The Expert Podcast

So how does this even happen so interest rates have gone up the real estate market is cooling off meaning less people are buying houses the sales volume is down meaning that the number of homes being sold has dropped down significantly from the last month but the prices are still going up how does that work isn't there supply and demand when less people are buying does that mean that the prices should go down how does this happen is this some kind of twilight zone we're in let's take a closer look at the numbers.

And see what's really going on according to the article the real estate market is slowing down but that doesn't mean home prices are getting more affordable and it says yet it says actually prices and rents are still going up in fact this does apply to rents we're seeing in some markets people are bidding up rental prices they're going into a property management company or landlord and seeing a rent advertised for 2200 and says look i'll pay 2 600 i just want this property that way they eliminate the competition that are also putting in applications.

Why does this happen well it's a sign of how hard it'll be for the fred for the fed to break the back of rising inflation meaning that the federal reserve bank is trying hard to slow down inflation of everything gas prices food interest rates insurance and home prices and the rate the way they're doing is raising interest rates on mortgages but it's not an easy fix doesn't happen all of a sudden by itself in fact redfin which is a major insurance company our major real estate company says the affordable housing problem is going to stick around no matter what in the face of rising interest rates why the u.s does not have enough homes to meet demand even as fewer people want to buy.

And this is something that we've seen for years for the last roughly 24 years even during the housing bubble of 2007 the number of homes that were built did not equal the increased number of home buyers or or households that were needed it was a slow reversal of volume absorption there was a spike in the number of homes built in 2005 through 2008 but even that spike didn't make up the difference for the deficiency in the number of houses look the the population is growing and it's growing because there's people being born and households being created people moving to the us from other countries and every one of those people or at least 2.5 of them need a house to live in and because of that increase in the number of people you need more housing units housing stock they just weren't built fast enough.

Now that was a big opportunity we had when interest rates were two and three percent for the last 10 years or so there was a good opportunity to build many many houses but since it was in the private sector and a lot of home builders were still stinging still had kind of sellers remorse from the 2008 housing crash nobody really wanted to step up and build a bunch of houses and get left holding the bag but it was just a math problem you could have seen this coming a mile away there was already a shortage of homes and that pent-up demand that pressure was partially being absorbed because there was an increase in homelessness there was also some absorption from apartment complexes that's one type of uh community that was built in a lot of areas those three-story large apartment complexes you saw absorbed a lot of that millennial gen z um demographic because they were first coming into adulthood and moving into an apartment but at some point everybody wants to buy a house or condo and there weren't enough of those and so that move up wave has no place to go.

What does that mean for the market the market is grim and will soon get grimmer according to ian shepherdson chief economist at pantheon macroeconomics right now there's a 2.6 supply still low it's an increase but it's still way way low it's something that the u.s market would need to get used to the volume wasn't absorbed by new construction home prices went up because a lot of the people that were in apartments had a sense of urgency because of the pandemic had a sense of urgency because they realized that travel and entertainment and eating out wasn't as important as having a house so the apartment model kind of went away so all those people wanted to move to houses but even apartments had a high demands in the last year or two.

This only gets solved when a very large number of homes are produced for people to live in that's not something like cranking up a factory that makes golf clubs not something like cranking up a factory that makes even cars building a home takes a long time first you have to acquire the land you know land acquisition is the first step of a general contractor then you have to have planning zoning permits layout infrastructure roads this can take several years in many cases so a fast fix for this doesn't exist even if you say well we're going to build workforce housing going to build um density housing urban fill-in housing the problem is that still takes time and the costs are more than what the roi is for capitalizing even rents that are subsidized.

The math does not show that this problem resolves itself even though emotionally and from a historical standpoint people might think well prices went up so there's going to be a crash the math is not there to absorb the number of people in the market that want to buy a house that still don't have a house what's your opinion put them in the comments.