I'm old enough to remember the summer of 2019, when the following things happened:
- Mortgage rates went to 4.5%
- The inventory of homes for sale rose to more than 11,000
- Good listings began sitting on the market for weeks with little or no interest
- Prices flattened and the market appeared to be, at long last, running on empty
Then, as you know, the pandemic hit. And with it, rates went to the mid 2's. Inventory disappeared and bidding wars began. Bidding wars intensified and we then went to frenzy mode. Overall active inventory fell from more than 9,200 listings in April of 2020 to 1,878 by the end of the year. Prices went up 20%. Everyone lost their minds. Buyers (correctly) felt (and continue to feel) hopeless. Sellers (correctly) felt (and continue to feel) emboldened.
And with that sea change in sentiment, the cramdowns began.
No need to get definitionally fancy here. A cramdown is simply one side imposing its will on the other, with little regard for real or perceived fairness, mercy or ethical balance in a transaction.
Where it shows up most is with inspections and appraisals. Sellers aren't fixing much and if it doesn't appraise (which it probably won't), then tough. Also, the sellers would like a free 60 day rentback, earnest money "hard" (non-refundable) early in the process and if you're even going to bother asking for an inspection (which might just cause them to toss your offer in the trash right off the bat), don't forget to turn the lights out when you leave.
Market conditions dictate negotiations, and with artificially low rates driving a 90 mph tailwind, home prices are soaring into the stratosphere. Buyers courageous enough to brave these conditions are expected to show up, smile and take their beatings like good little soldiers.
For now.
It's a wildly unhealthy climate and it comes with risks. We are engaged in the biggest money-printing binge in history (hello Modern Monetary Theory) with mortgage rates artificially dragged down to less than half the rate of inflation, which is totally illogical and makes no fiscal sense in any sane universe.
Ah, but I said "sane" - that's the catch.
We are living in insane times with monetary policy that reflects the insanity.
If the Federal Reserve was following its longtime mandate of keeping inflation at 2%, mortgage rates would be 5% or higher right now and the so-called market would be flat on its back.
The only way to kill inflation is with higher interest rates, which nobody wants to do because we have this little issue of $29 trillion (and counting) in federally financed debt, and if you raise rates, the country basically goes bankrupt and defaults on its debt.
So we keep pretending that 3% mortgages and endless money printing will work great forever, which is dubious policy at best and reckless endangerment of our entire economic system at worst. Inflating your way out of unsustainable debt is not a strategy - it's a conspiracy, and it certainly appears that the Fed is all in on printing money for as long as it takes to mitigate the impact of US debt.
(And, alternatively, if you know that endless money printing is likely to continue and rates will stay low until the whole systems breaks, those crafty Fed bankers get to move their own investments into assets that are inflation-protected hedges like gold, silver, and real estate)
You can only drive 90 mph for so long until you encounter a sharp turn, and at that point it will be interesting to see if the Fed can successfully navigate the hairpin or if we go blasting through the guardrail, over a cliff and land in Venezuela.
But I digress.
The original intent of this post was to talk about cramdowns, and if you're selling a home or thinking about it in the coming months, remember this.
It won't always be this easy.
When this market stresses or breaks, with prices that are so far beyond wage growth and incomes as to make inquiring minds like mine woozy with overwhelm... this whole notion of cramming down ridiculous terms on buyers will flip.
And while I think prices will hold most of their gains because of money printing and the fact we simply can't build affordable homes anymore, what will change is that buyers won't simply roll over and take it when the furnace is 20 years old, the roof is splattered with hail damage or there's a 30 foot belly in the sewer line.
When the pendulum finally swings, I expect buyers to be relentless and without mercy in their demands of sellers to provide homes in a condition that matches the over-the-moon valuations of 2021.
If you have something to sell, I would look seriously at selling it - sooner rather than later. And double down on that if it's a home that is less than perfect.
When this market eventually slows, you may not see huge price reductions, but you will see a very different world in terms of inspections, appraisals, reasonableness and leverage.
So enjoy your season of cramdowns, sellers.
While it lasts.
