03/02/2024
DOUBLE BET ( my advice for real estate inventors )
The most common question I'm always asked is,
"How is the market, will the prices go up or down?"
So, let's examine the residential real estate market to determine whether we should invest now or wait.
CRASH:
For a crash to occur, we need three components: a large number of vacant homes, motivated sellers, and a population reduction (people relocating to another market). None of this is happening in Maricopa County. Foreclosures are at their lowest level ever. Vacant homes can be easily sold or rented. Sellers have equity and benefit from low rates; there's no pressure to move or sell. Maricopa County continues to attract new businesses and people, growing by 100k people per year. No crash yet.
SUPPLY
A short supply of homes is one aspect all experts agree on. With builders constructing fewer homes for the last 15 years and sellers remaining in their homes due to low interest rates and high equity, Maricopa County has a 2.5-month supply of homes. A normal supply would be 4 to 6 months. I don't see how we can catch up by adding more homes. There will be a shortage of homes for sale in the near future.
DEMAND
The demand for buying a home is low, primarily due to higher mortgage rates. The majority of buyers are deterred by the 7% rates, and many are waiting on the sidelines to jump back in once the rates decrease. This low demand has kept the market balanced and home prices at reasonable levels. In a balanced market, prices rise with the rate of inflation. For 2023, homes in Maricopa County have seen around a 4.5% increase in price.
Some say the low demand is due to high home prices and low affordability. I disagree; it's simply a matter of math. Maricopa County has almost 5 million people. We don't need all of them to buy a home—just 1% or 50,000 potential buyers. Mortgage rates are the primary factor influencing the real estate market's performance at the moment. Once mortgage rates drop and start with the number 5, demand will significantly increase.
DOUBLE BET
If mortgage rates are the deciding factor at the moment, then we have two options: rates could go down, or they could stay the same. The long-term bond market, which is greatly affected by inflation, dictates mortgage rates. Therefore, the main factor for mortgage rates in the near future is the rate of inflation. Lower inflation means lower mortgage rates, and vice versa.
The government and the Federal Reserve are the main influencers of the country's inflation rate. They control inflation primarily through two main tools: the flow of money in the economy (printing money and restrictions on lending) and the Federal Reserve Bank's funding rates (high Federal Reserve rates increase the cost of products and services).
If we think that the government is not managing inflation well, mortgage rates will likely remain the same. The market will stay balanced, and prices will rise with the rate of inflation, 3-5%. If you believe that mortgage rates will soon decrease and eventually settle around 5%, then prepare for all the buyers currently on the sidelines to re-enter the market. Imagine all these buyers entering a market with a short supply! This would result in a strong seller's market, with multiple offers and a price increase of 10-20%.
Regardless of which option you prefer, a real estate investment will perform well.
Investing in well-structured and leveraged real estate properties is a DOUBLE BET.
Oggie Penev
