The Expert Podcast

Whether you're a homeowner, a renter, want to be a homeowner, or want to sell your house, everybody wants to know what's going to happen with real estate. The future of real estate affects so many industries and even people who aren't directly involved in real estate. Here's a subtle clue about what might be happening: a report from Bloomberg a couple of days ago stated that new home construction has fallen to the slowest pace since May. July starts dropped to 1.2 million, which is below all estimates – and that's the key, it's below estimates.

So, what's going on here? Some of it might have to do with the hurricane, but this is happening at a time when people are expecting interest rates to be cut. You would think if most opinions suggest interest rates will go lower, there should be more houses being built in anticipation of more people wanting to buy. But that's not what’s happening. I think another factor is involved: people's budgets are stretched. There are numerous articles saying that everyone's savings are depleted. All the money from stimulus and COVID relief is gone. Inflation has eaten into many budgets, and credit card debts have skyrocketed.

People have been using their savings and going into debt to maintain their spending habits over the last three to four years. Now, there's no more money to borrow or draw from savings, and prices remain high due to inflation. So, making a big purchase, like buying a bigger house or moving from an apartment to a house, is facing some headwinds. There's going to be less demand for everything, especially homes, because people are getting tapped out. The labor market is doing well, but salaries haven’t increased significantly, even though costs have gone up. And while there are reports that inflation is down, that doesn’t mean prices are going down—it just means the rate of increase has slowed.

Prices are still high; they’re just not rising as quickly. For example, if a dozen eggs used to cost 79 cents, and now it's $3, it might not go up as fast anymore, but it's still going to stay at that high price. Maybe it will only rise to $3.05 or $3.10, but it won't return to 79 cents. Prices won’t necessarily drop—that’s called deflation. Even if inflation hits 0%, prices will still stay the same, and they’re already high. This is a major factor for builders, who are saying, "We're not going to build a ton of houses because we don’t want to be stuck with speculative homes like in 2008." So, they’re hedging their bets and not going crazy with new construction.

What does this mean for housing? If fewer homes are being built, it’s going to contribute to the ongoing housing shortage. Even though some homes are still being built, it's not enough to keep up with the rate at which new households are forming. People are being born, families are separating, and immigrants are arriving. All of these factors create additional demand for housing. Furthermore, some older homes are no longer functional, and these need to be torn down, increasing the need for new homes. The rate of construction isn't keeping up with the demand. The estimate is that there’s a shortage of five to seven million homes, and that number could get worse in the coming years.

So, what can you expect two or three years from now? The housing shortage might be even worse than it is today, which could affect home prices, homelessness, and industries related to real estate, like lumber and furniture. This could have a domino effect on employment in those sectors. It’s just something to think about—we'll look back in a year or two and see what happened.

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