It’s no exaggeration to say the real estate industry has been booming. Mortgage interest rates went lower than many people had witnessed in their lifetime. With rates in the 2% to 3% range, buyers could afford to pay higher prices for houses, and bidding wars became common.
A perfect storm of factors
Many factors came together to make the real estate market so strong. Limited inventory coupled with low-interest rates had consumers itching to buy. Working from home had become the “new normal,” and workers could foresee it continuing.
They were no longer bound so strongly to location but could branch out to live in more affordable parts of the country, with space for the kids and a dedicated home office instead of a desk in the kitchen. For the typical millennial buyer – early 30s with a young family, little debt, and money to spend – the quality of life became even more important.
Yet, the demand for housing continues to overwhelm the supply of homes for sale at any point in time. This results in multiple offers for the same house, and when the offers are compared, those with contingencies of any kind lose out to all-cash buyers.
More than a decade in the making
Although the pandemic played a role in our current market situation, it was actually at least a decade in the making. Builders who were left with houses they couldn’t sell – or land they couldn’t afford to develop – in the 2008 financial crisis have been reluctant to ramp up construction too quickly ever since.
They saw many of their contemporaries go out of business during that time, and although they managed to hang on, they lost money as well. Not wanting to experience that again and perhaps face a worse fate this time, most builders are still not building on spec as they had been in years past.
Supply chain slowdowns during the pandemic exacerbated the situation, resulting in a sparse inventory of new homes. And skilled workers, such as plumbers and contractors, are hard to find.
How the market is different today
Certainly, we need to learn from the past. But as we look at what happened in 2007 and 2008, that market was different than today’s. Banks had become so loose with their lending that many people were given loans for which they really did not qualify under typical banking guidelines. As unemployment hit double digits, homeowners holding these subprime mortgages defaulted.
Banks have not made this mistake this time and financial regulation is in place to prevent this from happening even for the riskier banks who might want to venture back into subprime lending. Obtaining a home loan requires showing credit worthiness and a steady income within the standard debt-to-income ratio.
It will take time to dig out
A year ago, the industry was 4 million houses short of demand nationally. Making up that difference will not happen overnight. Builders are focusing on the move-up and luxury home markets, where they have more room to profit, rather than the affordable homes in demand. So, we can expect inventory to be low for some time to come.
As the Fed raises interest rates in an attempt to curb inflation, and housing prices remain high, some potential residential buyers will, unfortunately, be priced out of the market. Meanwhile, corporate buyers who can afford to hold onto properties, and international investors who consider the U.S. housing a great investment, will keep prices high.
What you need to know
While we are in a booming market, we need to be sure we are running as efficiently and profitably as possible. Build the business and build cash reserves. We at House Buyers of America believe that a business that is losing money in this market or operating on thin margins, will not last when prices taper off and profits are lower.
Nick Ron is CEO of House Buyers of America, Inc.
This column does not necessarily reflect the opinion of RealTrends’ editorial department and its owners.
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