Over the past 10 years the number one question I have been asked is “When are real estate prices coming down?”
The fear of 2008 looms in the back of many people's minds, and sadly, has kept them from buying real estate. This terrible mistake has caused them hundreds of thousands of dollars! People made this mistake because they did not understand the economic dynamics that caused the 2008 financial collapse and equated real estate prices to the age old adage of “What goes up, must come down!”
This adage does not apply to economics. Just think back to the incredible real estate boom that was caused by COVID-19’s impact on the economy, resulting in new historically-low interest rates. The following are the key economic reasons why real estate will not be coming down any time soon.
1. Rates will stay low for longer.
What the government puts in with respect to inflation is not the total reality, and real estate and prices and rent are the best indications of that.
I believe that at some point, we’re going to see prices that have outstripped affordability. I think we’ll see the economy start to labor. I think some of the income tax increases that will come about in the next few years is going to contribute to that. And that we’ll start to see the economy slow significantly. Imagine this: interest rates stay in the same range of 3-3.5% for the next 3 years. Let’s say we’re at the upper end of that at 3.5%, and the economy starts to labor. Where do you think interest rates will go?
Down. If the economy is struggling, there’s going to be a lot of pressure on the Fed because they need to keep the tax income. So, if we’re at an upper range of 3.5%; and all of a sudden, in 3 years, the economy starts to slow, I think we’re going to see rates come down to 2-2.5% in the next 3-4 years. Low interest rates support prices. That’s an important point to consider.
2. Inventory will remain depressed for longer.
Inventory is really low...really low--an all-time record low. That’s not going to change. That’s why they created the ADU (accessory dwelling units) laws. If you want to know more about ADUs, watch our latest video on it here.)
3. Potential homebuyers are much richer post-pandemic.
In this pandemic, we’ve had winners and losers. 10% of the people have really been devastated by COVID. But for that 10%, there’s probably somewhere in the 20-30% that have boomed. I mean, any drive-thru business has boomed. Online businesses have boomed. The real estate and mortgage industry has boomed. Some would say, “Well, what about all these properties in forbearance when they hit the market?” Well, it’s only about 10% of the people that have really struggled, and you have this gigantic number of people who have benefited that are hoarding cash and have all this money. They’re like these vultures flying over, waiting for these forbearances to hit the market, and they will be gobbled up fast. That’s another factor. COVID has actually benefited a lot of people.
4. Domestic and foreign institutional demand is increasing.
Because of the decline of interest rates, investors are looking for high-yielding investments. If you put your money in treasuries, bonds, and things like that, the return is so low. If you put it in cash, there's no return. If you put it in stocks, it could be really risky. With that, the choice really comes down to this: real estate or stocks.
5. The Federal Reserve and Federal Government are pro-homeownership.
The Fed has always been about controlling inflation. They pick a number and try to maintain it; and when it gets close, they push the brakes. Instead of saying 2% is our ceiling, they’re saying 2% is their average.
6. Demographic Tailwind
Though most Millennials are behind in purchasing a home (because of student loan debt, delayed unions, etc.), they have been the largest percentage of buyers for the past 5+ years! No longer are others starting to think that Millennials will have to rent for life!
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