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The current housing fiasco was built on a crumbling foundation of 2008 residue. The collapse of the get-a-bigger-house theory of wealth creation (which fed what banks and media pushed), Federal Reserve easy money policy that was supposed to stimulate the greater economy and didn’t seem to but still made the stock market take off, inadequate construction of new houses, and institutionalized interest in housing as a business proposition all set the stage.
Then came the pandemic, which pushed things over the edge. Here’s what’s been happening most recently.
Mobility, or more accurately its general lack, was a major issue. People were told to be locked down, and many became afraid to leave home. Families with money in small spaces looked to bail out of city apartments and moving to places with room. Assuming, of course, that they’d always be able to work remotely, which, by current accounts, isn’t necessarily a good bet.
I’ve seen it in our out-of-the-way part of New England, where people with lots of cash came in to scoop up properties that quickly grew out of the reach of many locals.
Complicating this was the mobility flip side, in which people didn’t want to sell a house because that would mean braving potentially dangerous public spaces to find other accommodations. With less supply and more demand than normal, prices have leaped up.
New construction has been historically expensive. You may have heard about lumber tripling in price. It’s now dropped low enough to be only 40% to 70% higher than two years ago, according to data from Nasdaq
But wood was only one commodity important to construction. Others didn’t rise to the same degree, but still saw significant increases. Gypsum wallboard, cement, copper and PVC plumbing pipe, and more all made it far more expensive to build something.
Then there’s been product availability. I’ve been speaking with construction firms, industry economists, and others who say that even if developers have been willing to pay, the wait for deliveries is long, pushing off projects.
Ongoing labor shortages in the construction trades is yet another factor. And whether you think a shortage means that many companies don’t offer enough to get the necessary workers, in one sense it doesn’t matter. If you lack the people, you can’t do the work. Offering more might expand the number of available bodies, but that’s different from having people with existing necessary skills who can do the work.
As I mentioned in the previous piece, according to a recent study paid for by the National Association of Realtors, lower-than-necessarily levels of construction has left a deficit of 6.8 million houses there were needed to accommodate expanding population and family formation. The country continues to fall behind.
Rentals become investment gold
That post also mentioned the pressures from Fed policies pushing investors to look beyond bonds as traditional hedging for stocks. Instead, there continues to be a rush to alternative investments, with commercial real estate a popular one.
My interviews in the field (as this is one sector I regularly cover) suggest that while industrial real estate and its necessity for distribution and e-commerce is the hottest area, multifamily and single-family rentals are highly popular with investors. They can provide good ongoing profit in an industry replete with deductions to make that money disappear on paper for tax planning, even while the cash keeps rolling in.
If you’re looking to buy, high expectations have settled in among sellers, according to a survey at Realtor.com. Overall, close to a quarter of sellers wanted to take advantage of the current market and make a profit, particularly among those in their late 50s and up. About 18% of sellers overall expect a bidding war, 24% think they’ll get more than their asking price, a quarter expect an offer within a week. It’s more pressure. And while house price growth is slowing, according to Yahoo Finance, in July it was still 10.5% year over year.
If you’re a renter, you’re now a product—a means to greater income for those who already have a lot of money. Some of these investment funds run well into the hundreds of millions of dollars, with one fund opening for additional investors even as the previous one closes.
The influx of institutional investors means a lot more cash is chasing a finite number of deals, creating upward pricing pressure. When properties are more expensive, investors need to charge more to get the return they had planned on.
Then there’s rising inflation. One of the assumed strengths of consumer rental properties is that, unlike in commercial leases, the owner is generally free to raise the rent every year.
That, in short, is where we are today.