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5 Reasons Why Real Estate Prices Are So High

The biggest news for residential real estate recently has been the incredible run up in housing prices. In a lot of markets, houses get sold a few days after going on the market for way over list price. To some, it reminds them of the housing market from 2004-2007 right before financial crisis of 2008.


As I explained in a recent blog post, I don’t think we’ll see a tsunami of foreclosures in the near future so we won’t see a corresponding nose dive in the real estate market. So, why is the real estate market acting the way it is and what should we expect in the coming year?


Supply and Inflation


Basic economics:


1. Low Supply results in Higher Prices.

2. Too many dollars in circulation results in Higher Asset Prices.

Real Estate supply is lower than normal because of COVID and its effects on the economy. A larger money supply is the result of the incredible amount of government stimulus and the Federal Reserves’ efforts to support the economy.

Let’s talk about supply first and the reasons that contribute to the reduction of housing supply.


1. Sellers Not Listing Homes on the Market


At the beginning of the COVID related lockdowns (March, 2020), fearful homeowners that didn’t have to sell, stayed at home and didn’t list their homes for sale. Maybe they didn’t like the idea of strangers coming into their homes during a pandemic. Some took social distancing to the extreme and became hermits for a while.


We probably have some fearful homeowners still left but now we have an increase in a different kind of fearful homeowner. Sure, you could sell now and get a great price for your home but what are your chances of successfully buying your next home?


For me and my family, we’re ready to upgrade to a bigger house but we’re not willing to take the risk and endure the stress of not being able to find the right follow on house to move into. We’re willing to wait until the market cools down (and it will.)





2. Lack of Labor Supply in Construction


The job market is extremely tight right now. There simply aren’t enough people looking for work to fill the demand.


At the beginning of the lockdowns, workers may have been prevented from working. Some of them caught COVID and were out of the workforce until they recovered. Others were afraid of getting sick themselves.


3. Lack of Materials due to Supply Chain Issues


Supply chain disruptions meant that it took longer to get building materials for construction jobs. This meant that it took longer than normal to build houses. It meant that prices went higher adding to the costs of building that new housing.


4. Government Lockdowns & Shutdowns


Foreclosure & eviction moratoria reduced housing supply. Fewer foreclosures meant fewer foreclosure sales to investors at the court house steps. It meant lenders took back fewer houses as REO’s (Real Estate Owned), which means fewer houses to add to the supply of houses to sell.


No evictions mean less houses that are available for rent or for sale by owners that want to.

Some local and state governments closed or had reduced hours of operations. This made it more difficult and it took longer to get building permits and record documents. These added to the timelines to renovate properties and to build new ones.


Court systems became jammed up with cases. Many courts adjusted and started using Zoom to hold hearings. Some courts imposed their own moratoria on foreclosures and evictions. All of these things slowed down the operations of court systems across the country.


A slower court system meant less foreclosures & evictions resulting in less homes for the housing supply.


5. Inflationary Trends


The federal government has been very proactive in providing people with economic assistance through the Paycheck Protection Program, Small Business Administration economic injury loans, direct stimulus checks, child tax credits, and numerous other programs. All of this added money supply means that we now have more dollars chasing less than the normal supply of housing.


The Federal Reserve was worried about keeping the economy supported during the lockdowns and the negative impacts these had on people being able to work or run their businesses. Now, the focus is changing as the inflationary effects are being more clearly seen and felt.


Conclusion


Real estate prices are going to stay high until the factors that affected real estate housing supply diminish in importance. It takes some time to ramp up building so it might take a year or more to get back to a more normal market. As it does though, every additional house that comes on the market will act to cool down the market.


Inflationary effects are a different story. How long will it take for the money supply to get to a more normal level, which would reduce the inflationary effects that we’re seeing throughout the economy?


History shows that everything reverts to the mean eventually. Supply will come back. Housing prices will cool down. Hopefully, it will flatten as more supply enters the market.

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