Is there a new norm for Real Estate?

[Alan Asriants]

For the next for next foreseeable future, I believe that we have reached a new baseline for the housing market: A market that doesn't have nearly as much inventory as there was historically. 

It's no secret that investing in Real Estate, or buying a house at all is extremely difficult right now.

Rates are higher than they have been in a long time and prices continue to go up and up. The worst part, is that there is barely any inventory!

While this is true for a lot of markets, it is not true for some markets. In fact, within the same metro area (Phila) we are seeing 2 different kinds of markets.

1. The suburban market - RED HOT sellers market, no inventory, and constant bidding wars

2. The Phila center city and surrounding market - BUYERS and Tenant market! Tons of inventory, lots of incentives, and not enough demand to keep up with supply

This situation is not unique to Philadelphia. Briefly studying the markets across the US, I have found this trend: Where new construction was red hot and building was promoted by the local municipality, they are enduring a more Buyers market and on the flip side, areas where there is not a lot of new construction and only really existing homes for sale - there is a sellers market. 

While the reasons for the Phila center city buyers market is not only the inventory - it is also the lack of demand. While a market out in Utah, seems more like just a bit too much inventory for the demand. Philly is different, because there are lots of political, crime, and other factors dealing with low demand. 

While the small rant above was just to demonstrate that not every market is the same, still, when we look at the national market, we are seeing a consistent growth in prices and very low inventory.

Why could this be? 

Of course one the common answers you have heard is: high interest rates are keeping sellers out of the market

This is 100% true, but it only answers one part of the economic equation: Supply

What about demand? Why are people still buying RE? The prices are nuts and the payment is so high. 

My theory is two part. The first part has to do with devaluation of money. The COVID pandemic showed us how vulnerable we are and how quickly things can change economically. Your $100 before pandemic and your $100 today are two different values. Going to the grocery store for 1 person for a month now costs me $1000/month. and thats not including eating out. 

People have seen and felt first hand how money has devalued. But they have seen another trend - Real Estate follows inflation. If everything becomes expensive, so does Real Estate. And it is one of the first things follow inflation - mainly due to its necessity and scarcity. People will always need homes, but there will always be a limited amount of land. 

So how does this tie in with demand? Because people now understand how putting their money into Real Estate can protect them from inflation. People believe in the appreciation of RE. 

The reason why we have some skeptics and doomsday predictors is because they are correlating a possible recession (which is still valid) with the housing market. While there is data to support that claim, the loss in value in property during recessions was not too harsh - except for 2008. And the reason why its so hard for people to disconnect from 2008 is because of how recent it was. But 2008 was a recession directly triggered by the housing market, of course values will go down. High default rates was a chink in the armour that gave in. Lending practices are extremely tight and default rates are very low. People are sitting pretty. 

The second part to the demand question is: information. 

Since 2008, social media and the internet has exploded exponentially. There is so much information out there and so many people now know what Rich Dad Poor Dad is, what an FHA loan is, how to buy a duplex and live in one unit and rent it out, etc. So many people are now informed. I have 18 year kids asking me to help them find a duplex with an FHA loan. 9 years ago when I was 18, I had no clue as to what that was (and my father was in real estate - honestly wish i knew lol). But thats not anyones fault. If reels existed when i was that age, I likely wouldve found out about it too.

Information about RE, just like this forum itself, has spread so quickly and given so many more people the tools they need to invest. RE used to be the best kept secret, but not anymore. 

So many people want to be in the game.

So now ask yourself, how can things change if everyone knows how to get in and if everyone wants in? 

In order for a market to experience a downturn, there needs to be more supply than demand.

I don't believe we will see an increase of supply because of default rates like 2008. I don't believe we will see an increase in supply unless rates come down significantly - but again this affects demand too. 

So it's very possible that inventory might stay low for a while, unless an outside force affects it (crime, politics, natural disaster, "unpredictables", etc)

What do you guys think? Have we reached a new baseline? Has the real estate market changed forever?

inspired by @Gaetano Ciambriello