By Eric Reich
Unless you’ve been living under a rock, you are all too aware of the extreme run-up in housing prices since the middle of 2020. Prices in some areas have literally doubled in just a few short years. High home prices are great for sellers but not so much for buyers unless you are looking to downsize. For those looking to simply relocate, it depends on where you are coming from and going to that determines if it is a good deal or not. My view is that if you are both selling and buying high, I’m generally okay with that. Same if the market is low, buying and selling at the same time is a lateral move.
How did we get here? In 2020 during the height of the pandemic, the government decided to stimulate the economy out of fears that COVID-19 would severely damage the overall economy. We saw everything closing down and for a brief period of time, even the stock markets dropped radically, falling 30 percent in just under two weeks, something we have never seen before in our lifetimes. This led to reduced interest rate policies, which fell to among the lowest rates we have ever seen. The economy quickly stabilized, but the loose monetary policies remained in place. With interest rates so low, it was hard not to look to buy property because the monthly payments were so cheap. During this time, even though the real estate market was starting to heat up, homebuilding was not. The inability to get labor, and high material prices caused many homebuilders to shy away from large-scale expansion.
Cheap loans, few new homes, and a roaring economy make for an ideal environment for existing home sales to explode. This led to a dramatic increase in housing prices. Add in the fact that we are in the early stages of the largest wealth transfer in history between the greatest generation and baby boomers at or near retirement and all that extra money, much of it being disposable, allowed prices to rise even further since the housing market was flush with cash buyers as well.
Now that interest rates are topping 8 percent, why hasn’t this slowed down the housing market? The high interest rates, which are due to inflation mostly caused by the overly easy monetary policy, are beginning to weaken the economy. This is actually a good thing so that we can get control of inflation. The reason the housing market hasn’t yet seen the effects of the higher rates is due to a few things. First, the higher rates haven’t yet hit the housing market. There is typically a delay in higher rates and their effect on housing. While it will hit the market soon, it hasn’t yet. Secondly, and the bigger issue is that homebuilders still aren’t building enough homes. At our current construction rate, we are still probably not going to fill the demand for new houses for close to four more years by my estimation. A lack of supply leads to prices staying higher for longer. Lastly, the wealth transfer trend I mentioned will continue for approximately 17 more years. These factors combined will lead to housing prices remaining elevated for the next few years.
On a bright note, I do believe interest rates will start to come back down mid to late 2024. The economy should continue to cool by then. The combination of these factors could hopefully cause housing prices to ease even if only slightly. Once supply returns to normal in a few years, we should see a further adjustment back to normal as well.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a
Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations. A lifelong resident of Cape May County, Eric resides in Seaville, NJ with his wife Chrissy and their sons ,CJ and Cooper, and daughter Riley.
