Will Real Estate Ever Slow Down?

  • Is the housing market showing any sign of slowing down from red hot?
  • Separate primary home from investment decisions
  • Primary home serves a different purpose than an investment
  • How to navigate real estate in a hot market

A Down Cycle or Forever Up?

Where I live in California, housing prices are completely bonkers! That is a technical term for out of control high. Every week many folks check Zillow to see how much home equity they built. It’s crazy! But we are not the only ones, across the country many mid sized and large cities have seen prices escalate over the last decade, only to go into warp speed over the course of the pandemic. From Bloomberg:
From the U.S. to the U.K. to China, housing is riding an extended boom. Global valuations are soaring at the fastest pace since 2006, according to Knight Frank, with annual price increases in double digits. Frothy markets are flashing the kind of bubble warnings that haven’t been seen since the run up to the financial crisis, a Bloomberg Economics analysis shows.

Supply, Demand, and Work From Home

Is the current surge mainly fueled by low supply and high demand. Millenials and Generation Z are growing up fast. These two generations combine account for 42% of the US population. Gen Z is still in high school, but many Millenials turn 40 soon. They are on fast tracks to form families and buy real estate. But there just is not enough housing to go around. From Forbes:
The housing market has been struggling to keep up with demand since the 2010s, when the number of new homes built was slashed in half compared with the previous decade. As the demand for residential real estate has increased, the scarcity of homes for sale has created a logjam on the supply side. Millennials—who make up approximately 38% of homebuyers’ share—are getting married and having children and, in effect, looking for a home, either their first or second. With so many motivated buyers in the market, you end up with multiple people bidding on the same house, which triggers price increases. Affordability issues then naturally arise.
In addition, people no longer need big city living. Many can work from anywhere in the country remotely. It seems like some level of this remote work will stick even post pandemic.

Steady Ride Up!

Well, the last 9 years have been quite a ride! Many forget that housing and real estate does not always go up. In fact, there is typically a consistent boom and bust pattern in California and other markets. Some places in the country kind of plod along with steady yet small growth that might track inflation. This is a big reason that Robert Schiller, the Yale economist, does not believe housing or real estate is a “good investment.” He specifically likes to dispel the myth that our primary homes are “investments.” In other words, think of your primary home as a consumable place to live and a liability. A home has certain psychological benefits and is still remarkably a bedrock of the “American Dream”.  Of course, over the long run, it probably is financially advantageous to have a paid off house and live mortgage free. This situation can dramatically reduce your monthly living expenses in order to fund retirement. SEE RELATED: Real Estate – Your Primary Home

International Perspective

Keep in mind real estate markets are always a local phenomenon, therefore we speak broadly here. Also, different types of properties fluctuate in price and sales volume depending on economic conditions. We also apply the current market conditions to the effect on someone’s financial independence goals.

A real estate auction in Sydney, I think I would walk away…

From Financial Samurai

I kept buying real estate because I also realized U.S. real estate was, and still is, cheap compared to international real estate. Working in international equities enabled me to explore various countries while working. And I always checked out the various local real estate markets while on business trips. Not only is U.S. real estate cheap on a global context, we also have jobs that make U.S. real estate affordable.   Take a look at the real estate statistics from one of our biggest foreign buyers, Canada. Cities like Vancouver and Toronto are equally as expensive as the most expensive cities in America. Yet, there are hardly any big Canadian companies that come close to paying as much as U.S. companies. Go ahead. Try to name just three Canadian companies that pay new college graduates over $100,000 a year.

Historical Perspective

Housing price fluctuations and sales are typically cyclical. Therefore, we appear to be at the end of a very long extended 7+ year up cycle. Housing prices have been going up in value and sales have been steadily growing over the last 7+ years. After this historically there is a 3-4 year down cycle period. Since the 1940s this 7 year up and 3-4 down cycle has repeated itself.

A correction in the cards?

Housing prices are mainly effected by employment stability, wage growth, median income and interest rates. As these various levers are pulled different things happen in the market. For example, as wages stagnate or interest rates go up, homes become less affordable and less people buy. At the current moment, there is simply a supply demand imbalance. There are just not enough homes to go around for for the demand. One thing I believe is that the prices are tied to people’s salaries in many ways. If prices continue to go up at this point, there will be very few buyers. The housing market is strong right now. It should continue to stay strong for several more years, albeit with slower price appreciation. However, the upside is not guaranteed. Even if there’s an 80% chance the property market could continue to go up, there’s still a 20% chance it could get knocked down.

Silver lining

I think the good news here is that if there is a correction (meaning prices decrease a bit), this could actually benefit sellers and buyers. Sellers that have had property for many years can take advantage of some healthy gains in equity if they are at a place to sell. Buyers can perhaps negotiate a little harder to get prices down a bit. I notice that the bidding wars seemed to have subsided and houses are staying on the market longer. Given the tricky situation, it is important to keep several things in mind. If you lived through the great recession you know that housing can crash. No one knows what the market will do next, but there appears to be mounting evidence of a slowdown and perhaps downturn in prices. Experts do not anticipate the carnage of the Great Recession which was triggered by a housing meltdown, but they do forecast a slow down and some price softening.

FI Dreams

I am jealous of anyone that is selling in an expensive market and moving to a nice mid sized more affordable town. This could be a major boost to financial independence goals. If someone can sell a home in California, take out $300k to $500k in equity, they could pretty much eliminate the need for a mortgage in many wonderful mid-sized towns.

Housing basics, how to manage a hot market

In my opinion there are a few rules of thumb when it comes to housing and wealth building. Here are some thoughts:
  • Buy in a great neighborhood. This does not mean a “fancy” high end 90210 neighborhood, this means a good solid middle class neighborhood with good schools and a high quality of life. Houses can be cosmetically changed and added onto, but you cannot move the property. Buying a good neighborhood seems to pay off in the long run.
  • Right size and think about future space needs. The pandemic has shown that space and layout count.
  • If you have kids, keep green space in mind. Children especially need outdoor play space, I am a big believer of this. Kids locked up in houses in front of computer screens all day are less healthy with more social and mental problems through life. We all need some nature. It does not need to be anything fancy, but ensure some connection to the Earth either by being close to a park or having a nice backyard.
  • Do not go home improvement crazy. The home improvement shows are meant to convince you that your life is not complete unless you have the latest XYZ remodel job. This will do well for your Lowes and Home Depot stock, but not so well for your wallet. Try to be content with a nice, clean, well maintained home.
  • One must be prepared to compete in this market. Perhaps in some areas it makes more sense to rent for a while. I have to imagine that things will cool eventually, but of course all housing is specific to a particular area.

SEE RELATED:

Rental Property Challenges Real Estate Investment Trusts (REITs) Real Estate Investing – A Comprehensive Overview  

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