Real Estate Prices - When Will They Drop?

Is the real estate market going to crash?

If you look at the past 60 years of real estate data, you will see that there has only been one major real estate price correction. This took place in the 2008 recession. The grey bars on the infographic below show periods of economic recession whereas the trendline shows median sales prices for homes in the United States. As you will see, during 6 of the past 7 recessions, real estate prices have been well insulated from price corrections. This shows that real estate as a whole is a very stable asset class. If there is another recession real estate prices should weather the storm.

Homes Built and Population Growth

We are not experiencing an artificial bubble. This is a very real housing shortage. Unlike bubbles in the past, like the Dutch Tulip Mania in the 1600s, housing is a necessity, not a luxury. Everyone needs a place to live. As the human race continues to populate the world, we will need more and more places for people to live. The infographic below shows how the population trend has been going up in the USA by about 23+ million people every decade. During the 1950 to the 2000s we were building 20+ million homes per decade to keep up with the rising population. After the 2008 financial crisis, builders took a very big hit and stopped building. There was an oversupply of homes available during the 2008 recession which is the reason why home prices went down. During the 2010s, only 6 million homes were built. In the 2020s they are projected to build 17 million homes in America. This is still a massive shortage. For this reason, we fully advise people to buy dirt! They aren’t making any more of it.

Building Costs

Another factor that is making home prices rapidly climb is the cost for materials, labor, and building fees. During the covid19 pandemic, lumber mills in America shut down. There was a huge bottleneck due to labor constraints. There have been supply chain issues up and down every industry because of the pandemic. Have you tried to purchase furniture or appliances lately? Some places are 4-6 weeks behind! Sometimes more! As you can see in the infographic below, the cost for 1,000 board feet of board has risen dramatically from September 2015 at $220 to $590 in September 2020. In September 2021, the cost of 1,000 board feet came down to $584.70, but it is still dramatically higher than where it was. The chart also show that in 2019 $50,000 could buy enough lumber to build 10 houses. In 2021, that $50,000 would be able to build a little more than 2 houses.Other building materials besides wood have also gone up.

Labor, materials, and building requirements have become even more onerous for developers in places like California. Every new construction home is required to have solar panels installed. Construction costs have risen too because of the shortage of skilled labor. Going through the city permitting process on a simple renovation or even an ADU project can take a year reviewing plans before construction even begins. California has come out with a few bills to expedite the construction of affordable housing, yet these bills don’t alway have the desired effect or impact on the market. Local municipalities are understaffed, overworked, and can barely keep up with the review process. All of this adds to housing prices.

Annual Appreciation

Take a look at the annual appreciation of real estate over the past year alone! Due to these supply constraints mentioned above, the demand for housing, the rising cost of lumber, building, planning, and doing business, we do not anticipate real estate prices slowing down. We highly recommend investing in real estate as a stable and secure asset to park your money in as a hedge against inflation. It is nice to own something tangible and real, something that you can touch and hold. We are huge fans of investing in real estate and highly encourage you to find a way you can invest more in this asset class.

More Listings and Sales… but Low Inventory?

With all the talk of rising real estate prices it may sound discouraging. On top of that, you may have heard that the listing inventory has been extremely low. However, it may surprise you to learn that 2021 (6 million) is projected to have more home sales than 2020 (5.6 million), and 2020 finished with more home sales than 2019 (5.4 million). The reality is that there are more homes being sold than in the recent past, the challenge is they are selling faster than ever because of low interest rates and high demand. This is extraordinary news. Most people believe that there are less homes selling and that there is nothing available. While active listings are down, home sales are up as a whole nationwide. There are still opportunities to buy out there, and to take advantage of them you simply must make a plan to succeed and take massive action to achieve it.

In summary, with the costs of material, labor, plans, and supplies baked into the sales price of a home, real estate prices will not be coming down any time soon. There may be a major economic disruption, but that is impossible to predict. As we learned in Econ 101, price is determined by supply and demand. Until we create enough new housing to meet demand, prices will continue to climb upwards and to the right.