brokers to take on that portfolio of property management.

There’s a tendency for NAR members not to manage property, but simply list property, sell property, close property. And that’s just a non-diversified portfolio. It’s wise, from a diversification standpoint… When I was in practice, many, many years ago, I always kept some number of properties under management. Not a large number, but, if nothing else, to help tide me through the winter months, when we were out of that selling cycle of real estate. And so, we could be in for a slight downturn in the real estate market in terms of the number of sales, so now would be a good time to look to put into your portfolio, as an individual real estate broker, or, and I say “broker” meaning someone that holds a professional license to sell real estate, it’s a good, good time to have that diversification in your portfolio, and manage some properties. It will provide you with an income stream through slower times.

Matthew Blake: I mean, properties are expensive to buy. Like, don’t you run into some of those same problems as your clients with that? Or, what, how would you…

Ken Johnson: Well, there’s a lot of people looking to rent property right now. And it was never… I, at least it was my experience, and it has been many years, that I’ve mostly turned down property management gigs. There were usually local firms that specialized in that, and I only wanted to do it for certain properties, so I never had trouble finding potential clients. You know, and it was usually people that I had dealt with in the past. Perhaps they had bought another house and they wanted to rent their current property, or they were buying an investment property. And it was always nice to put some few of those under property management, where I would manage that month-to-month leasing, and set that up, and take away a lot of the hassles and worries from my former and current clients.

And at this time of year, in Christmas time, and January, is always the slowest commission months. And that’s just really a good thing to tide you through, and if we are gonna have a real estate downturn, it’s not gonna be, and, again, most parts of the country as bad, but it’s really nice to have several properties under management, that’s going to produce income for you on a monthly basis, as a broker.

Matthew Blake: I wanna get into iBuying briefly, because we actually were able to meet each other in person in Miami for the National Association of Real Estate Editors Conference earlier in December, and you appeared on an iBuying panel there, with representatives from Opendoor and Offerpad. What did you take away from that panel, and what did you feel at that conference, which included, you know, the main iBuying company, Zillow, which is winding down iBuying, of course, was a very prominent presence at that conference? What is the consensus now on iBuying?

Ken Johnson: So, iBuying, in one form or another, has always been with us. We all remember seeing the signs around town that say, “We buy ugly houses.” You know, this is just an expedited version of this. But iBuying is now, as it becomes more institutionalized, as you get more and more major investors involved in this, iBuying is here to stay. It always was, but the magnitude of it is here to stay, and I’m guessing 1% to 5% of the market in any one given year. I think iBuying won’t, as I said, go away. It’s here to stay. But I think how iBuying, its practice, will vary with where you are in the housing cycle. Currently, we’re nearing the peak, and it’s been really easy for the major iBuyers in the country, most of them that is, to come into the market around ’14 or ’16, and they’d buy now when the price of housing is going up, and especially these last two years, it was pretty easy to make margin on these houses, but as we get near the peak of the housing market, those spreads that they have to offer potential sellers will have to get bigger and bigger.

So, iBuying will slow down a little bit, and then once you start down the other side of the housing cycle, prices are either going flat or actually declining, iBuying will still be here, but their margins on their offer, how much they will provide to any one seller, will have to be lower, meaning creating a bigger margin. Think they can have the expertise in this, I think they do have the expertise in this, and I think the other thing that you’ll see different with iBuying when you’re on the down cycle, and we had disagreement on the panel that day, is that many of the companies that are involved with iBuying will actually take property into inventory, they will buy the property from you, and then hold it in inventory for some amount of time, waiting for the housing cycle to bottom out, or a better time to sell. So they will actually become landlords, I believe. I’m sure all of them manage some few properties now anyway, but I think this will become pretty commonplace when we’re on the downside of the housing cycle.

Matthew Blake: I think that’s very interesting about, kind of, what you were saying earlier with, basically, correct me if I’m wrong, you’re basically saying that now is a really good time to be an iBuying company, because prices are appreciating because there’s a lot of consumer demand. Is that correct?

Ken Johnson: That is correct… I would say the party is nearing its end, but it has recently been a very good time, because the property appreciation was so fast. So, I could buy today with a relatively small margin, as an iBuyer, and even if I’m… Through the process of holding the property just a few months, I’m gonna get some pretty good appreciation in the property. So it was easier to make margin on each individual sale. But I think that party’s coming near to the end. If I’m right in this, and many of us are predicting this, that we’re nearing the peak of the current housing cycle, that party could be coming to an end very soon. And I think that has something to do with the Zillow withdrawal from the market, and I think they see a little bit of the writing on the wall, and yes, they had trouble with iBuying, but I also think they are quietly forecasting the peak of this current housing cycle.

Matthew Blake: Just one more thing on the iBuying issue, because Opendoor, Offerpad, as I’ve reported, many other people have reported, even during what, as you say, is a pretty good time to be an iBuyer, these companies are still losing money. So, during…you know, if the housing market were to become lower demand, if prices were to appreciate less, the strategy that you floated on the panel is maybe the iBuyers becoming landlords, and holding inventory. Just, on that, like, were there other ideas discussed as to how iBuyers can weather the eventual downturn of the market?

Ken Johnson: Sure. So, on the downside, besides property management, one of the things you have to do is get much better at the spread that you offer. In other words, the price that you offer on the property, you have to make sure the spread between… If this was stock, we would call it between bid and ask. So, the spread, the what they buy for, and hopefully ultimately what they sell for, is going to have to get bigger. That’s just it. Once we start on the downside, that spread is just going to have to get bigger. They’re gonna have to find ways to manage the cost, too.

One of the things is, as you start to go on the downside of a housing cycle, so many of the contractors, their work dries up, so you’ll see them developing strong relationships with contractors that will work in the markets, and they’ll specialize more in the markets. I don’t think you’ll… You won’t see them going into Middle America, Montgomery Alabama, Topeka Kansas. I don’t think you’ll see that as much as you do now, but they’ll also want to have that local set of contractors, that can pretty much handle everything from roof, to floors, to A/C, to plumbing, etc. And that repeat work, they’ll look to be getting not only the best work, but the best prices from those contractors. And this comes back to managing property again. They’re gonna look for good property management. I wouldn’t be surprised to see a number of professional real estate salespeople, brokers, go to work for a number of the iBuyers. Or even iBuying firms contract with maybe a national real estate chain. That wouldn’t surprise me, because it all comes in with property management. How well you collect the rents, how well you maintain the property. How big of a margin can you buy for us?

It’s a little bit more intense, it’s a little bit more difficult, but that’s always been the market that many investment buyers have always thrived in, is when the market is either going flat or going down.

Matthew Blake: What was the biggest real estate story of 2021, in your opinion?

Ken Johnson: Thank you for teeing that one up. There are a number of good pieces that were interesting pieces. But the biggest story, I think, is Zillow withdrawing from buying of property. I think they learned a lesson, that, while information is very key in valuing homes, valuing homes is a big part of selling property, but not the only thing. They thought that, “Boy, if we could price them right, they will sell instantaneously.” And while that, in great part, is true, I don’t think they understood the full equation of what it takes to bring a property into inventory, rehab, put it on the market, sell, close, do all of these things in an economically efficient way. They weren’t ready for that. I think their pricing mechanisms are very good, but I don’t think… They don’t have the core skill sets to be an iBuyer, to be, just, a long-term iBuyer.

That, Opendoor and these guys are different from Zillow. But Zillow is a great information company.

Matthew Blake: So, it sounds like you’re saying that Zillow will continue its sort of primacy, head of the class, in terms of being the place that consumers go to as a real estate website? Or do you feel that their failure in iBuying, would you characterize that as, you know, the biggest story of 2021, do you think that’ll affect things like Premier Agent, and, yeah, kind of, their more long-standing business?

Ken Johnson: I don’t really see it changing their core business. I think they saw a chance to branch out, and they learned that they got into the deep end of the ocean that they weren’t prepared for. Not that they can’t do other things very well, and so I think Zillow is going to be just fine. They just bought back, I believe it was $750 million of their own stock. They’re in really good shape. If you’re buying back your own stock when you know you have good things to come in the future, that proves out again and again in the equity markets, they’ve got some good things going on. I think they’ll shed the iBuying episode. They’ll learn from that. I do think it was rather shocking, because they had been…they had proved to be able to do anything, and whoops, they proved they couldn’t do this.

But I think they’re gonna be fine, with the way they interact with brokers, will continue to evolve. That relationship can sometimes be contentious. Sometimes it will be swimmingly well. But Zillow is here to stay. I just don’t see them in iBuying, and I see them getting back to their mission of [inaudible 00:20:53] production and lead generation for brokers.

Matthew Blake: What do you expect to be the biggest real estate story of the upcoming year? And, obviously COVID changes all of this, colors all of real estate, all of everything, but what are you looking at right now as what people might be talking about at this time next year?

Ken Johnson: Matt, one of the things I think that will happen is we will see different responses in different markets to the peaking of the housing cycles. I keep saying, “Well, prices should flatten out.” And that’s hard to explain what that means, but I’m trying to have a method of explaining that look, some places, there’s gonna be a minor impact, where prices will slow down, perhaps even appreciate, albeit very slowly. Or maybe go down a little bit, in terms of absolute prices. In some markets, there’s going to be a catastrophic results, and a pricing failure. That unlike perhaps these markets, and I don’t see it happening to the same market. So, for example, Miami and Los Angeles were really hit hard back in ’05, ’06, and ’07. They appear to have learned somewhat from this, although the Miami prices continue to rise rather rapidly now, but they’re still way below where they were.

These cities, seemingly, metro areas, will weather this coming downturn in pricing much better, perhaps, than, say, cities that are in the Northwest, and Austin, Texas, for example, and these cities where we see that they’re selling at 40%, 50%, 60%, 70% premiums above where they should be selling for, given a history of prices, some of those cities are really going to bottom out pretty hard, and it’s all gonna depend on demand, inventory, and interest rates, and how those three things shake out. Prices could rise too high, inventory could be too short, and the results in, say for example, Detroit, Michigan, where we’ve had pretty rapid price appreciation, but the long-term trend is pretty flat, it should return back to that long-term pricing trend. The population in Detroit is actually, within a 25-mile radius, is less than a 1% growth in population in the next 10 years. I don’t think Detroit will fare well.

I think places like Tampa, Florida, Miami Metro, Los Angeles, they will fare very well, where there’s still strong amounts of popularity, especially if I would stick to the example in the two Florida cities, high demand, we’re getting 15% to 25% increase in population in each of these metro areas. There’s just not going to be this major housing downturn in southeast Florida. It’s gonna go flat. And it’s usually where you’re gonna have a small increase in population, or even a decrease in population, is where you’ll see markets take the biggest hit. My home town, Montgomery, Alabama, has seen a significant run-up in prices for the area, but their expected population growth is zero in the next 10 years. So I don’t think they’re gonna fare that well.

Matthew Blake: So, when you say catastrophic results, and you mentioned Montgomery, Detroit, catastrophic results, for whom? For homebuyers? For people who own homes presently? Like, who is going to be hurt when the market starts to ebb?

Ken Johnson: Well, you’ll see loss in value. By catastrophic, I know I’m not qualifying it well. Let’s just say where we’ll see prices go down by 15% or more, 20% or more. And who’s gonna be hurt by that will be obviously homeowners in those markets, as they see the loss in value, it’s just like your stock accounts are going down because the stocks you’ve chosen are falling in value. I think you can see that 15% to 20% decrease in markets, such as a Montgomery or a Detroit, and oddly enough…and another example where you have high demand but the prices have just run up so fast would be Boise, Idaho. Would be a number [crosstalk 00:25:06] Would be a number of these cities where… Boise in particular, their premium is still up around 79%. They’re paying 79% above…on average, the average home is selling for 79% above where its past pricing suggests the prices should be. That’s amazing, and all that run-up, virtually all of that run-up, Matt, has occurred in the last [inaudible 00:25:28] months. You can’t have that significant of a run-up without having some repercussions when interest rates start to rise.

No matter how many people are moving into the area, they just can’t move in fast enough. But they’ve got demand. That’s what’s so strange. There’s demand to move to Austin, Texas, to Provo, Utah, to Boise, Idaho. But it’s not balanced with the premiums that have been increasing in these markets, the prices that have been rising in these markets. So we’re gonna have this divergent set of outcomes, where last time around, pretty much everybody went down quite a bit. And this time around, I think we’re not gonna see that. We’re gonna see some metros do quite well through this, with only a short downturn, and we’ll return to that long-term pricing trend.

Others could have a significant fall, with a longer amount of time to… They’ll fall below the long-term pricing trend, with a longer amount of time to get back to that long-term pricing trend. So, that will be the big difference this time around, and I think that will be the story for the next year.

Matthew Blake: Ken Johnson, Florida Atlantic University. Thank you for appearing on “Houses in Motion.”

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