US Housing Market Analysis and Forecast – Are We In a Bubble?

Hello, and welcome to another episode of Passive Real Estate Investing. I’m your host Marco Santarelli and to all of my US-based listeners, happy belated independence day. I’m recording this a couple of days after July 4th, and I guess I just took a week off last week. So I apologize for not getting an episode out there. Having said that, I want to remind you that success doesn’t come from what you do. Occasionally. It comes from what you do consistently. And part of that, which is something that I talk about all the time is to constantly or consistently educate yourself. You always want to be on top of things. Now that doesn’t mean that you need spent hours every day becoming a master at anything, but the more, you know, the more you grow as they say, and you’ve also heard the phrase, the more you learn, the more you earn well, that’s so true.

And I think part of that should be understanding at a high level things about our economy and what is going on in terms of our monetary policy and our fiscal health in this country and what money is and what money is all about. And the fact that it is a tool that you can use to leverage, to increase the amount of free time you have in your life. And you build your lifestyle around that.

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So what I want to do today is talk about the US economy to a very small degree, but also talk about the health of the housing market in general, and a bit of a forecast going forward for the rest of 2021, and maybe into the years to come. Now, I don’t have a crystal ball. However, there are a lot of data points out there that we can look at and make assumptions and predictions on that typically play out in the greater picture.

So when you understand what’s going on, you can get a pretty good sense of what is to come in the coming months and coming years in terms of housing or inflation or monetary policy or wages or employment or unemployment, whatever it may be. And I think it’s a good idea to stay on top of that stuff. You don’t need to be an expert or spend hours every week on top of it. But my goal here is to give you a taste of it. I think it will be helpful. And I will probably do this every quarter where I have a quarterly us analysis and forecast. I might do it monthly. I’m not sure yet. We’ll just see how it goes. And maybe I’ll just gauge that based on the feedback I get from both my team, as well as you, the listeners, because I do get emails from time to time saying, Hey, I liked this.

Or didn’t like that. Often some people will say, Hey, I have a question about what you talked about, or they might say, Hey, I really liked what you covered. And it would be great to hear more of that. And one of those examples is market spotlights, where we just interview a provider that we have in a particular local market to talk about that market, why it makes sense to invest there and what’s going on and what are the opportunities? I think people have been finding that very helpful. So I’ll probably do more of those going forward, but I’m always open to your feedback and your suggestions, and if there’s something specific or general, but you want me to cover by all means, let me know. Well, having said that, let’s just dive right on into it here. So let’s start with this crazy unprecedented federal spending that we have seen here over the last year, year and a half.

And that all begins with the cares act that came out. I believe it was March of 2020, which was a whopping $2.2 trillion. That’s with a T. And that is a very, very big number for those of you that can wrap your head around that. But you take that cares act at 2.2 trillion, and you add the cares extension that came shortly thereafter of almost $1 trillion. It was 0.9 trillion. And then the American rescue plan, which was another $1.2 trillion. And if you add that up, you have a $5 trillion injection into the economy. That is a lot of currency that is working its way into the economy and swishing around. And why is that important? Well, before I tell you the answer to that, let’s just look at what is potentially around the corner to add to that $5 trillion. There’s the American jobs act, which has proposed at $2.7 trillion, more than half of what has already been spent here in the last year and a half.

And on top of that, there’s the potential for a second infrastructure bill. And if that is proposed and passed, we are potentially looking at another two to $3 trillion. So we’ve got 5 trillion spent with potentially another 5 trillion on top of that, which gives us approximately $10 trillion. If you really think about that and compare it to how much has been spent over the last hundred years in this country, you will see that we are essentially doubling down every time we have to come to the table with a federal spending rescue plan of some kind. And this didn’t start back in 2008 with the great recession that came out of the housing market, implosion, it continues to repeat itself. It seems like almost every 10 years or so, but what’s the point of all this? Why is all this federal spending very significant? Well, I guess there’s two things that play into this number one is how it’s going to juice or supercharge the economy at already has, but will continue to supercharge the economy through the end of this year and into 2022 and so on.

And that’s great for business, at least for businesses that can take advantage of it. We’ve had the PPP, the paycheck protection program, which was $670 billion plus another 325 billion. And that continues to go on through the rest of this year. We have unemployment that is in chunks of 250 billion plus a 44 billion chunk, plus another 120 billion chunk. Plus another 206 billion unemployment chunk that is in effect right now. We have all the student loan forbearance that’s going on through the end of September of this year, plus all the mortgage forbearance that has been going on and will continue to the end of the second quarter, beginning of the third quarter and on and on it goes, plus there’s another proposed $146 billion for expanded tax credits. And this is part of the proposed American rescue plan bill that is in Congress right now. So what does all this mean?

Well, first of all, it’s supercharging the economy. So it was great for business. It’s also helping to fuel what we’re seeing in terms of the housing market, because this is just adding to what builders and people within the economy that are benefiting from all this capital, this free capital or credit that’s being pumped into the economy. It’s working its way into different sectors, including the housing market. So that’s going to juice the economy and also continue to stimulate the housing sector. But in addition to that, and one of my concerns is what it’s doing in terms of inflation. So the wall street journal did a survey amongst the economist. I forgot how many economists were in this, but they were asked, what do they expect to see in terms of inflation over the next three years, due to the $1.9 trillion American rescue plan, which has proposed, we’ll actually not propose it was passed.

I take that back. Now, keep in mind everybody’s opinion is all over the board. And then you’ve got what the government reports as the target rate, the CPI of 2%. However, I think most people who live in the real world know that inflation has been much more than 2% and you can do a Google search and look at the numbers that are coming out in terms of inflation rates in transportation utilities and especially food, which has been largely in the double digit. In fact, I’ve seen one article that reported that meats had increased almost 22% over the last 12 months. That’s a lot of inflation, but going back to this wall street journal survey, it showed that less than 2% of these economists that were surveyed predict that inflation is going to stay below 2%. And that was 3% of those surveyed 16% of those people surveyed are going to say or predict that inflation is going to be around 2% similar to the CPI and what the feds are predicting as the base rate of inflation.

And I really think that is under reported all the time, because it’s really just a number that the media can off of. But interestingly enough, 81% this time around of the economists surveyed predict and expect inflation to be higher than 2%. And that should be no surprise. I mean, it doesn’t take a rocket scientist to figure that out, but 81% believe that inflation will be higher than 2% over the next six months to three years. And that’s just going to continue to increase as the months and years go by as more and more of the stimulus money currency works, it’s waiting to the system. Why is that important to us as real estate investors? Well, twofold, number one, remember that inflation creates a situation where the value of the dollar goes down, therefore assets go up in nominal terms. And in fact, in real terms, so your housing, which is nothing but a bunch of commodities is going to go up in price.

Now that doesn’t mean the value is increasing, but the price certainly does. So that’s price inflation. The other benefit to us as real estate investors, if you’re in the game or looking to get in the game is that your debt being denominated in dollars will become worth less each and every year. So the higher the rate of inflation, the less valuable that debt is. It does not adjust for inflation, which is a great thing for us as real estate investors. So that means that every year you’re paying off that mortgage or that loan on your assets, like your real estate and cheaper and cheaper dollars. That’s a beautiful thing if you have debt. And that’s why it’s interesting to think about the concept of having as much debt as possible. Now I’m talking about good debt, not bad debt, mortgage debt. So the more assets you control using borrowed dollars that are fixed in terms of its interest rate, you continue to pay that off with cheaper and cheaper dollars every single year.

Meanwhile, the price goes up because of price inflation. So this is the whole thing about inflation. I can almost guarantee you that it’s going to be higher than 2%. It has been for months, if not years. And we all know that when we talk about the real rate of inflation, but it’s expected to continue being that way for the next three plus years. So keep that in mind. Now let’s transition briefly to unemployment. We know that it spiked in 2020 because of COVID, but it has come down rapidly. In fact, there are a lot of employers all around the country right now who are struggling to hire, even though the official unemployment rate now has dropped down to 6.1% or even lower as of may keep in mind that number is coming down to where it was before COVID, which was somewhere around 6% or just under.

And we are going to see that continue, because right now there seems to be a struggle, getting employers, uh, employees into employment situations. And it’s funny because I’ve even seen a sign recently that McDonald’s is hiring at $18 an hour. So, you know, there’s a bit of a struggle. The good thing about this is that as more and more people get employed, it will continue to keep the economy running smoothly and growing. And that means more people are employed and can afford rents and mortgages. But that gets into the topic of affordability, which we’ll talk about here in a moment. So let me just summarize these macro economic factors if you will. So right now we are seeing good economic growth. It has been stable. In fact, it’s actually been accelerating here since late last year. All the leading economic indicators are remaining strong, which is a good thing a year ago.

We didn’t see strong leading economic indicators. So that’s a positive sign for the US economy. And to a large degree, even the global economy affordability remains relatively average. It’s been slipping a little bit since last year because price appreciation has been so rapid. The existing home market has strong new home market is strong. Housing supply remains strong. However, there is a bit of a struggle in keeping up with the demand for housing. And so I expect that over the next 12 months that to be dropping, so housing supply will continue to drop. And that’s one of the things we’re struggling with with our investor clients is that we are sometimes having a hard time getting inventory for you, our clients on a rapid basis. We always get it. That’s not a problem. It’s just not readily available. The day we’re talking to you, it might be a week or two or maybe a little bit longer, depending on what the specific criteria is of what you’re looking for.

Now, as far as housing market conditions, this is very interesting. We have seen a shift over this past six months or so of this year. In fact, it actually started around October, November of last year, where the top 50 housing markets in the U S have shifted from being a relatively normal market to a strong or very strong market in terms of price, growth, price appreciation, especially with new home sales have really taken off. Currently 82% of those top 50 markets are what we would call in very strong price growth mode. So inventory shrinking prices are going up rapidly. And it’s obviously creating a bit of an issue for people who are trying to buy a home in these areas, or even as a bill to rent rental. And this is also true for the existing home market, not just the new home sales market.

And so all this means is that new home sales are brisk and price appreciation is very strong. And that’s a good thing for these new communities and for builders out there that are selling new construction and new homes, but it creates an issue when you’re trying to get into that market, especially when they are metering and pacing their sales. Now, because of that strong demand. Now in terms of price appreciation forecasts for this year for 2021, we’re going to break this down into two sections, new homes and the resale market. First of all, let’s take a look at what other sources in the industry are predicting right now. The national association of realtors is forecasting a 3% price appreciation for the year 2021 in terms of new construction. That’s on the low end. When you look at the wall street journal economic survey, the one I was talking to you about before their estimate or prediction is that we’re going to see a 3.2% price appreciation this year.

Obviously, if you’re listening to this now in July of 2021, you’ll know that we’ve already far surpassed those numbers. This is what their prediction was. And this is actually a prediction they had earlier this year, you know, dating various months, but typically around the April timeframe CoreLogic, which is a big data aggregator, they predicted a 3.5% price appreciation for this year. The Zillow economic survey predicted a 6% price appreciation. And I was going off of this about three months ago, I was estimating or predicting myself that we would probably see somewhere between a six to 9% price appreciation on average across various markets in the US this year. Well, we’re now surpassing that national association of realtors prediction for the resale market. Not new home construction was 9.2% Zillow predicted 9.9%. Fannie Mae was talking about an 11.5% price appreciation for the year 2021.

Now Moody’s was predicting 11.6% almost exactly the same as Fannie Mae. What our own internal data is showing in the resale market for this year 20 21, 12 months is a 13.8% price appreciation. And in the new home sales market, new construction, our internal data is showing a 16.1% price appreciation forecast. So think about this. We have this very wide range, obviously we’ve surpassed the 6% price appreciation. The year’s not over that can fluctuate, but we have reason to believe that that’s going to continue to appreciate. And so it is not unreasonable to expect that by the end of this year, that we will see price appreciation in general, across all markets, all major markets to be somewhere in the 14 to 16% range, depending on whether you’re talking about resale or a new construction, that is a very, very strong year in terms of price growth.

And probably one of the strongest that we have seen in the last 10 years. And we will probably see in the foreseeable future, this is definitely going to be one of the strong years. And I’ll talk about that here in a minute and a little further. So moving on, let’s take a minute and talk about mortgage rates. So we still seeing historically low mortgage interest rates somewhere around the 3.3% interest rate on a 30 year fixed conforming mortgage. And so if you look at the 12 month averages here, that’s what we’ve been seeing is in the mid 3% range. However, the forecast for this year is going to be pretty consistent with that. It’s predicted to stay around 3.3%. However, we do expect to see a bump in that mortgage rate on the 30 year fixed rate conforming mortgage to about 3.7. So we’re still sub 4%.

And also the forecast for 2023 is about 3.9%. Again, marginally higher. And for 2024, which I know is about three years out, is still going to be around that 4%. So the bottom line here is that interest rates are going to stay very low, historically low inch up over the next two to three years and remain at or below that 4% interest rate level. So again, very, very cheap money. And the thing is, is I believe that we really can’t raise mortgage rates too much, too fast, because it will slow down the housing market. We don’t want to cripple the housing market right now because it is the shining star, as far as the sector in our economy that is humming along and very bright and really keeping our GDP up there. Will that lead to a bubble? Um, well again, when we talk about bubbles, we have to talk about that in terms of specific markets and sub markets, because you can’t just generalize that across the board in terms of a us housing market, because a us housing market doesn’t exist.

All real estate is local. We have over 400 metropolitan areas and over a thousand, if you’re looking at sub markets. So we have to talk about that very carefully and be very specific about what we’re talking about now, as far as affordability, just to touch on this, we have seen prices appreciate rapidly over the last 12 plus months. And so Ford ability has been dropping, especially since the second quarter of 2020. And that’s because there was this pent up demand for housing. It came out very quickly with the low mortgage rates yet sellers weren’t putting inventory out on the market. Like they normally do come the spring. And so there was this drop in supply strong demand, and that pushed prices up rapidly. So right now we’re seeing affordability continue to drop. However, we do expect that to top out around 2023 and then pull back to becoming more affordable as that year unfolds.

But time will tell, we’ll see what happens, but I will say that affordability is expected to worsen through 2022 and into 2023 because of the rapid home price appreciation, as well as the marginal increase in mortgage rates that we expect to see. So anyway, this is a moving variable, a moving target, and we just have to keep an on it. Now, for those of you out there that are thinking that we are going to see this rush of new foreclosures coming out onto the market because of forbearances and whatnot. I’ve had this conversation so many times with so many people that think that we’re going to see this wave of new foreclosures coming along, and there’s going to be all these great deals to be scooped up. Well, I hate to burst your bubble, but that is not likely to happen. The percentage of mortgages that are underwater right now.

Well, measuring it now, but based on data from the fourth quarter of 2020 is eight minuscule 2.8%. And guess what, when those properties, if, and when those properties actually do go through the foreclosure process and become a bank owned REO, and then come out onto the market, they’re going to be scooped up so quickly that the demand for that inventory, that’s waiting out there to pick it up, is going to be so strong. That prices are probably going to be bid up very quickly. And because it’s going to be a very competitive environment. So keep in mind that there’s very little foreclosure inventory and whatever there is. And if it does come out into the public market, public demand for it is going to be so strong that it’s going to be gobbled up quickly. And it’ll probably be scooped up at higher prices because everybody’s going to be competing for it.

Now, as far as affordability again, although that remains relatively speaking weak and is not expected to improve in the near term, the good news is that mortgage rates are very low, uh, both on fixed and adjustable rate mortgages. They are going to continue to stay low. We see a bit of a trend in that decreasing, and that just means that credit is going to be available and affordable for a lot of people, especially those that qualify for it. I guess that is really the only negative thing as far as what I am going to report today. And that is this. If you look at the U S median home price and divided by the income as a ratio that unfortunately has been increasing, which means that housing in general is poor in terms of affordability. And so that is continuing to increase. And that just means that fewer people who are on the fringe, on the border in terms of affordability, of being able to buy their first home or their next home or moving up might not be able to do so until things change.

And that means one of two things that mortgage rates drop a little more to increase that affordability. And that’s a major variable or prices plateau, or maybe come down in specific markets, the markets that those people are actually looking to purchase in. So really that’s the only negative factor out there. Everything else is really just a shining pot spot in terms of factors that lend into a strong housing market, or in terms of you investing in real estate. So what are we going to expect for the rest of this year? Well, let’s just summarize it here. As we bring this to a close, it is reasonable to expect that we’re going to see a strong housing market for the rest of this year, but it will cool off a little bit as we get towards the end of the year. And that is primarily driven by affordability challenges.

We had a very strong early 20, 21 with strong price appreciation, but we do expect that to decelerate as the year goes on and into the next year, we are also going to see a strong job market continue here for the rest of the year. And although wages are rising and rising significantly in many sectors, the thing is, is that because of inflation and with housing and food and utilities, those prices are rising significantly faster than wages are rising right now. So that’s leading to a greater increase in unaffordability factor that we were talking about before. However, if you’re in the manufacturing or the services sector of the economy right now, those two sector specifically are expanding at multi-decade highs. So those are areas that we’re seeing a lot of opportunity and growth, and that’s great if you’re in manufacturing or the service sector, hopefully that’s benefiting you, but this is also true in the education space, the healthcare sector, leisure and hospitality as the well, let’s call it a post COVID economy continues to open up.

So we’re seeing this all across the country, more so in some states than others, but I think that will lend to racing the wheels and the gears of the economy more as we move forward. However, at the same time, what we’ve been seeing is that demand has been increasing for commodities and housing. That seems to be the biggest problem. And we’ve been compounding this problem with supply chain bottlenecks and in many places, a lack of labor. So that’s been holding back these industries, interestingly enough, small businesses today across the country are reporting that the quality of labor for them is the single most important problem they’re experiencing today. It’s not so much the lack of labor, but the quality of labor. So that’s an interesting fact, but the thing we’re seeing on the new home construction front, which is a growing portion of the inventory that we are selling to investors these days, is that a combination of increasing costs for labor, as well as materials have forced the builders to literally limit or meter the number of sales that they are letting out every week or every month as they catch up on the backlog of reservations and contracts coming in.

So it’s an interesting problem, and they would call it a good problem to have because they’re outselling their existing supply and what they can produce. In summary, we see single family permits to increase the rest of this year mortgage rates to remain below 4% for the next several years, that will support a healthy demand for new homes. We expect to about 16% or more total price appreciation across the board for the year 2021 in terms of housing. And this obviously is because of low levels of supply rising costs that the builders need to obviously pass on to the consumer. But having said that that price appreciation will definitely slow down as we go into 2022 and 2023 to a more healthy figure in the single digit range. And that will probably be about 7% in 2022 and drop to maybe four or 5% in 2023.

We’ll see us as we, uh, move from quarter to quarter. But having said that again, credit will remain cheap with mortgage rates floating in the three to 4% range through 2024, and that will help keep housing, afloat and support the growth that is there right now in the resale market front, the people who actually paused and held back listing their existing inventory, their existing homes in 2020, we’ll probably reconsider. And come back to that decision here this year in 2021, now that we’re in the middle of the summer and probably for the rest of the year and into 2022, again, as with new homes in the resale market, we will also see price appreciation, slow down considerably as we move into the new year. And that’s probably a good thing for the overall health of the housing market. You just can’t have price appreciation going on as fast as it has indefinitely.

That’s just not sustainable in any way. And one last thing to keep in mind is that as you see prices rise, like they have, you’re seeing equity grow in properties, especially in principle residences, and what that might lead to is a push or a movement towards people moving up and, or to second homes or buying vacation homes. And so you might see a bit of a boom in those areas. In other words, the move up category of housing, as well as second home and vacation homes. And last but not least, I have to make a comment about rents. We’ve seen rents rise rapidly quarter over quarter here for the last probably two to four quarters. But what we will continue to see is rents rise across the nation and continue to accelerate as we have seen them accelerate in many markets, but we expect a 6% increase in rents nationally this year and through 2022 with a tapering off in 2023 of about 5% and maybe a drop down to 3% in 2024.

But for those of you that have rental properties right now, and you haven’t raised rents for a number of years, keep in mind that there’s probably a lot of opportunity there to increase your rents and your net operating income on your properties, because there has been a strong growth in rental rates across the board. So again, a great thing, if you are a property owner and tied with that is of course the whole BFR or bill for rent construction industry. That’s just something we’ve been into recently and quite heavily, again, low supply of this newly built construction is lending right into that. So there is a lack of supply out there and builders are building these built for rent specific homes. And that’s something that has been very attractive and in high demand from many of our clients. So ask us about that. If it’s something that you are interested in or want to learn more about, well, that is it for today.

Again, you know, this was kind of my first crack at it. If you will, about the us housing market and the forecast for the next one to three years, I will continue to compile data on this. And if it’s something you like, they’ll continue to do it. I can probably do this at least once a quarter, if it’s helpful for you, maybe we can do a more summarized version on a monthly basis, but I know some people are not too heavily into the data and they don’t need it as often as a monthly period, but I enjoy doing it. And so I will continue to do it anyway.

That is it for today. I appreciate you listening. Remember to subscribe to the show if you haven’t done so already, it only takes you two seconds to click that subscribe button. If you want to leave us a rating and review on iTunes or wherever, please go ahead and do so. I greatly appreciate that. And again, as always, thanks for listening. I will see you on our next episode.


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