Real Estate: From an almost industry crash in 2020 to record sales and prices in 2022. What’s Next?
So here we are. A little over two years since our lives have been flipped over thanks to COVID-19. At that time (February 2020), when we actually decided as a society that COVID-19 was real and that we should take it seriously, I decided to write my first blog of “Broker Thoughts”. The idea was to write about the Real Estate Industry and the impact the pandemic would have on it. Just to provide an opinion to those interested in the industry that may find it useful to read different perspectives. Predictions are a very difficult endeavor to take on. I know that the hard way. I will leave that to the economists and gurus going forward (maybe I still like to risk a few thoughts still).
I am a Real Estate Broker advising clients in the best way possible. We aim to maximize their returns on investment looking for opportunities where we can add value. So two years ago, I was advising some clients about how to manage their Real Estate portfolio, and the biggest challenge I had was the question: what should I do? should I sell my assets? should I buy more properties? Do Nothing? It was a very difficult set of questions to address. Specially because, the last pandemic before covid-19 was in 2009. They called it “a novel influenza virus”, something similar to a flu, but a little stronger that killed many humans, but it was very small in scale compared to Coronavirus. So for the purpose of this blog, I am going to rule that Covid-19 was a my first pandemic where I had the responsibility to advise clients what to do with their real estate assets. This self-evaluation aims to provide some of the lessons learned with this experience to make sure we do not make the same mistakes in the future.
March 2020
Let’s look back at what we said in 2020 and use it as a comparison baseline against today.
- Market Prices: at the time we though the market was hitting record high prices. Much higher than the pre-crisis of 2008. We thought: “That’s it! With the highest prices in history, the virus, and people stuck in their homes and losing their jobs, who is going to buy houses?”. An for a while, I was right. But only for a very short period of time.
What happened since March 2020? Better yet, let’s see what happened since 1953! The green line reflects home prices adjusted by inflation. Therefore the number is pure home price value without monetary influences.
We thought that home prices would slow down their ascent. We found that for a very short period of uncertainty they stayed in place with some sellers wanting to cash out. But for the most part everybody hit the brakes and withdrew their homes from the market. Mainly for fear of getting infected during showing and meeting people.
The industry reacted extremely well. As son as sellers where pulling out, they began implementing technologies that were use shyly at the time, but soon became mainstream. We are talking about virtual showings, zoom meetings and digital signatures and notarizations. Still the reduction on inventory was drastic. The effect: bidding wars and sellers looking at the possibility of cashing out their properties at values they have never imagined. Buyers desperate to buy a home and escape the confinement of the big city or high density population areas where the risk of contracting the virus was high.
2. Interest Rates for Mortgages: we did not make a specific prediction on interest rates, but it is worth mentioning because of the impact it has on the demand of homes in a market with low inventory. We all know that due to the pandemic, the Government offered assistance to people by sending cash and facilitating other instruments to ease the restrictions implemented to contain the spread of the virus. Amongst other things, the Government maintained the interest rates at historic lows in an effort to maintain the market in motion and alleviate the impact of the pandemic in the economy. This only fueled the real estate market for more demand.
3. Timing: We said that many people who where leveraging their real estate investments with debt will see themselves in trouble due to the uncertainty of the market, the pandemic effect on the housing market and the risk of foreclosure. The effect wasn’t quite dramatic. There were no massive foreclosures due to the “stay” condition that everybody was embracing. The government and the banks where in no position to begin actions against delinquent accounts.
Today
The result was a combination of the factors explained above, that contributed to produce the reverse effect of what we expected:
- House prices increased due to low inventory but also for high demand from relocation of people from big cities to more suburban areas. This situation remains the same, although we are seeing a slight slowdown with houses extending their days on the market and sometimes selling for the listing price and not in bidding wars and above listing price anymore.
- The low inventory was generated in part from the seller’s withdrawal from the market but also from a new construction shortage due to lack of materials and labor. The situation still remains the same after two years and there is no clear outlook as to when it is going to be normalized. Some experts say ” maybe 2024-2025″. We can only hope.
- The government maintaining the interest rates at the lowest levels in history, assisted in generating a perception of opportunity with buyers and seller to keep on trading. The latest actions by the FED, indicate that the time of low interest rates is over. They have to tame inflation. Otherwise the consequences would be worst. We can expect rates of 8-9% by the end of the year which, in our opinion, will affect the buying power of a substantial part of the population and cooling down the real estate market. How much cooling down is the government willing to do is up for debate. I will let the experts and gurus weigh on it.
- Cash availability in the market allowed buyers to temp those reluctant sellers to sell in 2020. This prompted bidding wars in a market with uncertainties. Today, some variables change. Now we have supply issues. Cash still remains the preferred transaction payment mechanism for sellers as it facilities and expedite the transactions. So still, cash is king!
This last point of cash purchases is important to highlight. We said back in 2020, and we say it again today. In markets with uncertainty “cash is king”. That statement held true and it seems to never fail. We recommended our clients to buy in 2020 every property they could get their hands on. Specially, if they had the cash available. Looking for opportunities with those owners that had high mortgages and needed to sell was the right move. Many of our clients followed our advice. The capital gains alone on those transactions were unbelievable. When we consider the purchase price in 2020 and apply the price increase of the properties over the period equity increase if over 20%. And the outlook does not seem to be very different.
What Now?
The market conditions are still strong and it appears that they will remain strong for the next 6-12 months. The supply of homes is still behind and it will take time to catch up with the demand. The process is accelerated by the government intervention by increasing interest rates. That reduces the demand for mortgages for home. The question to answer is: Are cash buyers continue buying at the same pace? Is there an expectation that home prices have hit record highs and now it is time sell and cash out? I think that is the most likely scenario in the 365 days. Here is my ninja tip: if you have cash I suggest that you analyze your numbers carefully and negotiate hard. The worst thing you wan to do is buy at the top of the market to see your equity reduced in 6 months. If you are buying with a mortgage, make sure you understand the pros and cons of buying at the top of the market. Use the appraisal contingency clause to make sure you have the ability to cancel the contract if that appraisal cam below the contract value. Check the terms of your loan and your prepayment penalties in case you commit today at a high rate but wan to refinance when the rates go down again. And they will (maybe in 24-36 months)
That’s all I have for now. Thank you for reading this blog. If you wish, I would appreciate if you leave me your comments. I pay a great deal of attention to what the readers have to say, and usually respond in 48 hours.
Sebastian Manes