Opinion: Get used to the housing crisis – it will be with us for years – but there will be some surprising benefits
If you think the white-hot housing market is a supernova that’s doomed to die out, here are some tips: Put on your heat-resistant space suit.
The factors that led to the real estate boom and the sellers’ market are still very much present: pent-up demand; limited supply; excess liquidity in the economy due to pandemic-induced savings; low interest rates; rising inflation; steadily increasing manufacturer prices; and a demographic wave of millennials who want to start a family and need more space.
To meet demand, the US housing market needs 3.8 million more homes than there are currently on the market. This is 50% more than three years ago. There’s no way construction can catch up with demand anytime soon.
Not a bubble, exactly
I was CFO for years, including the tough years of 2008 and 2009 when the real estate market collapsed. Now CFO of the financial services company Ygrene, I am particularly attentive to the unique forces at play.
While you might call this real estate boom a bubble, it is different from the speculative foam we saw before the Great Recession. The catalyst for this recent buying frenzy is the forced shutdown of the Covid-19 economy and a subsequent acceleration of underlying market trends.
Price increases will likely slow down towards the end of the year. Freddie Mac predicts that home prices will rise 6.6% overall this year and slow to 4.4% in 2022. Nonetheless, the conversations we will have about real estate next summer, and the summer after , will be like the lively conversations we have. have now.
The continuation of the real estate boom will be beneficial for the economy. Many jobs will need to be filled, not only to build new homes, but also for renovations, repairs and additions to existing homes. More home related products will be sold. Home Depot and Lowe’s will be very busy and will need to hire more employees. Chances are, REIT investors will be happy.
Secondary markets will thrive. Wider acceptance of the virtual workforce means homebuyers who can’t afford San Francisco will turn to Sacramento. Instead of Brooklyn, young couples will be drawn to the much lower house prices in Buffalo or Syracuse.
Rural markets will benefit. Buyers will not only get more goods for less money, but improved Wi-Fi service and new infrastructure projects will make once-overlooked parts of the country even more attractive. The effervescence of the real estate market will lead to a geographical redistribution of wealth.
And we’ll see a stronger focus on home value. Many owners will decide that it makes the most financial sense to stay put and upgrade for added value. There are more ways than ever to finance home renovations beyond traditional options like HELOCs, personal loans, and credit cards. An affordable alternative is the Property-Rated Clean Energy Program, or PACE, which allows homeowners to fund energy efficiency and resiliency upgrades up front and then reimburse costs over time.
The evolution of housing
Empty baby boomers who don’t want to sell their homes will install new solar panels, bathrooms, kitchens and patios to improve the value of their home. Adventurous young people will buy homes in areas of the city that have seen better days and renovate them. I believe we will see more gentrification and an increase in the value of townhouses.
The rental market will continue to grow and evolve. Apartment rents in desirable large cities like New York, San Francisco and Chicago, which fell during the pandemic, are picking up steadily. And in the suburbs, there will be more built-for-rent communities like Las Casa in Windrose, a gated subdivision of single-family homes outside of Phoenix, which developers are building to rent, not sell.
A tight and sustained housing market will, unfortunately, also mean that more people with lower wages will be excluded from the homeownership market, perhaps permanently. Service workers, government officials and even teachers and nurses who cannot take advantage of virtual workplaces and have to live in or near expensive cities simply cannot afford to buy, even if the rates are low. interest remains low. There will be less affordable housing, and that’s not good.
Of course, a prolonged real estate boom is not guaranteed. An unexpected geopolitical event, a resurgence of the pandemic, a severe recession, a 9/11 ‘black swan’ type incident, or the bursting of a superheated asset bubble could make life very different.
But in all likelihood, buyers and sellers will spend at least the next few years – if not many more – grappling with the tough decisions of when to pull the trigger and buy or sell? How far should buyers stretch their budgets? Where should sellers go after the sale? How much should current and new owners spend on improvements to increase value?
The good news is that if Americans are indeed engrossed in these kinds of spending assessments in the years to come, the economy will inevitably benefit.
Greg Saunders is Chief Financial Officer of Ygrene, a financial services company focused on financing energy efficient homes.