May 31, 2021
By Saeed Ghaffari
Variables with Major Impact on Residential Real Estate Market
If you have a degree in economics, you may have an idea with what’s going on in today’s crazy real estate market and have a projection into where it’s headed. But if you are a non-economy major with interest in the real estate market, if you are not shocked, I am sure you are a bit puzzled with how the market is holding so strongly in favor of sellers with such highly unprecedented appreciation in values. Additionally, are you wondering what has contributed to the current market conditions and where it might be headed!?
What you are about to read in this report is not an economist’s point of view on the market, rather, the observation of a 30+ year veteran of real estate professional as a lender, investor and entrepreneur who has seen pretty much all sorts of real estate markets and the factors and variables contributing to their conditions.
Let’s start with why the market is so strong despite the pandemic and its perceived impact in slowing the economy.
The pandemic may have slowed down the economy in certain industries such as restaurants, travel, tourist and airlines. But it also has boosted the economy in other areas, such as online education, video communication, health and safety products, gardening products, cleaning products, e-commerce, deliveries, IT technology and I can go on and on with a countless number of other businesses. What’s highlighted on social media, in the news and always talked about among people are the negatives. With a little digging and a deeper observation, the pandemic has helped more businesses than hurt.
On the other hand, the people in the industries impacted negatively by the pandemic have been receiving some sort of government assistance, mortgage forbearance or tenant assistance, enabling them to spend on the basic necessities and more. Not only that, there are many who are not hurting economically but are hiding or falsely reporting their income and taking advantages of government assistance programs and mortgage forbearances, increasing their spending power.
On this note, at least currently, the pandemic has fueled the spending power and it is only one element keeping the real estate market so strong.
Additionally, the pandemic has forced many businesses including schools and colleges to go virtual and conduct their operation online. This has boosted the need for additional space in residences, creating a demand for more housing.
Let’s step away from the pandemic and shift our attention on the mortgage interest rates. The rates in the 2’s and 3’s are also unprecedented. These are historic lows and improve people’s purchase power dramatically. Also, the stated income mortgages, loan products not requiring the proof of income have been back for a while with interest rate in the 4’s. Investor loan products, equity based loans designed for fix and flip investor offering 80% to 90% of the purchase price and up to 100% of the improvement cost are widely used these days by investors all across the country.
In order to buy a home, one must have or feel the need for one, have the down payment, and qualify for and be able to afford the mortgage payment. With the world going virtual, the need has been created. Flexible loan products and more lenient underwriting guidelines, afforded qualification to prospective buyers. With the low interest rates the purchase power and the affordability has been enhanced, enticing people to sell and upgrade their lifestyle into bigger homes in better neighborhoods and bringing first time buyers to the market. All in all, not to mention the herd mentality and the power of real estate marketing and advertising, every element necessary for a perfect storm is currently in the market, creating a frenzy buyer market pushing the prices through the ceiling.
Here is the million dollar question: Where is it going from here?
I don’t have a crystal ball or a degree in economy to foresee the future. But I think I can use my 30+ years in the industry to shed light on the variables affecting the real estate market logically and let the readers come to their own conclusion.
To tackle this, let’s allude to the first principle in economy, the law of supply and demand. When the demand is high and the supply is low, price goes up. The variables contributing to a higher demand moving into the future are as follows:
- Virtual World: The world is going virtual. Actually the virtualization of the world had been started way before the pandemic. All the pandemic did was to bring it to light and speed it up. With a virtual world, the need for residential space will be greater and in the immediate future, the supply may not keep up with the pace for demand, keeping the prices steady or increasing.
- U. S. Foreign Policy / Immigration: With the democrats in charge of the country, U.S. is more welcoming to immigrants and their contribution to our economy. With a more open policy, it is expected to see a bigger influx of foreign investors to our country than the past four years. Many of them from the Asian and middle eastern countries, with the propensity to invest in real estate. This is significant as they come with deep pockets and a taste for high end properties and investment opportunities.
- Money Supply: Lower interest rates, flexible underwriting guidelines and loan products will continue to afford the funds needed towards the purchase of a home, keeping our own citizens in the market.
Aside from the basic laws of supply and demand, other factors and variables should be taken into consideration when trying to project the direction of the market. Here are the two most important ones that come to mind:
- Post-Pandemic Impact: Pandemic has some lasting and some short lived effects in our lives and economy. I don’t consider myself qualified, certainly not to write on the lasting effects of the pandemic. But what I see coming soon is that we are nearing the end of the pandemic and we’ll be getting back to our normal lives, meaning government assistances going away, mortgage forbearances lifting, unemployment continuing in certain industries. All this will bring a number of distressed sellers to the market. Not necessarily a flood of foreclosures alike of 2008 meltdown, but certainly people who can’t afford to hold on to their properties and must sell under pressure. Distressed sellers will impact the prices adversely, especially if and when there are not sporadic.
- Historic Real Estate Cycles: Real estate market is cyclical. History shows it auto-corrects itself in about very 10 years. In other words values adjust, supply and demand adjusts and an equilibrium takes over the real estate activity in the market. Why it happens and what causes this phenomena is beyond my knowledge and the scope of this report. You may need to ask a person with a degree in microeconomics to better understand it. That said, the last downward adjustment in the market came in 2008 with the big financial market meltdown. The market has been on the rise for a while to its own detriment and the 10 year cyclical auto correction is due any time. The cycle does move back and forth a year or two hear and there, due to unaccounted variables such as the pandemic, wars, and other natural and manmade phenomenon, but it is inevitable. With that on the horizon, one should not be majorly surprised if the market take turn start softening.
The combination of all these factors and variable, the ones in favor of high demand in the near future and the latter ones calling for downward adjustment, the presence of them together simultaneously makes this market more unpredictable than ever. In consideration with everything said above, here are my last 2 cents on the subject. It is my opinion that if once wants or has to sell a property in next 3 to 5 years, now is the best time to put it on the market. If one has to buy property now, must be prepared for a hard ride, competing with multiple offers, offering prices higher than the listing price and putting up with sellers’ demands and sometimes unreasonable terms and conditions.
For data specific to your local market, we have expert real estate professionals listed on M&M Expert Panel under the real estate column. Additional real estate services maybe found in M&M Business Directory. For free real estate and mortgage consulting, write to [email protected].
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