The housing market with Eric Hogland
Every day I am asked when the bubble is going to pop.
I hear people ask good questions and make reasonable statements like:
“Is this market bound to crash?”
“I do not think it is a suitable time to buy, I will just wait until the prices come down.”
Hearing this from my friends, family, and customers, I have been doing a lot of research into the topic and the underlying economics behind what we are seeing. I have read and listened to many really smart folks from different financial sectors and have pieced together a few observations that may help you answer these questions.
These are the factors that everyone is talking about, inflation, the rise in interest rates, lack of inventory, and growing interest in further legislating income properties in CA. Let me take each of these factors, one at a time, and try to make some sense out of it all. I recently heard Robert Hahn (a dynamic market and strategy consultant in the real estate space) speak at a national property management conference and his hard-hitting quote was:
“Home Prices haven’t gone up. The Dollar has been devalued.”
We have all heard that inflation is here, fueled by the pandemic and several other factors. What most of us do not realize is that the way we measure inflation changed in 1980, and the problem is actually much worse than you might have imagined. If you look up the current rate today, you will see it is around 8%, but if you were to measure it the way we used to, pre-1980, the number is much closer to 18%. Believe me, Wall Street sees this disparity and more and more large hedge fund investors are not placing their reserves in safe T Bills, but in Real Property and REITS (Real Estate Investment Trusts). In 2021 Morningstar REIT Index outperformed the S&P 500 by 6.1%. It seems to me that if the largest money minds in the world see the dollar value retention of investing in real estate, we might want to consider doing that too.
Interest Rates are on the rise. This is true, in fact we expect the rates to go up as many as six more times this year. What does that mean for you? Buying real estate, even if it is at a seemingly high price, will be offset over the life of the loan by capturing as low an interest rate as you can right now. Let me be clear, interest rates are still well below the 50-year average. In fact, anything under 8% is considered below the median since 1971. So, while the dollar is losing value, the fact that you can lock in a low interest rate and ride out a season of inflation by investing in real estate really makes sense.
The real problem is a lack of inventory.
Even if you want to buy, can you find something that will be suitable for your needs? With a reduced workforce coming out of the pandemic, the soaring prices of materials due to inflation and supply chain problems, and the red tape involved in building in CA, it is no wonder we have a lack of housing on the secondary market. According to the National Association of Realtors, the average buyer searched for eight weeks and viewed an average of eight homes before getting an offer accepted.
Legislation in CA is running hard against easing the inventory issue. Rising calls for Rent Control in areas make holding on to rental property, let alone investing in more, a scary proposition for the mom-and-pop investor. As mom-and-pops cash out and sell their rentals, these properties are snatched up by first time or move up home buyers. This effectively removes that inventory from the rental pool, thus adding to the rising rent problem and the continued lack of available rental properties. My question is, where can the mom-and-pop investor put their money from the sale of their investment that will give them a better return than owning the real estate they just sold? The factors listed above make the case that they are losing more than they are gaining, when you consider the true rate of inflation and the fact that real estate is outperforming even the S&P 500 right now.
Here is my takeaway.
I will personally either continue to hold my real estate investments, or if I sell, I will reinvest the proceeds in a move-up property purchase. I believe real estate is the only way the average middle-class individual can build wealth in America; I help folks buy, sell, and manage their real estate investments, but I also invest in real estate myself.