CNBC released an article describing the current state of the housing market:
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Rising building materials costs, as well as shortages of land and labor, have left builders unable to bridge the inventory gap, pushing up house prices
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The median house price increased 4.5 percent from a year ago to $269,600 in July
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U.S. home sales fell for a fourth straight month in July
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July's drop marked the longest streak of monthly declines since 2013
Economists polled by Reuters had forecasted existing home sales would rise in July.
What do you guys think of this incorrect forecast? What does this downward trend in sales mean for the housing market?
I don't think this incorrect forecast will have an impact on the market, but I do think it may signal that a turnaround in the market could be looming. If materials, land, and labor costs stop rising, a decline in housing prices and an uptick in sales will likely occur.
I do find it interesting though that home sales are declining despite there being an abundance of capital and rising economic conditions.
Any and all real estate was absolute trash in the 90's despite no wars and good economic times. Anything is possible. You could barely give an apartment building away in 1996.
Bump, curious to see what people think about the current real estate market conditions;
My brother just bought a house for more than he had wished (seller hiked the price once he found out there was interest in the property). He bought the house to serve as a rental property and diversify his income, with my mother serving as a mentor in the process.
It's sort of hard to say. There is still a lot of pent up demand for home ownership since we're nearly at mutli-decade lows of home ownership levels. A higher-than-normal number of people are renters. What is truly the biggest headwind for price increases is the cost of debt service increasing. If rates continue to rise, people will naturally be forced to reduce their bid prices in order to fit their budget. This will put downward pressure on home prices.
Very informative, thanks
Rates won’t have an effect on the price of housing because they are tied to a strong economy. Therefore people have more money.
Also the real interest rate has risen as much as short rates or the 30 year versus variable.
Probably a decent time to take 30 though over variable.
I agree with The Duke above. I’m very interested to see if lending standards remain the same and thus put a downward pressure on home prices OR if lending standards loosen and the acceptable Debt to Income Ratio rises; essentially allowing people to afford more by allowing them to take on more debt. It’s also interesting to see the income distribution gap. I’m in my early 20s and I think just among my age group- I have friends working in CRE/ IBD/ Med/ Tech who are doing very well and others who just have nothing going on. This is super ancillary and not scientific data. But there is actual data showing the growing spread between upper-middle/ wealthy and the lower-middle/ poor.
This is an interesting point to focus in on I think. I really believe that we are going to have a big issue in the next 15-20 years with respect to the overall employment dynamic in the country.
Not sure if anyone saw the graphic that was floating around the inter-webs a week or so ago that showed that the amount of jobs available has actually outpaced the number of people in the workforce looking for jobs. While a lot of people thought this was great news, if you look at the TYPE of jobs this is extremely alarming. Almost all of these openings are in very skilled/niche labor sectors, and I have a theory that our educational system hasn't shifted quickly enough to bridge this gap, and I would expect this trend to continue. So basically my fear is that we have a more pronounced, dystopian future where the population wants to work but is unable to perform the jobs that are in demand, and the jobs that they can perform is replaced by robotic/autonomous labor while the skilled/very technical jobs remain unfilled and can't yet be replaced by technology.
TL;DR version - watch the movie Idiocracy.
MonkeyWrench, I completely agree with you there. That’s why I’m very bullish on multifamily over the very long term. I think as people can afford less and less in real terms, more people will forever rent. I think people are more comfortable with renting with closer proximity to work/ entertainment than moving out further and buying. I recall reading an article about the new hot amenity being Location- where people care more about that than buying a gigantic home out in the desert area (CA specific).
Honestly I basically foresee life being sort of like a hybrid of Tokyo/the Matrix/Wall-E where people pay like 4k/month to basically have a retractable tube-bed in a skyscraper where they plug in their VR headset and have a feeding tube as the 'kitchen'. Then there will be massive 'common areas' in the apartment complexes as 95% of the space will no longer be dedicated to any one unit.
Don't know if I'm more worried about the fact that I have these visions in my head or about the fact that I'm drooling over the management/leasing fees I could save in the future.
Haha isn’t that the original amenity?
Completely agree, good stuff. +1 SB
I ponder this sometimes. In the past the system has been able to retool the population’s skill set, but what if this time the gap coincides with automation and becomes the workforce’s event horizon?
What if wage growth picks up and outpaces inflation? Wouldn’t purchasing power increase and be able to more than justify the increase in debt service? I don’t know how much lower unemployment can realistically get here, but have heard that the labor market is very tight in terms of finding qualified people. We are seeing construction pricing jump as a result of less skilled workers being out there to build our projects. Do you all think wage growth could be on the horizon or are we likely to remain in our current state for some time?
I think the unemployment rate isn’t the full picture. I don’t know if there’s accurate data on underemployment, but that would be very interesting to see. It’s not just people working, but how they’re working. Student loans continue to put negative pressure on DTI (along with outright stupid and dumb spending habits “for the Instagram post”), wage growth remains largely stagnant when looking at the majority of American households, and labor force participation isn’t at an all time high. As prices of housing continue to increase, less and less people will actually be able to afford it. Edit: the BLS has data on underemployment
I agree that there's probably a lot of underemployment and many are forced to wait for their career to move up. I think one of the biggest changes we'll see to come are the retirement of baby boomers. Wage growth will respond much better as baby boomers leave the workforce allowing for promotions to generation X'ers and older millennials. However, its hard to see if baby boomers will give into retirement. Many would probably need to sell their home to obtain the equity needed to fund retirement that was originally lost in the GFC. Even if those boomers offload their homes, where would they go or how could they downsize? Housing is just costing more overall, less purchasing power right now. Every other market has experienced significant price growth on housing, and rent has only grown the same way too.
Unfortunately, we are not in that part of the cycle. The current frictional unemployment rate has caused wage push inflation and therefore, will always lack until a correction. Labor and material prices are up for several reason. One being tariffs which has caused appliance and even items such as nails to increase in cost. The other problem is labor. In coastal markets, home price growth has almost completely priced out laborers. While you can earn $75,000 as a construction superintendent, you need a $120,000 down payment AND household income of $130,000 to buy in Southern California. It's a paradox, but why would you live in poverty with no chance to ever purchase a home so you can work outside in the heat and dust.
The decline in sales is also related to declining inventory balances earlier in the year. Builders do not want to sell homes too quickly, so they're releasing units for sale closer and closer to the completion date which is causing prices to increase. The same way you cant buy a non-optioned BMW (or Tesla!) sitting on a dealer lot, builders load up their homes with options so prices are effectively higher the longer the home is U/C because of options.
Lastly, experienced builders know we are very late in the cycle and do not want to tie up capital for years in the entitlement process given the uncertainty in markets. So if you have $30MM tied up in construction inventory and you cant make new projects pencil buy buying and developing land, you'll increase your pricing to maximize yield because you don't have a use for the capital once returned via home closings.
My only comment would be that superintendents commonly make well over that. $75K could be a superintendent with maybe 2-4 years of experience, which, coming out of school, isn't terrible.
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