Real Estate Market Overview
Whether you’re a homeowner, a renter, or want to be a homeowner or sell your house, everybody wants to know what’s going to happen with real estate. Everybody wants to know what the future of real estate is, and it affects so many industries. It impacts people even who are not in real estate. And here’s a very subtle clue about what might be happening. This is from Bloomberg a couple days ago: new home construction falls to the slowest pace since May. July starts to drop 1.2 million, below all estimates—that’s the key—below estimates.
Factors Influencing Real Estate
So, what’s going on here? Some of it has to do with maybe the hurricane. And this is in the face of where people are expecting the interest rates are going to be cut. So, you would think if the vast majority of opinions say the interest rates will go lower, they should be building more houses in anticipation of more people wanting to buy homes. But that’s not what’s happening. I think there’s another factor involved in that: people’s budgets are stretched. There are a lot of articles saying that everybody’s savings are depleted—all the money from stimulus and COVID and everything else is gone. Inflation has stripped out a lot of budgets. In fact, credit card debts have skyrocketed. People have been using savings and debt to keep up their spending habits as much as they could for the last 3-4 years. Now it’s to the point where there’s no more money to borrow, no more money in savings, and prices are still high through inflation. So, buying something else like a bigger house or moving from an apartment to a house has some headwinds.
Decline in Demand for Housing
There’s going to be less demand for everything, especially houses, going forward because people are kind of getting tapped out. The labor market is pretty good—it’s not like there are a lot of people unemployed who don’t want to be unemployed. The problem is it hasn’t increased salaries that much. There’s more people working, but salaries haven’t gone up, while costs have gone up. And for all the news stories about inflation being down, that doesn’t mean prices are down. That just means the rate they’re going up has leveled off. So, if the prices are going up this fast, all of a sudden they start going up maybe a little bit less steep. The prices are still going to stay high—they’re just not going to go up as fast.
Impact of Inflation on Pricing
For example, if a dozen eggs used to cost 79 cents and then went up to $1, $1.50, $2, $3, it may not go up that fast, but it’s still going to stay at $3. Maybe it only goes up to $3.05 or $3.10, and so on, but it’s still going to be at that high price. Prices won’t necessarily go down—that’s deflation. If there’s any inflation, even if you have 0% inflation, that means prices are going to stay the same. And prices are already high. This is a big factor in builders who have to put their money where their mouth is, saying, “We’re not going to build a ton of houses. We don’t want to be stuck with all these speculative homes like they did in 2008 for a different reason.” So, they’re going to say, “Let’s hedge our bets a little bit. Let’s just see what happens. There’s an election coming up, there’s some economic headwinds coming up. Let’s not go crazy.”
Housing Shortage Concerns
So, what does that mean for housing? Well, if there’s fewer homes being built, it’s going to contribute to the housing shortage, even if you say, “Well, at least they’re building some houses, so there’s more homes.” But the homes aren’t keeping up with the rate of new households being formed. More people need homes because there are people being born, people immigrating, and people that are separating from their families. If you have a family with three kids, their kids go off and they need new houses. That’s always creating additional demand. Plus, you have older homes that are no longer functional—if you have a house that’s 60-70 years old, you might have to tear it down. So, the rate of construction isn’t even keeping up with the increased demand. The estimate is there’s a five, six, or seven million home shortage, and that’s only going to get worse.
Future Housing Market Predictions
So, what can you expect? Maybe two or three years from now, this housing shortage might even be worse than it is today. That could affect pricing, that could affect even homelessness. It could affect everything from lumber supplies and lumber prices to even employment for companies and industries that are related to real estate, like furniture, contractors, and things that people buy when they get a house or expand a house. All those industries could have a domino effect and slow down in the near future. Just food for thought. We’ll look back on this in a year or two and see what happened.
