Quick, ask someone about the US Housing market. The answer: It's Hot, Red Hot. Getting Hotter.
That's true and not true.
I asked a closing attorney how March 2022 compared to last year. He said, he made lots more money, but closings were down. Why did he make more money? His fee is tied to the price of the home sold. House prices are up again this month. So he's making more money.
I asked a real estate agent how was March? Same answer. Less buyers, but more commission because the price of sold homes is still on an upward streak.
I asked a builder, how was March? Similar answer. He has a waiting list of people to buy homes. In fact, he now includes an escalation clause in his purchase agreement. The agreed on price of the home is likely to increase before the home is completed.
So what's the other side of the city?
I asked a private lender that works with investors about March. His answer, not a single deal. No loans completed, and April doesn't have any scheduled either. So what? Who cares about investors? You should. Investors are the canary in the coal mine.
Seasoned investors are pulling back in the housing market. The reason is that the price of homes has reached the point where renting the home does not generated a high enough return on investment. Simply put, investors can't buy a home cheap enough and rent it to someone else for a big enough profit.
The second reason is that investors can't buy older properties cheap enough for fix-n-flips. Remember our builder friend? He and his buddies have put a lot of PVC pipes in the air recently. New subdivisions are sprouting up this spring like Iowa corn. Which means the demand for renovated homes is about to decline.
Still wondering why it's important to have investors buying older homes? Most people need to sell an older home to buy a newer home. Investors buy many of those older homes, or have in the last couple of years. When investors stop buying, older home inventory will stack. When the inventory stacks deep enough, prices will drop. Or buyers that had planned to buy new homes, will instead stay in the older home.
Here's the headwinds that we're pushing against:
- Inflation has scared the Fed. Fed is reducing its purchase of mortgages. Fed is raising interest rates. Banks will have fewer places to sell mortgages. Buyers will pay more to borrow money to buy homes.
- New home inventory is low, but new home permits and homes under construction is high. Supply chain problems is holding up completion. Expect a new home glut soon.
So is this doom and gloom or are we in the real estate boom? I have been through a few cycles. I keep hearing,
This time it's different. Don't worry, the government has put safety rails in place. There's no better time to buy a home. And my favorite, "guess what I just got my real estate license!"
I am pretty sure I heard all of those in 2008. But don't worry, the wind down take a while. I will venture to say that we have reached the peak, but things won't look bleak for another 12 months.
Here's an article for some perspective https://seekingalpha.com/article/4498666-us-housing-is-a-dead-man-walking I don't have any connection with the author or seekingalpha, but I think it is a pretty good summary of what to worry about.