Housing – Where We Are and What It Possibly Means for the Future for Investors

By Douglas Katz – 08/31/2022

As the summer comes to a close and the market is no closer to any predictability, more and more organizations are adjusting their forecasts for the coming months and years to better reflect this craziness.

To understand where we are, it helps to see where we have come since the last major even, namely 2008.  FORTUNE recently published a great article, How Homeownership Has Changed Since The Great Housing Bubble And Crash, covering this subject.  The article covers a great deal of specifics, but the real take away is that homeownership has increased in the wealthiest segments of the country as defined by earning $100,000 or more. According to their analysis, the increase was not linear and was most pronounced as the household income increased.  Families making under $100,000 faced declines in homeownership with the most negative impact for incomes of $35,000 or less.   This definitely points to an growing affordability gap that became even more pronounced in recent years with unprecedented appreciation and that for a large portion of the population owning a home will be an unobtainable goal and renting will be their only option.

Fortune’s analysis is especially interesting as it comes when many organizations are updating their forecasts about the near term housing pricing and valuation.  Housing was increasing at an unbelievable pace up until this year when it stalled.  While not yet a crash, most if not all forecasts are for continued slow growth for some markets and with some even going negative.  This may help with home affordability for some but likely only the ones in the aforementioned wealthiest category or those in less desirable geographical locations seeing the most profound drops, which was also a segment identified by Fortune as a segment of increased ownership.  For everyone else, the pain will likely continue as things like inflation and increased mortgage rates outrun any benefit for slowing values.

Finally, the rental market, specifically long-term rentals, continues to be tight in most areas with low vacancies and high rents.  Rental homes are part of the total properties and the scarcity we are seeing in the purchase market is applicable to the rental market.  In addition, the last five or so years has seen an immense growth in short-term rentals has been astonishing.  While a great source of income for entrepreneurial real estate investors, the short-term rental growth has further exacerbated the shortage of homes both for purchases and long-term rentals.  Unless there is a major shift or significantly increased inventory, there is likely to be little change in the potential in rental.  This is further supported by big money from players like Jeff Bezos moving into the rental space with the Arrived Homes platform.

One saving grace for housing would be the result of hard times for everybody with a recession and cooling of the economy.  Unless you have been completely disconnected from reality of the economy and the pendulum swing as financial markets correct.  We will get higher interest rates, higher unemployment and other negative factors.  As a result we will also get layoffs and other financial hardship for homeowners.  Many of these families are just emerging from COVID forbearance and may still be financially vulnerable.  Foreclosures, short sales and just necessity based sales will become more common and, although not a 2008 type crash, it will bump up the inventory.

Unless things really change, I think flipping will remain a less common strategy as the numbers still do not work as prices are still high, inflationary pressures are keeping material costs high and buyers have hit pause with no good predictions of when they will again start buying in mass.  Fannie Mae has communicated their belief that rates will return to the mid-4% range in 2023, but there is a lot of time between now and then.  Rental properties will likely still dominate as investors either look to exploit the tight rental market or to short-term rentals to benefit from the vacation and travel markets which have regained a lot of pre-COVID profitability.

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