HERE'S WHY I DON'T THINK WE'LL SEE A MAJOR CORRECTION FOR A WHILE

[Jason Malabute]

We all know the saying, “what goes up must come down.” We also know that the real estate market is cyclical. Historically, real estate cycles have lasted 8-9 years. However, we have been experiencing property values going up and interest rates going down since 2009 (over 12 years ago). In yesteryears, when interest rates increase by 1% property values have decreased by 10%. Although the feds have increased rates since January 2022 and intend to keep increasing rates throughout the year, I don’t believe we will see a correction anytime soon.

There are 2 reasons I don’t think we’ll see a major correction soon. The first reason is that there is a housing shortage. The Feds can increase rates by however much they want, but that will not solve the housing shortage most markets are facing in the nation. Another factor to consider is that the psychology of the majority of people is still bullish on real estate investing. I heard that close to 40% of our currency floating in the economy was printed in the last couple of years. Therefore, people are looking for a place to park their money to fight inflation. That is why in 2021, stocks, virtual currencies, and real estate were at record highs.

The two things I would watch out for that could affect real estate prices are over construction and rent controls. Recently more operators are transitioning to new construction to get a better return compared to the traditional acquisition model. However, if supply surpasses demand for rental units, that would decrease property values. Also, if there are nationwide rent controls to battle rent increases, that would make real estate investing less desirable and ultimately decompress cap rates.

[Nathan Grabau]

I would like to share another data point as a commercial roofing contractor based out of Northern Colorado. The cost of new construction is skyrocketing, maybe even faster than the housing market. We have seen over 40%+ in material price increases in the last year and are being told to continue to expect another 5% a month. Beyond that, projects even with our the best general contractors we have are running behind. We have gone from being able to get a load for a large roof like a school or 100+ unit apartment building in a few weeks, to now being out about 11 months, with no signs of improvement on the horizon. 

To further cement this point, I had put a proposal together earlier this week where we were offered a cost lock to the end of the year. I had to put a 42% escalation over the whole project to protect us, so this includes labor and overhead, not just materials, and there was not a concern over the updated price. It is a very strange market, but one where we do not need to worry about new inventory underpricing/ flooding the market. 

I personally have got to the point where I think the government will need to come in and subsidize new construction somehow, because the price of building is going to start dramatically exceeding existing inventory appreciation. When we cross this tipping point, if the government does not step in, it would not surprise me to see another super aggressive move in the market. 

We really do have a listing supply issue, that does not seem like it is going to be fixed any time soon.