Keith, founder of Get Rich Education, hosts the Get Rich Education podcast to help create passive real estate incomes for massive outcomes.
In this era, I believe that an American housing crash is certain. But, come on now. No one has clairvoyance, so how can I be absolutely certain? It’s because, from my view, a crash has already occurred. Did you miss it?
I’m not referring to a price crash; I’m talking about a housing supply crash. The reason I consider it certain is because it has already happened. Available housing inventory fell off a cliff during the pandemic housing frenzy in the spring of 2020. That’s when inventory failed to make its seasonable rebound. The housing supply still hasn’t gotten back up from its mighty fall. In July 2016, there were almost 1.5 million active listings in the U.S., according to Federal Reserve Economic Data. By September of this year, there were just around 701,000. This supply drop signifies a decline of more than 50%.
Let’s understand why I see a supply crash as more substantial than a price crash: A price crash means homes are temporarily suppressed in value, whereas a supply crash means America cannot house all of its people. Potential first-time homebuyers must often keep renting, while many renters and even college students are struggling to find or keep affordable housing. Sadly, in August, homelessness was 11% higher than the year before, the Wall Street Journal reported.
Solving the shortage will not be quick or easy. Given land costs, impact fees, safety regulations and zoning rules, it can be difficult to build. Many builders aren’t yet using 3D printing, and I don’t think shipping container homes appear to be a near-term answer.
As someone who helps others get started in real estate investing, I’m seeing that a market like this might have some investors looking for opportunities. In fact, the necessity for new housing is a big reason why Warren Buffett invested in three homebuilders this year.
Where is the housing demand coming from?
Some haven’t made the connection that the simple Economics 101 of supply-demand is why a near-tripling of mortgage rates since December 2020 has not stopped home price appreciation in many areas. See, the Federal Reserve can try to crimp demand by hiking rates at an unprecedented pace, but the Fed can’t create a housing supply.
But where is the demand coming from? One factor is millennials; they are the largest generation in America and are in their prime home-buying years. Swelling migrant numbers are also increasing the need for housing in some areas, according to the Wall Street Journal. Baby boomers are creating more households as well. This demand keeps bidders on the scant few available homes, thus supporting prices. Consequently, this housing supply crash hedges against a price crash.
When one does sell a property, it doesn’t always add a unit of supply onto the market because that seller needs to live somewhere else, which also removes a unit of supply from the market. Additionally, there are many people who don’t want to sell their properties because they would lose their 3% or 4% interest rate and trade it in for today’s 7% or 8% rate. This means that fewer existing properties come onto the market.
If there were a shortage of yams, you could eat sweet potatoes instead. Eating yams is not vital to human survival. But, see, housing is a non-discretionary consumer item. It sits on the base of Maslow’s Hierarchy of Needs. It’s part of “food, shelter and safety.” You simply can’t sit out of the housing market. In fact, you’re probably interacting with housing as you read this right now.
What must investors know moving forward?
This undersupplied housing market and poor affordability are dreadfully challenging for prospective first-time buyers, who are facing an average home price of $431,000. Paying higher mortgage rates, plus $86,200 for a 20% down payment on a median-priced home, leaves many of them priced out. But they must still live somewhere.
Because of this, real estate investors might see this as the right time in the market to expect upward pressure on occupancy and rents. However, as always, keep in mind that the market is more important than the property, and if you’re thinking of investing in a property right now, you must still do your due diligence. Determine whether the property is in an area where population or employment contraction is expected. Profitable properties need tenants with incomes. Ensure you also have a competent property manager unless you plan to be the manager yourself.
Additionally, keep in mind that owning rental property in a housing shortage can mean owning a long-term desired asset. Temper the excitement by assessing whether the property’s rent income would exceed the mortgage, vacancy factor, property insurance, maintenance, property taxes, utilities and management.
The least that you need to keep in mind is that I believe the housing crash is certain because it has already occurred. It’s a supply crash, which hedges against a price crash.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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