Perspective....
As we turn the page on this crazy year I think it is safe to say we have all gained some "2020 Vision". 2020 showed us that we are all a lot more vulnerable than we thought. It showed us that the things we take for granted can disappear in a heartbeat, and it showed us that what is important and what is "essential" is not always the same. There is a lot to unpack after this year, and the world and the economy will be grappling with the implications for years to come.
In times where there has been a large economic "catalyst" (something which shakes things up and creates or accelerates new trends) I always find it helpful to take a step back and look at the big picture. How low really are the "record low interest rates?" How real is the "lack of inventory in housing" relative to the past? How does the "rapid home price appreciation" compare to the longer trajectory of home price appreciation? Let's investigate these key developments and what they may mean for the future.
Mortgage Rates
No doubt this has been one of the biggest factors on the housing market in the last few years. When you combine already low rates with huge fiscal and monetary stimulus what happens? Yep, even lower rates. The Federal reserve announced yesterday that they plan to keep the headline rate at 0% through 2023, no doubt keeping in mind the fiasco that ensued when they tried to raise rates in December 2018 and the market drama that ensued. They also have recommitted to their bond buying program (which includes mortgage backed securities, providing an exit for lenders and an incentive to offer lower rates) So we have hit yet another record low (2.67%) the 15th record low this year. This is great news for would be borrowers, but what does it mean for the future of the US Dollar? Cheap money can only be created for so long until it starts to lose purchasing power on the world's stage, and as we can see from the above chart, the move lower in rates has been sharp and sustained. Will the virus get under control and the economy reopen quickly and aggressively, causing inflation and an ensuing rise in interest rates? Only time will tell, but the Fed clearly seems to believe in the strategy of "lower for longer".
Inventory Crisis
I believe the 25 year chart above of housing starts (a leading indicator for housing supply) gives us a lot of color on the current inventory shortage and how we got here. New home construction essentially came to a standstill after the debacle of the Great Recession and has been very slow to recover. While starts have been on an uptick lately, homebuilders (which have been operating at record profitability as of late) still cannot provide supply fast enough to the constant demand of new homeowners. Throughout the pandemic the home has become so much more than just a place to sleep and more and more people are looking to take advantage of low interest rates, which has lead to the boom in homeownership that we see above. So, slow building since the great recession, accelerating homeownership and household formation, and increased incentive due to pandemic factors and low rates, = continued low inventory.
Home Price Appreciation
What do you get when money is cheap and inventory is low? Record home price appreciation! Even on the 20 year basis, the recent gains in home prices are drastic. This has created huge profits for home flippers (those who can find a deal to begin with) and created record profitability for builders. It has also created huge gains in equity for the average homeowner over the last year (10-14% depending on region). Interestingly however, over the 20 year period this is only a 3.75% annual increase over the broad spectrum of time. In other words, while the percentage changes at the moment are extreme, the declines in the Great Recession were also extreme, and in the long term the price appreciation is only slightly higher than what many would consider to be "normal".
The Bottom Line
Low mortgage rates, low inventory, and sharply increasing home prices have been the main themes of this year and they have all had some very significant moves, so the question remains - will these trends continue or are we headed for some sort of "correction". Will an increase in inflation due to a rapidly restarting economy create a rise in mortgage rates? Will increasing homebuilding profits and low inventory cause possible overbuilding? Will the above two factors cause a drop in home prices as inventory increases and demand trails off? Possibly, but a case can also be made for the trends continuing over the next few years. From looking at the long term trends we see a few things...first, home prices have really only increased at about 3.75% per year, hardly "bubble" appreciation. Second, home building is a slow process, and new levels of supply are going to take years to come to market. Third, mortgage rates are likely to remain low, as an accommodative Fed will likely continue and continued political stalemate may make it difficult for a new administration to implement any earth shattering changes. In short - the trends which have been accelerated by the pandemic are still going to drive the housing market for years to come so a large and drastic "correction" seems somewhat unlikely.
Thank you all so much for supporting me and LA Creative Realty in our first year of operation! We are just getting started and I really appreciate all of the support! It is my goal to educate and inform you all about housing and investments and help you all get some great deals! 😎 So please let me know how I can be of service to you and what types of content you guys would love to see / learn more about! Of course I am always available to you all 24/7 to chat anything real estate or investments!
I hope you all have a wonderful holiday season and that your personal life and business are full of joy and opportunity!
See you next year! 🥂
Take care,
- Gabe
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6737 Vesper Ave, Van Nuys 2 BR | 1 BA | 1041 SQ FT | 7,434 SQ FT Lot | $667,900
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Aegis Management Inc. Lic. # 01932663 All material presented herein is intended for informational purposes only and is compiled from sources deemed reliable but has not been verified. Changes in price, condition, sale or withdrawal may be made without notice. No statement is made as to accuracy of any description. All measurements and square footage are approximate. Equal Housing Opportunity.
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