06/30/2022
Everyone keeps asking about what is coming in the real estate market...this seems to be the best explanation I have seen regarding the supply & demand.
Inflation. Recession. High interest rates. High fuel cost. Labor market disruption, including The Great Resignation. Supply chain shortages. Bear Market. And the hits just keep coming.
Are we heading for the end of the American economy? Is the housing market going to crash? Is this generation going to be priced out of the housing market and never be homeowners? No, no, and no.
Sorry to end your fear-porn party, but the sky is really not falling. Itâs definitely scary, and some of the things going on truly do suck, but the sky is NOT falling.
When youâre operating on fear, fight or flight chemicals flood your brain and your critical thinking skills shut down. Higher thought patterns and analysis are only possible when a perceived threat is lowered. You donât ever make good decisions based on the âthinkingâ you do when youâre afraid or angry. And the news cycle right now will make you both angry and afraid several times a day if you let the drama in.
Yes, inflation is real. Shutting down factory production to âflatten the curveâ created supply shortages. Remember that? This Administration made it worse by virtually ending domestic oil production and creating even more supply shortage. The result? Soaring gas prices. Worse yet, the soaring cost of labor is now compounding the whole situation. Too many people were sitting on their couch collecting Biden bucks and the only way to get them back to work was to triple entry-level wages. That loaf of bread that used to be delivered by $2 gas and put on the shelf by a $10-an-hour worker is now delivered with $6 gas and stocked by a $30-an-hour worker . . . so the price of bread went way up to cover those costs.
People coming out of their collective caves after quarantine dove into the housing market like a Baptist after a casserole. Simultaneously, the cost of lumber, labor and other supplies drove the prices up. Oh, and production was down, creating a shortage. House prices have increased by 29% since the end of 2019 and 18% since the end of 2020. And theyâre projected to be 8% in 2022. And yet, thereâs STILL a housing shortage.
So, in the middle of this crazy, crazy ride, why do we at Ramsey still believe house prices arenât going to crash? Itâs simple: The Law of Supply and Demand. One thing and one thing ONLY drives house prices: Supply vs. Demand. When demand exceeds supply, house prices donât tumble.
Still, people are asking, âYeah, but what about 2008?â
In 2008, demand fell dramatically below supply, and house prices actually went down. That was the first time we had seen any substantial and sustained house price drop in almost 100 years. Even then, prices recovered within a few years.
Currently our supply inventory of houses for sale are half of what it was in 2007, and new housing starts (supply) is 1.38 millionâ35% lower than the 2.07 million in 2005. Low used supply and low new supply equals low supply.
Meanwhile, there are now 4 million more Millennials in their mid-30sâthe prime earning and house-buying ageâthan compared to 2006 when Generation X was in their mid-30s. In 2007, there were 116 million households in the U.S. compared to 128 million households in 2020. Thatâs 12 million more households wanting to own a home.
Granted, higher interest rates and high prices have temporarily boxed out some of those millions from their dream house or even home ownership, but not enough to offset the huge drop in supply.
Bottom line: We still have too many buyers chasing too few houses. So for the next five years, we will continue to see house prices INCREASE, certainly not crash.
I was selling real estate in 1981 when mortgage interest rates went to 18% and there was no âHousing Crash,â no huge drop in prices. We didnât sell many houses and some sellers used price to attract one of the few buyers, but the market as a whole just sat and waited. In 1984, I sold 78 houses with fixed rates of 14%, and there was a line around the block to look at our model homes. That line was made of people who waited on rates to come âdownâ from 18% to 14%, and even then, there was no âHousing Crash.â Supply and Demand sets pricesânothing else. Not your fears, not your politics, and not your conspiracy theories.
We will see the slowing of the economy, high gas prices, recession, inflation tightening budgets, and high interest rates sideline some buyers. The buyers sitting on the bench for now will cause the sellers to experience a more normal marketing process. It might take 90-120 days to sell a house instead of getting 85 offers in three hours. And as a seller, you might negotiate on the sale price. But until just recently, both of those parts of the process have been a fact of life for sellers for almost 100 years.
We are in wild, scary times. If you are under 35 years old, this is your first ride through a rough economy. If this is only your first or second ride on the coaster, hang on. It can be scary, but we will be alright.
All this upheaval leaves us in a very strange place for the next six months or so. Itâs a strange time because we can actually say with accuracy that this is a great time to buy a house AND it is also a great time to sell a house.
Sellers are going to see a slowing of the speed of the market but no huge crash in prices. The market will still be strong, mainly due to supply shortage, making it a great time to sell.
Buyers are going to see prices go up every year for the next five years, but not much. So, prices right now will be the cheapest youâll likely see on a house nationally. If you are a buyer who is out of debt, has their emergency fund, and a good down payment, NOW is the best time to buy in the next five years. Donât wait on the âBig Correctionâ or âHousing Market Crashâ because it isnât coming.
I understand being afraid, especially if this is your first ride. I am no more happy than anyone else at the minor heart attack I get from filling my car with gas. I am not happy with the politicians in charge who are making much of this worse. I donât wish anything for you but good fortune and a prosperous life. You will do well in these crazy times to keep your head about you and not function on panic mode from watching the news all day.
My friend Zig Ziglar used to say, âI read the paper and the Bible every morning; that way I know what both sides are up to.â We will weather this storm, and we will actually come out ahead by not using fear as our compass.
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On July 14th, I'll be hosting a FREE livestream event about the real estate market to unpack even more of the facts and answer your questions.
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