“Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.”
–Lao Tzu
“It’s tough to make predictions, especially about the future.”
― Yogi Berra
Several readers have asked me to predict and give the outlook for housing prices. As the quotes above suggest, prediction is a hard thing to do.
But here goes: I don’t think prices will crash, although there will be some trying times ahead.
I believe real estate is a very solid investment over the long term. However, it has its ups and downs, and it looks like we may be entering a down period.
To explain my reasoning, I will note a few factors to consider and highlight several recent market trends. Knowing about those factors will help you decide whether you want to purchase, invest, wait, or consider other alternatives.
While people ask about prices, many potential buyers and investors mostly have questions about market timing. Buyers don’t want to purchase if the market crashes, and a subsequent forced sale locks them into a financial loss. On the other hand, investors wonder whether they should stand pat for a while and wait before investing.
The reason for the concern is the dicey economy, which is sending out mixed signals.
IT IS OK TO BE CONFUSED ABOUT ECONOMIC TRENDS—HERE ARE A FEW ISSUES TO THINK ABOUT
The economic cross-currents we are facing as a nation are unprecedented. We have record low unemployment. However, inflation has been at its highest rate for 40 years. Interest rates are rising too. The economy is neither expanding nor contracting. And the supply chain issues that have snarled our economy are improving in some areas–and worsening in others.
This combination of factors should not coexist. It is like discovering both garlic and anchovies in your fruit salad. However, in this case, you can’t fire the economic chef. Instead, you have to see what they serve you next.
In one way or another, all these cross currents have a bearing on the housing outlook. High-interest rates tamp down demand. Inflation increases the cost of building and home purchases. When people lose their jobs due to high rates, it hurts the demand for housing and so forth.
So, let’s step back and look at the general factors influencing housing and the trends that shape consumer housing decisions. Overall most of the underlying factors are positive, but rising interest rates are a real threat.
HOUSING ISSUE NO 1: YOUR HOME IS MORE VALUED THAN BEFORE THE PANDEMIC BECAUSE OF SOCIETAL AND ECONOMIC TRENDS
Several factors will likely contribute to resilient home prices.
Consumers have realized that buying a home may help their household budgets. Any household has three primary costs: housing, transportation, and food. With telecommuting becoming common, many people opt to pay less for transport and more for their houses. That tends to keep housing demand high because people are more willing to spend a higher percentage of family income on their homes.
The second significant change after the pandemic is that the perception of value is different. For example, the value of a home purchase is the higher of 1) its utility as a home and 2) the rent gained from it. That is a change too. It used to be that rental and ownership housing were considered very separate in how they were valued. Not nearly as much anymore.
The net result: residential housing is a bit more valued than it used to be, and it is more resilient to ups and downs in the economy.
Conclusion: This factor supports housing prices
ISSUE 2: AS A COUNTRY, WE HAVE NOT BUILT ENOUGH HOUSING TO KEEP UP WITH THE DEMAND
Supply and demand are significant determinants of home value. But, unfortunately, supply has not kept up.
According to one source, we are 3.8 million units short of meeting national demand after a decade of underperformance. Moreover, in some high-growth areas, the shortage is acute.
Conclusion: This factor supports housing prices in underserved areas but not in areas of adequate housing supply. In general, high demand is a positive for housing prices.
ISSUE 3: FOREIGN INVESTORS MAY REKINDLE INTEREST IN HOUSING
One blogger I greatly respect believes the US housing market will attract significant foreign investment as an international safe haven. Should his predictions come true, foreign demand will eventually support housing prices. Please read here for his detailed analysis of existing conditions and persuasive analysis of market trends.
Conclusion: This factor supports housing prices. However, while the trend is likely to have some impact, the timing is uncertain. Moreover, in the past foreign buyers have tended to support housing prices in large coastal cities. So, the effect may be uneven.
ISSUE 4: WOULD-BE HOMEBUYERS ARE BIDDING AGAINST INVESTORS TOO
In recent years, private companies have been mass leasing single-family homes. That, in turn, has heightened competition. Approximately twenty percent of home bidders come from Wall Street or institutional buyers.
Conclusion: This factor supports housing prices.
ISSUE 5: SOME AREAS ARE UNAFFORDABLE, AND PRICES HAVE BEEN BID UP TOO HIGH
Over the past few years, prices have made astounding gains in certain areas. For instance, according to one source, between October 2020 to October 2021, in San Tan Valley, Arizona, home prices increased by 37.8%.
Hollywood, Florida, prices increased by 37.0% in the same period.
The problem is that when you compare incomes in many areas to current housing prices, they are entirely out of balance and far too low compared to home prices. Read here and here to see two analyses that try to quantify the imbalance’s risk. The danger in some areas is that prices may drop significantly.
Conclusion: The risk varies from place to place. However, overall this is a significant negative.
ISSUE 6: IF INTEREST RATES GET HIGH ENOUGH, ISSUES 1-5 MAY NOT MATTER. HOMES WILL NOT BE AFFORDABLE
Rising interest rates do two things: 1) they make homes less affordable to consumers because of high monthly payments, and 2) they slow the economy and make potential owners’ jobs less secure.
Prices are falling in many areas. And overall, they fell by .77% in July alone.
Conclusion: housing market risk rises as interest rates rise. Risk evaluation is generally more straightforward when rate hikes have concluded or plateaued. So, it will pay for investors and potential homeowners to be patient and see if the rise in interest rates is temporary or not.
IF YOU ARE THINKING OF BUYING
A few important points:
- Know your own needs and timelines—purchase is a complicated decision and cannot be adequately covered here. This post only covers general observations about the housing market. Get professional financial and real estate assistance before making any purchase decision.
- Be patient if your situation allows you to be. Thinking about a purchase when you have time is one thing. Purchasing if you have a child on the way is another. If you can be patient, do it. Unfortunately, this economic cycle and more potential rate increases have not played out yet.
- Know how undervalued or overvalued your local markets are—if your area is severely overvalued, wait to purchase if that is possible. While there are some solid reasons to believe that housing values will be resilient, buying in an extremely overvalued market is a risk.
- Be aware of climate change factors if you plan to be in a specific area for a long time. For instance, see here. Know the risk.
IF YOU ARE THINKING OF INVESTING
It is an unsettled situation right now with rising interest rates. So, caution is probably best in the near future. But as someone once said, real estate is local. So, know your local market thoroughly before making any moves. There may be pockets of opportunity you can exploit.
As before, consult real estate and financial professionals (fiduciaries) before making any decisions.
Disclaimer: consult with a financial fiduciary before taking any steps outlined here. Not all advice may be suitable for your circumstances or investment style.
Photo Credit: Tierra Mallorca
License: Unsplash