Are RE prices gonna come down, stay about the same or go higher?

Question

So, I have noticed that real estate prices have really skyrocketed in Orlando, Phoenix, etc. just over the last year.  I mean they have gone up 20-25% for SFH.  Do you think this kind of rise is sustainable?  Do you think prices will crash (like 2008)? Do you think prices will just stay about the same for now?  We all know the Fed is gonna start a series of interest rate hikes so will that affect the prices and demand?  I just can't see people's income able to keep up with higher mortgage prices.  The low low rates as of the last couple of years along with recent high demand after people felt we were getting over Covid has swelled prices, and the low rates kept the total payment in check, even as prices rose.  But now, with higher interest rates coming can the prices keep going up, or will they just stall but not crash?  Thoughts?

Russell Brazil · Answer

Reference this post of mine from a year ago.

James Hamling · Answer

For those skimming across things take SPECIAL NOTICE when @Russell Brazil said this will continue throughout the DECADE, not year or summer or whatever, DECADE. This is a statement speaking of economics, specifically U.S. Economics and how it takes time for inflation to move through the system, time as in years not weeks or days.

On the subject of inflation, we are at the beginning of the beginning. The way inflation works is when it's first realized, it hasn't even started having true impact. Some move proactively to adjust pricing for it's impact but think about your T.B. Tacos, ever wonder just how many hands and steps that taco shell went through from being a corn seed to being a taco in your hand? When inflation happens, it starts hitting certain segments, and than works it's way through the system, and each step raises prices on a % basis so a 10% increase in say corn at market, does not = 10% increase in your taco shell, it's probably more like 45% because of the chain affect. And it takes time, months and years, with many adjustments until we hit this place called price stabilization.

The annoying question of will we see things like 2008 again, well look around, WE ARE RIGHT NOW, we are living in a bursting bubble this exact second, it's just a reverse bursting bubble, and just like the 2008 bubble burst brought prices down this one bursting at the down side is rocketing prices up. Maybe if you think of it this way things will make more sense.

Is the impact of housing costs upon incomes sustainable, no, everyone knows when housing costs exceed 50% of gross household income it is not sustainable. But that does not change the cost of housing, it does not, because housing is 1 of the 3 fundamental needs of life and there needs to be a way TO lower housing costs for it to go down. Right now, costs of New Units is far higher than existing stock, so you can't go new to get lower housing costs. And new units pricing is pushed up by material and labor costs, and various taxes, unless they want to build for free there is no real savings to be made there, until gov. starts cutting taxes, anyone see that happening anytime soon?

We are entering an era of The BIG Squeeze.

Existing housing stock is going to continue to trade up as it works it's way within a parity with new unit offerings, because that's what's driving this price rise in existing unit sales, because we are in a shortage environment and people need roofs over there heads.

So you got 2 ways to bring down housing prices: (a) eliminate demand. It's that simple, about 35million Americans die tomorrow and "pow" you have eased your housing price pressure. or (b) find a way to slash 10% out of the cost of New Housing units. Right now, builders and developers are running very tight margins, and costs keep going up. Our Gov. raises taxes, well it all goes up more.

Here is the catch to it all, inflation is known as a tax on EVERYONE, because that is the affect it has. Remember your taxes are decided and paid as a % ratio, make the #'s bigger, and taxes go up without actually raising them. And again, it is the chain affect. If you want to see real price impact to make things affordable, DROP minimum wage too $5.00 nationwide, tomorrow. CUT programs that remove ready able persons from the workforce. The cost of good will drop like a stone, employment will raise to near 100% (or closest it can) and while yes, people will have less income, the cost of things will be far less making for more disposable purchasing power, making everything more affordable, and a much lower tax burden.

But thats the crux of it all, it will lower taxes. We are living in a time of convergence where about 50% think we should steal... sorry TAX as high as 65% on middle class and just give away to all including those not contributing. THAT my friend is the recipe for collapse. A nation where 35% support 98% is not sustainable at all.

By law of economics YES prices will keep going up, that ship sailed when they cut the pie in a few trillion more slivers.

YES prices will keep going up because nobody really cares to give relief to the middle class, this is simply a statement of observable fact.

Day-dreaming of 08 collapse is just that, a daydream.

Russell Brazil · Answer

And this is what I posted on Facebook expounding on this post.

"When I wrote this about a year ago, yearly inflation for 2020 had just come in at 1.2%, and the most recent monthly readings had come in at 1.4%, 1.2%, 1.4%, 1.2%, 1.2%, 1.4%, 1.3%. Now the most recent monthly readings have been 7.5%, 7.0%, 6.8%, 6.2%.The lesson here is, increasing the money supply by 35% was going to very obviously create inflationary pressure, and will continue to do so throughout the decade. And while conventional wisdom is to think we can stop that by raising interest rates....I point to the all time high interest rate of 18%, which still saw housing prices average in the run up to it and the 3 yeara following it, 8% yearly increases.However as someone who owns real estate, high inflation is not something that bothers me in the least bit.  You can be punished by inflation, or you can benefit from it. The choice is ours to make."

Chris Clothier · Answer

I think @Russell Brazil shares some great and prescient data.  I'll share some data that I think points to the fact that in many metros, housing prices are not coming down anytime soon if ever.  One thing to keep in mind is that I am going to share some data that is national in scope.  There is no national housing market.  Each market is independent of one another and you can certainly have some markets around the country that are going to go down in the near future while others will remain unreasonably hot and continue to climb.

We are roughly 5.5 million newly built, single-family homes behind right now to keep up with basic yearly consumption.  As new households are formed and they want to purchase a home, they can either buy a brand new home or they can buy an existing home.  Either way, a new house needs to be built.  Either for the first time buyer or the seller of a home and that cycle continues until somewhere down the line a new house is built or a homeowner exits the SFH altogether and downsizes to some other form of housing.

As a country, we produce somewhere between 700k and 1.0 million new single-family houses per year and 2020 was expected to be a year in which builders would make up some of the shortfall.  There was expectation that builders would produce closer to 1.5 million units and that trend would need to continue for he next 8 years to keep up with new household formations and past unrealized demand.  Unfortunately, supply chain issues occurred and lumber pricing went through the roof.  The tripling of lumber meant housing starts were actually slowed. We produced less than 1 million SFH last year and are only anticipating 1.2m SFH starts this year.

We are very, very behind in keeping up with SFH demand.  So basic supply and demand economics tells us that supply is short and demand is high and that is before we even factor in the data showing large scale institutional buying in some markets.

I personally don't see any scenario where housing prices can come down in most markets.  The economics simply don't make sense and I foresee institutional buyers being more than happy to keep paying up to get more housing under control.  My .02 cents anyway ~

Lexey Vezzoso · Answer

Hi James!

My team and I have had a conversation about this recently. We are located in the Boise market and to answer your question without going too crazy we see prices staying about the same and maybe even raising a little bit again for the spring and summer of 2022. The reason for this is because inventory is so low still making it a sellers market. Yes, interest rates are already going up but due to supply and demand we believe the market will stay about the same. We don't foresee a crash happening but more of a steady plateau.

If you wanted to go into more detail about it I'd be happy to hop on a call and have a conversation. These are just my thoughts and insight based on what we've been seeing in our market.

Here is a link that gives you an idea of the mortgage rate trends from the last 30 years that might give you some good insight as well!

https://www.creditdonkey.com/h...

Good Luck!

-Lexey Neitzel

Boise Turnkey Properties

Robert Keesler · Answer

Let your personal situation dictate whether you can or should buy now. If you were suddenly underwater on a mortgage and lost your income, do you have a way to continue payments until you can recover? Assess personal risk accordingly.

Sam C. · Answer

We are in no man's land and coming to the end of this cycle with this particular fiat currency. What I see is a controlled (or attempt to control) demolition of the economy. Rising inflation and rate hikes are only a benefit to the central banks (and their wealthy members). AND THE GOV'T/FED DEBT WILL NEVER GET PAID. People will be made poorer (inflation is a worldwide problem), houses will rise in prices (along with metals and commodities. Maybe cryptos) but most people will have to settle for less house (if they can buy at all) with each rise in the mortgage rates. Will that translate into more renters? Logically it should but the quality of the applicants may be problematic. And the central banks are hellbent on bringing in a digital currency (just look at what gofundme, paypal and now Canadian banks are doing. You can assume that the ability to shut people off from their money with a tap of a key is bad). So what does that really mean to us real estate investors? Leverage can put you out of business if your ability to finance the debt goes south (you can gross a $1,000,000 a month but if it is costing you S999,000 to service that income, we'll you know what I mean). In every RE correction I have been through, the higher the leverage the quicker the fall. So the more room you have between the income and debt the longer you will last. What I am seeing is that the areas where lockdowns and covid actions killed jobs and businesses, people are moving out  and they are going to have trouble sustaining asking prices and jobs. While many of the same people are moving to more desirable locations (states that stayed open and did the least amount of damage to their citizens and economies, i.e.: Florida. Miami/Orlando are hot and possibly already overpriced). An exception to this may be Utah. I have heard that because Mormons stay close to home and have large families, there are a large number of offspring starting out and buying homes. (Good flip market?) Will you be able to pay your debt? Will you be able to keep good tenants? Will you be able to offer a decent unit and at better (lower) rents than the next guy? Can you afford a 15, 20 or even 25% vacancy rate? Will you have to sacrifice maintenance and repairs because of little to no reserves after vacancies, mortgages, taxes and insurance? OK. So I know  I'm the last guy you want to invite to your party but  I started in real estate in 1987, been through 3 corrections and by following my own advice did OK. HOWEVER: I honestly do not see this one coming as a correction but more of a fundamental reset with a new reserve currency and most likely digital. (The correction should have happened in 2008). They decided to make it 1000X worse.  But when the dust settles and if you are on the other side with your portfolio intact, you will be well positioned. Or don't overpay (or use price appreciation to make the numbers work), save your money (cash or a solid credit line) and wait till the shit hits the fan then buy "when there's blood in the streets".

James Hamling · Answer

Ok folks, let's do something TOTALLY Goofy and just bat-guano-crazy and look at HISTORICAL DATA and compare it on what happened.

This chart below, is the year and inflation rate for each month. All this talk of will inflation create a housing collapse now or soon, well, remember a housing collapse in 1970? How about 1974, inflation hit 10% than soared even higher, it MUST have collapsed housing right? Ok, how about 1975, 1979, 1980, 1981.... Yeah, exactly, going from the ACTUAL data here on inflation and the consistent experience a person would almost say inflation makes housing prices GO UP, or at least it has the last 4 decades plus. I actually have 100yr of data but I will save the misery of the repeating reality.

Now look at the bottom chart, Notice how inflation was diddly-squat before, during and after the '08' collapse. Actually very little change at all for what, a decade and a half. How many more persons did the U.S. grow by in that time? The reality is the ONLY bubble was the DOWN-bubble we have been living in, and government "stimulus" was an atomic-blast of air into that bubble that ripped it wide open, super-burst. We are now living in correction.

Sorry to say to a YT's and doom-preachers slopping there BS of housing collapse around, the data, history and economics ALL say different, they speak to INCREASE in housing costs, weather you can afford them or not.

Bob Okenwa · Answer

I remember that post @Russell Brazil. It made sense then and makes more sense now. It should be a sticky on the front page as I swear this question is asked at least a few times a week.

The magnifying glass/search option is there for a reason. Not enough people use it. 2008 isn't coming back. Even if it somehow did, real estate doesn't crash like the stock market and drop heavily by the minute. It was circa 2011-2013 in most markets before prices bottomed out so it isn't as if there is a news report that says "A CRASH JUST HAPPENED" and then home values fall 50%-75% the next day.

I'll go a step further for all of those who will continuously ask this very tired question that's been asked for about 10 years now. If a 2008-like housing collapse were to happen again, people seem to forget that lenders were not lending to the average joe to go scoop up all those empty houses. You had to have cash. You know who does have cash and a lot more than the average mom and pop investor? Institutional investors. Blackstone/Invitation Homes would buy 100,000 homes before you could find a lender to fund a deal for you.

I'll end it with this chart below. Home prices almost never have significant declines and each market can experience different levels of growth or decline. Even if they do fall, they'll eventually go back up to higher levels than before they fell.

James Bitakis · Answer

But if wages don't keep up, how can people afford to "just pay higher rents"?  I think the super duper insane home price increases will stall, because now rates are 5% and going up, but I don't see a fall like 2008 either; rather a plateau at these now higher prices or a smaller increase this year of 4-8%. IMO

Are RE prices gonna come down, stay about the same or go higher?

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