Over 44 years in the real estate industry, Keller Williams founder Gary Keller has endured record-high mortgage rates in the 1980s, a steep drop in home prices in the 90s, a devastating housing crash in the late 2000s and, now, a pandemic.
During his opening remarks at Keller Williams’ annual Family Reunion on Sunday, Keller, who has aided millions of agents and brokers amid market shifts in four books and countless lectures, said COVID has spurred one of the greatest shifts of all.
“2021 was the greatest sales [year] in the history of the real estate industry,” he said in front of a crowd of more than 19,000 agents during a marathon session that lasted for two-and-a-half hours. “You should have had a really good year, but understand this: some people can have their best years in a down market and some people have their best years in the best market.”
Keller acknowledged worries about a fearsome down market looming ahead as mortgage and inflation rates rise, home values continue to fly off the charts and the United States navigates the third year of the coronavirus pandemic. Although agents can’t control those factors, he said, they can control one thing — their ability to provide a stellar sales experience that helps consumers confidently reach their real estate goals.
“Don’t worry too much about what the market is doing,” he said, holding the crowd captive as he guided them through multiple slides without even taking a water break. “In the end, focus on your main activities of finding men and women who want to do business with you. If you can do that, the market will not totally drive your career.”
Are we in a housing bubble?
The real estate market has been operating at a fever pitch over the past three years, with home values, home prices, sales volume and transaction sides easily breezing past previous records. Despite securing consecutive banner years, many industry members have been anxiously awaiting another housing crash similar to what happened in 2008 to pull the rug underneath them and the millions of Americans who are betting on real estate to build long-term wealth.
Over the past 54 years, long-term U.S. annual home price appreciation has remained around 4 percent, Keller said, with a few exceptions where economic factors (e.g. the Great Recession) caused values to deviate from the trend line. We’ve been well above the 4-percent trend line since 2012, as supply and demand imbalances continue to push home prices to the upper limits.
However, over the past three years, annual home price appreciation has reached 17 percent — something Keller, KW Chief Economist Ruben Gonzalez, KW VP of Content Strategy Jay Papasan, and KW Head of Industry Jason Abrams said they’ve never seen before.
“I will tell you for 44 years, every year always seemed, except for the Great Recession, always seemed like a great number, too, it always seemed bigger than it should be,” Keller said of the previous record for home sales and annual home price appreciation. “But the last two years have been the most remarkable appreciation period ever since [the National Association of Realtors] started tracking it — [I’ve] never seen anything like this before.”
While everyone basks in the glory of record transactions, Keller said it’s important to remember real estate markets operate in cycles, meaning a downturn is in the future. “Are you in a bubble? No, probably not. Not today,” he said. “Are you beginning to blow a bubble? Yeah, probably.”
Papasan said it likely won’t be the same as the Great Recession, where the housing bubble burst after years of overbuilding and subprime lending that enabled unqualified buyers to purchase homes they couldn’t truly afford.
Instead, he thinks buyers will simply pull out of the market, which will eventually cool home prices.
“At some point homes become unaffordable,” Papasan said. “Either we do what happened last time and start jiggering with the way we finance [homes] —and that didn’t turn out well — or it naturally cools off because buyers just say, ‘I won’t pay that price.'”
Looking at inventory issues through another lens
A large portion of the housing conundrum stems from a worsening inventory shortage, with months of supply dropping to a record low of 1.8 months in December 2021. Although plummeting supply poses a gargantuan challenge for real estate agents and consumers alike, Keller said there’s a silver lining that most people are failing to recognize.
“In December, we had the lowest month of inventory in the history of the real estate industry ever recorded, and people go, ‘It’s so hard,'” he said. “But you do realize in order to sell 6.1 million homes, you had to have 6.1 million homes to sell. So it’s not that you didn’t have the inventory. What you did have were instant sales.”
Gonzalez said the pandemic and the coinciding shift to remote work forced millions of Americans to rethink their home needs and enabled those with financial means to take advantage of the opportunity to move with a lower cost of borrowing, thanks to record-low mortgage rates.
“I think the thing that I think caught myself and a lot of us off guard about the pandemic was it shifted what people needed from their houses,” he said. “And you look back through times in history when that happens. Home sales surge, because all of a sudden, there’s like a new demand that gets generated because people’s requirements for their house shift in people who may have been settled in. All of a sudden, it’s like all coming on the market at once. And demand just went through the roof.”
In addition to shifts in work environments, Keller said the federal government’s decision to stimulate the economy with multiple stimulus checks and paycheck protection payment (PPP) loans meant many individuals and businesses had access to more money than ever before. While some people used those extra funds to pay down debt, handle immediate needs such as food or rent, or “blew it on cowboy boots,” Keller said a sizable swath of people put their cash into real estate.
“When you were looking at the abyss, the government went out and said, ‘We have to spend money, we have to give people money. We have to do all of these things to make sure that we don’t go into a depression,'” he said. “Well, they accomplished that. You can criticize that all you want, but in the end, the right decisions were made to keep us out of a depression.”
“Now, you get people that have more money in savings than they ever had before, not because they worked but because the government gave them the money. Businesses applied for PPE thinking that they were going into the abyss, and then they didn’t, and they looked up and they had more cash than they’d ever had,” he added. “So now we know what people do when they have more cash building they’ve ever had before: They call in sick a lot. They change jobs. They bought dirt. They bought real estate.”
He continued, “When they had excess money, they bought real estate. That’s crazy. It’s also cool, and I think this is uncharted territory. All of this is new.”
Mortgage rates and inflation are trending up, but don’t freak out — for now
Mortgage rates began their steady ascent in the third and fourth quarters of 2021, bringing them out of the rock-bottom 2 percent range they’d been stuck in since the early days of the pandemic. As rates track toward 4 percent, Keller said, homebuyers and some agents have become increasingly worried about what it means for their bottom lines.
“You’re over here worried about 4 percent mortgages, and I was dealing with 17 percent,” he said while reminiscing about his first year in the industry. “If you got in the real estate industry in 2002 or 2003, you really have never experienced high mortgage rates. You’ve been living in the cheapest era of money.”
“By the way, I sold six houses my first month,” he added. “You can sell real estate, people will still buy and sell, you guys.”
Gonzalez said mortgage rates hit 3.9 percent on Feb. 17, and are expected to keep bouncing around as the United States deals with several domestic and international issues that could bolster or undermine the economy. “On next Thursday [Feb. 24], I expect to see rates come back down a little bit. I think we’re going to be bouncing around a lot,” he said. “We’re probably trending up toward four and a half percent next year if they keep trending up.”
He added, “If something bad happens, we bring rates back down again. You know, it’s gonna be hard to predict next year, honestly.”
Keller said the government’s handling of inflation and the impending crisis in Ukraine are two crucial issues that will either tip mortgage rates down near COVID lows or back up toward the historical average of six percent.
“[The federal government] are going to look at one thing: Are we still overstimulating the economy? That’s all they’re going to look at,” he said. “If, in fact, it looks like things are calming down, they’re not going to touch it. If they think that inflation is rampant, they’re gonna keep raising that rate and raising that rate till they stop it.”
Keller said inflation is nearing a “very scary” boiling point of 7 percent, which has caused the cost of everything to quickly shoot up. However, inflation is expected to cool back down to 2 percent as the government enacts the economic policies needed to make it cool down.
Although the real cost of cars (+30 percent), gas (+56 percent) and home prices (+58 percent) adjusted for inflation have all risen by the double digits since 1989, Keller said mortgage costs have actually come down — meaning that despite all of the very real challenges homebuyers face today, real estate is still one of the best things someone can spend their money on.
In 1989, the average mortgage was $825 per month, which equates to $1,915 per month in today’s dollars. Meanwhile, the average mortgage in 2021 was $1,455 — which represents a 24 percent decline.
“We’re talking about things are so expensive. It costs so much money, and then you do an analysis. You realize, ‘Yeah, the car does. Yeah, the gas does. Yeah, the house does. But my actual cost to live in my house doesn’t,” he said. “This is the slide you want to keep. You want to show the people in real dollars what’s happening, right?”
He added. “People will look up pricing trends and they’ll naturally have this reaction of, ‘Oh my gosh, this is so expensive.’ And then when you show them [this slide] you say, ‘Yeah, but there are two things that makeup affordability. That’s the cost of the product and the financing that it takes to buy it.”
What agents can do about weak housing starts
Over the past 12 years, ramping up housing starts has been cited as the top way to cool home price growth. Although new homes are needed, Keller reminded agents that too much building was one of the main factors that spurred the Great Recession in 2007 and 2008. “We overbuilt by about 2.5 million homes, the Great Recession hits, and then we started underbuilding,” he said while noting years of underbuilding has created a shortage of 2.5 million homes.
“Just look at 2021 as an example and [you’ve built] 123,000 [more homes than the previous year],” he added. “You didn’t realize it’ll take you 18 years at that pace to get back to the trendline of [1 million homes per year] — 18 freakin years. So when you talk about this bubble bursting, it all begins and ends right here.”
Keller and Abrams said agents and brokers can’t solely count on builders to get their act together and start building the inventory needed to rebalance the housing market. Instead, they need to create innovative ways to create inventory in their individual markets.
“This is one of the key reasons that we started the new homes division. We didn’t just like make it up on the Uber ride to the office one day,” Abrams said. “We looked at the dials and said, ‘What are the things that are gonna be driving the industry?’ You’ll be really well served to go back, look at your market and see where you fall historically locally [with housing starts] and figure out if that vertical makes sense for your business.”
“Go buy dirt,” Keller said while pointing to his shirt with the same phrase. “Go find dirt as a Realtor, go find dirt as a market center, go find people with land and show them what to build. You know better than anybody what they should build.”
Don’t be afraid of industry consolidation
Economic shifts aren’t the only things impacting agents and brokers’ ability to thrive, Keller said. The consolidation of the real estate industry is also posing a challenge to salespeople who are competing with portals, mortgage companies and other technology behemoths for consumers’ attention, business and ultimately, their pockets.
“When you look at the industry, you have all these players. We put us at the top — real estate companies and real estate agents — but then you have the insurance industry, you have the mortgage industry, you have home builders to institutional buyers title and escrow. You have the power buyers, and then you have the portals [such as] Zillow, Realtor.com and everyone else,” he said. “We get it wrong when we think that they’re not in the real estate business. Everybody is in the real estate business.”
Keller highlighted Zillow’s decision to suddenly close Zillow Offers in November 2021, as the tech behemoth realized it overextended itself in the quest to beat out incumbents, such as Opendoor or Offerpad. Keller admonished those who reveled in Zillow’s blunder and reminded them that everyone’s success — whether you like it or not — is partially connected to the success of another.
“After a while, you realize that my vendors are my friend, or my enemy, or frenemy who I do business with,” he said. “I’m just going to give you some basic advice. Do what you need to do to help your buyers and sellers and for you to run your business in a way that makes you the most amount of money.”
“Just keep an eye out and understand that every vendor that you do business with is absolutely headed towards taking more money from you eventually,” he added. “I’m not saying that as a criticism. That’s just gonna happen. We formed businesses like Keller Mortgage really in the beginning as a defense mechanism because at the end of the day, if they’re going to own everything, then we should all go own everything.”
With that in mind, Keller said agents and brokers should be prepared to keep seeing the nation’s biggest real estate brands, such as Keller Williams, Compass, RE/MAX, Realogy and others, invest in sprawling technology platforms and ancillary services.
“You can come up with all the reasons why you think that we do it, but the number one reason that we do it is to serve as a governor for what all others charge,” he said. “We’re not necessarily going to be better than everyone else on everything, nor will they, but if there’s someone over here that sets the price of technology over time in such a way that people look up and see they have a choice on pricing, what does that do, economy scholars? It keeps prices down.”
Keller said competition breeds innovation and agents who seize the opportunities to learn from their competitors, whether it’s another agent or a portal like Zillow, and maintain a diverse business strategy will be the ones to come out on top — no matter the shift.
“I think that’s the takeaway of what’s happening in the industry right now, make sure that you have your three to five buckets,” he said. “As a professional, every day you wake up and you make sure that you’re working your different buckets of sources of business, and as long as you do that, you’re going to be fine no matter what.”