09/09/2022
This supports the idea that real estate values will, in the long term, hold up well due to a scarcity of inventory relative to demand. Remember that prices are determined by supply and demand and even if demand falls, prices can hold their ground if supply remains low enough. For now, our inventory level is low relative to demand and low relative to where it needs to be to serve us well when the market moves back into a robust sales mode.
"FACTORS CONTRIBUTING TO THESE CONDITIONS:
1. Increased informational efficiency – Recent advances in information technology have dramatically reduced the time it takes to find and buy a home. Whereas real estate agents once had to drive buyers around, showing them houses to learn their tastes, narrow their search to more suitable properties, and suggest even more properties to consider, today most buyers do most of their research online, and often tour homes virtually before even contacting an agent. Buyers today are also aware of the history of a property in terms
of prior sale prices, the quality of the school districts and other neighborhood amenities. This efficiency has served to accelerate the prospect-to-purchase cycle.
2. Accommodating fiscal policy – The Federal Reserve kept Interest rates near historic lows in 2020 and 2021 to help stimulate the U.S. economy after a pandemic-induced quarantine. Low rates touched off a refinance frenzy that has left many homeowners with interest rates much lower than they could expect to get in today’s market. Owners that secured financing in 2020 and 2021 are now paying less than the current rate of inflation, and are the beneficiaries of negative real rates. Going forward, these owners will have no incentive to sell and give up this cheap or free money. Low locked-in rates reduce the supply of homes on the market.
3. Remote work – Home sales increased as workers, untethered from urban centers by remote working arrangements during the pandemic, looked for bigger and more work-friendly living spaces. At the expense of dense urban markets like San Francisco and New York City, suburban and coastal markets experienced increased demand as owners made lifestyle moves, taking advantage of low interest rates to purchase homes with monthly payments at or below what they were previously paying in rent.
4. Institutional investors – In the wake of the Great Recession, when home values crashed, institutional investors picked up the slack, buying single-family properties at a discount and converting them to rentals. This has become a new asset class and a number of publicly traded single family rental REITs. This proved to be a profitable business model but served to reduce home inventory. The addition of iBuyers in recent years
has only increased investor demand. In 2022 to date, a significant percentage of the homes in the bottom half of the price range, especially in the less-dense suburbs, are being purchased by individual single-family rental investors.
5. Restrictive zoning – As home prices have risen in recent years, existing homeowners in some communities have pushed for zoning restrictions to prohibit condominiums and other higher-density residential multifamily ownership opportunities. The power of NIMBYs (not in my back yard) has accelerated with the ability to quickly form opposition groups online using social media platforms.
6. Supply chain – The National Association of Home Builders has reported severe shortages of land, labor and lumber, three cornerstones of new home construction. New home production has increased in recent months, but not fast enough to keep up with demand, especially in more affordable price ranges.
7. Rooted sellers – With inventories so low, it may be easy to sell a home, but it may be hard to buy a home and that, in turn, results in some sellers not wanting to risk selling a home and being stuck without a home."
I would add to these factors to the discussion: the demographic factor of the massive Millennial generation moving into household formation mode en masse after the new home industry underbuilt by about 5-7 million units nationwide during the 2010's...AND...the fact that many homeowners who purchased when interest rates were in the 3's will be captive to their rate, unwilling to list their home and then have to buy a home at a much higher rate.
All of these factors lead to the idea that even if we have a period where demand is lower than it was in 2020/2021 and our local market adds several thousand listings over the next couple of years, we may not "peak out" with enough inventory to meet demand in the next upcycle in the housing market.
These factors should help to support property values in the long term.
(credit due to Black Knight and Dr. Michael Sklarz, Managing Director of Collateral Analytics which is now part of Black Knight, Inc.)
Dave Sansom
CFO/COO, Carolina One Real Estate Services
**Please message me if you'd like to see statistics supporting the above.
