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Gary Keller: A ‘rolling recession’ will hit the US housing market in 2024

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On Tuesday morning, the Austin Convention Center — frequently the site of rock shows, comic book conventions and corporate conferences — sounded more like a thunderstorm sweeping down the plains as Keller Williams returned to its Texas roots for the brokerage’s annual Agent Mega Camp event this week.

Gary Keller

As a pre-recorded storm thundered from loudspeakers, thousands of agents scanned messages about the housing market as words scrolled across three screens inside the arena. “We all feel it,” the screen read in reference to the perfect storm of inflation, rising mortgage rates and sluggish home sales that hit the housing market this year. “But none of us fear it.”

And then, as if a shelter from the storm, Keller Williams Executive Chairman Gary Keller emerged from the stage, vowing to agents in Austin for the two-day event that the next 12 months would be a cake walk now that leading market indictors suggest a return to historical norms.

“We had a pandemic, when things happened that caused our industry to spike, and now it’s coming back down to normalcy again,” Keller said. “So understand that it’s just a world of getting your unfair share. That’s all it is. If you do the work regardless of the market, you will have a great real estate year.”

“What we’re trying to do is give you slides that you can literally take and use in your presentations and your conversations,” he added. “Our goal is for you to always be the economist of choice for your local market. We want to give you information in a way that you can take it in and easily have a conversation with your buyers and sellers.”

‘Things got expensive’

Despite the challenges of the moment, Keller, Head of Industry and Learning Jason Abrams, VP of Strategic Content Jay Papasan and KW Chief Economist Ruben Gonzalez said there are plenty of tailwinds in the market — home price appreciation has strengthened, employment has slid back toward historical lows, millennials are nearing their peak earning years, and mortgage rate volatility is calming.  However, they said inflation is preventing everyone from fully seeing the turning tides.

“The trick is things got expensive,” Keller said while pacing the stage and donning a skull and bones t-shirt.

Keller said most of the difficulties we’ve experienced over the past year point back to the Federal Reserve’s attempt to slow consumer spending. The nation’s gross domestic product (GPD) dropped to -3.4 percent in 2020 as mass layoffs, social distancing and other COVID procedures slowed consumer activity. However, the GPD volleyed back to 5.4 percent in 2021 — which is too high for long-held economic standards.

“They like to see 2 percent growth on an annual basis for GDP. You got 2 percent, you’re having a good market. If it gets to 3 percent, that’s really awesome and to get to 4 percent, you’re rockin’ and rolling,” he said. “If we go back to 2020, the pandemic hits and spending goes to the floor. It comes right back up, roaring back, which is why you’re sort of in the situation you’re in our industry.”

The boom in consumer spending put stress on the manufacturing world, Keller said, as consumers spent money on purchasing high-ticket items like houses and cars and expanded their budget for personal care goods and personal services. Inflation and interest rate trends have finally slowed the GPD down to 2.1 percent in 2021, and Gonzalez said 2023 is projected to end with a GPD of 1 percent, which means we’ll enter 2024 in a mild recession.

Ruben Gonzalez

“The first quarter and the second [of 2023], we were at 2.4 percent. So yeah, we’ve been rocking and rolling the first two quarters,” he said. “But we think we’re going to slow down here in the second half of the year.”

“There are some risks out there right here. We’ve talked about what’s going on Russia and Ukraine being a risk to the global economy,” he added. “We’ve talked about the fact that in the past, consumer spending drives the economy. With interest rates going up, there’s always a risk that consumer spending is going to drop further than the Fed thinks right? And then we get a bigger recession.”

If projections are correct, Keller and Gonzalez said 2024 will usher in a “rolling recession,” where specific sectors of the market suffer and others continue on as normal.

“You can write this down: ‘If I’m wrong, I’m wrong,” Keller said. “I truly believe that we’re headed towards something I’ve never seen before and that is a rolling recession. Meaning that sectors in the economy, one’s doing well while another one’s not.”

“So right now real estate is the sector that’s having a recession. Any industry right now that is driven by the cost of money is having a recession, but cell phones are not having a recession right now. Are you with me?” he added. “Yeah, there’s a lot of products or services that are not in recession right now, but banking could be the next one that experiences are recession.”

Even if a rolling recession happens, Papasan said he believes the Federal Reserve would still call it a success.

“The Fed has been fighting for that soft landing,” he said. “I think they would call a rolling recession where the whole economy is healthy but parts of it aren’t. I think they would call that a win if they can get inflation down.”

Budget house or dream car?

Recent housing market challenges have eroded consumer sentiment, Keller said while pointing to a recent Fannie Mae survey that revealed 80 percent of Americans believe now is not a good time to purchase a home. Although he recognizes the headwinds that face buyers and sellers, he said the media’s reporting of home sales, home prices and other market indicators have pushed buyers and sellers into a “fool’s game” of trying to time the market.

“I think they got it wrong, but understand that the media fundamentally doesn’t understand our industry. So when they report it, they always report it in what I would call a childlike manner,” he said while a few jeers came from the audience. “I don’t mean this as a criticism. It’s just an observation. Because here’s what you and I know — It’s always the right time to buy the right piece of real estate. Yes or no? Yes.”

“Why would [consumers] think they can predict the economy?  Right timing is a fool’s game. Yes or no? Yes. Timing is a fool’s game. You should always be looking to buy the right piece of real estate,” he added. “You should never walk around and in your mind go, ‘It’s not a good time to buy.’ That makes no sense to me. If you study history, history says that is stupid. That is uninformed.”

To prove his point, Keller put up a chart tracking home prices from 1990 to 2023. In 2006, when median home prices reached $222,000, he said that price was 21 percent above the then-trend line. Meanwhile, 2023’s projected median home price of $382,000 is 7 percent above current trend lines.

“So here’s a big issue for us and that’s the price of real estate,” he said. “What I think is fascinating again, people go, ‘Oh, it’s way overpriced.’ It may feel that way to you, but shockingly, it’s not phenomenally overpriced. I keep having to go back to the slide to remind myself of that.”

“In 2006 we were 21 percent above the trend line. You’re going, ‘Yeah, but it was only $222,000.’ But you’ve got to realize if you went back to that moment in time, $222,000 was considered an exorbitant amount of money for a piece of real estate. Some of you weren’t born then, but that’s where it was right?”

“We’re at $382K. I mean, that’s only 7 percent above the trend line, and what’s fascinating is the trend line would be $337K,” he added. “Think about it this way, if real estate drops by a percent, we’d only be 2 percent above the trend line. Maybe 3 percent. Does the consumer know that?”

Jason Abrams

Although all four men said the industry could do a better job in helping consumers contextualize pricing, they don’t want to minimize the very real challenges in affordability and closing a persistent inventory gap.

“It also would be nice if we could build some affordable housing,” Abrams chimed in during the midst of an aside about rising builder sentiment.

Keller said improving affordable housing is ultimately a municipal issue, with local leaders needing to reduce the red tape that holds up projects and invest more funds into programs that help first-time buyers.

“The only way that’s going to happen is for local municipalities to lower their costs, with fees and permitting and permitting and all of that, and to also come up with some probably special financing,” he said. “You can do that. You can go use bonds. It’s been done before. Nobody yet feels the pressure to go do that, and right now the problem is inflation.”

While the affordability help buyers need won’t come in the near future, Keller said the misconception about pricing and mortgage trends is cheating homebuyers out of long-term wealth opportunities. He said American consumers are overspending on cars — which currently hold the top spot on the inflation list with a 16.9 percent bump in insurance costs, a 12.7 percent bump in maintenance costs, and an 11.6 percent bump in monthly payments — while trying to cut corners on purchasing a home.

“We were in the Research Room, and I just brought up the point that people tend to live in their budget house and drive their dream car,” he said. “The guys were like, ‘What the hell are you talking about?’ I said, ‘Well, I lived it. Mary and I. Times were tough.’ We were starting the company and we wanted to build at that time what was our dream house. We drove used cars. We drove the least expensive cars have anyone in our friend group.”

“When you were launching KW, you were driving a black Ford Taurus,” Papasan said, prompting Keller to joke about giving every KW agent two Ford Tauruses.

Keller said consumers are short-changing themselves by putting money into depreciating items like cars and waiting to spend on appreciating items like a home.

Jay Papasan

“Let’s just say you bought a $200,000 home in 2014. You put 20 percent down with a 4 percent mortgage rate and you own a truck you bought in 2015,” he said. “Your mortgage payment is $1,597 a month and your truck is paid off. Let’s say that you stayed in your home but you decided to buy your dream car, so you’re in your budget home and driving your dream car, a 2022 Jeep Grand Wagoneer. Those are great-looking cars.”

However, Keller said the estimated car payment with an 8 percent interest — $1,824 — is more than the mortgage payment — $1,597.

“Your total debt is $3,300 a month,” he said. “Let’s say that you flip it and you keep driving the truck and instead you buy your dream home. Look what happens. You keep your truck, sell your home now worth $400,000 and buy your dream home for $650,000. You use your full equity as a down payment, you pay a  7 percent mortgage and look at that — it’s only $50 more per month. $3,350.”

While some homebuyers, particularly millennials, don’t have the funds to purchase a $650,000 home, Keller said most people do have the ability to purchase property, even if it’s a townhome, apartment, or condominium.

“They track the net worth of every American and on average homeowners’ net worth is 35 times higher than renters,” Papasan said.

The incoming millennial wave

Despite current challenges, Keller said the real estate industry is poised for success over the coming decade as millennials reach their prime earning years and finally take their roles as the primary leaders of the housing market.

“They’re going to have to catch up for another probably couple of years. Maybe three years, maybe five years that at most,” he said while noting inflation has curtailed their buying power this year. “There’s going to be the catch-up period. And then that whole group is going to show up with pent-up demand.”

Keller said now is the time to educate millennials about making smart financial decisions and prepare them for an upcoming wealth transfer from baby boomers to their generation.

“We talked about the greatest wealth transfer in the history of the world because of the baby boomer generation. It hasn’t happened yet. It’s fixing to happen,” Papasan said. “Between now and the 2030s, millions and millions of businesses will be sold as [baby boomers] go into retirement.”

Keller ended the session by saying he’s unable to predict the future, but the past shows that real estate is always a good investment.

“It’s the thing that we do for a living. I know you think that the last two years of order-taking is the real estate industry. That’s not the real estate industry that I know,” he said. “The real estate industry that I know, that I got a degree in and I’ve been doing for over 40 years, is we educate and we give perspective.”

” I can’t predict the future, but I can look backward and say ‘Thank God. I started buying real estate right out of college,'” he said. “[The market] is not horrible. This is not horrible. You can see that when you look back over the last 10 years.”

Email Marian McPherson