The four variables of interest rates, demand, inventory and housing prices have a major effect one other. However, interest rates and prices will be a stronger determinant on demand and increased inventory. The reason I make this assumption is looking back during previous markets as rates rose, demand lessened and inventory increased and lastly, prices decreased.
But at the moment demand has never been this high. I have never experienced such heightened desire to own a home in my professional career. I think fear of missing out has also fueled the market, just like Bitcoin, cryptocurrencies and the massive increases in stock market prices.
Fear has also been part of the equation as trillions have been sitting on the sidelines, not sure of where it should be invested. As most have realized and experienced, inventory is at the lowest point in history as well as where interest rates have been and still are. Over-the-top-demand causing bidding wars (driven in part by Covid in the past two years) has led to a 60 percent increase in housing prices over the last 10 years.
According to the U.S. Bureau of Labor Statistics a $100,000 home in 1967 increased by 841.67 percent or at 2022 prices $941,668.422. Average inflation rate for housing over those years was 4.16 percent per year, even though overall inflation was only 3.95 percent.
As I have mentioned in previous columns the Consumer Price Index doesn’t include food and energy due to their volatility. So when you include those commodities. inflation today is closer to 15 percent. Again, I am quite sure those items are not included because that would be a negative for consumer spending habits or maybe not.
Although demand for consumer goods is still strong even with current inflation, I see a more moderate or inflation-based increase in housing prices for 2022 which will be set in motion as interest rates rise.
But I do not see rates going higher than 4.5-5 percent because this would raise the cost of U.S. debt tremendously (currently every 1 percent increase in rates would add more than $225 billion of interest to our debt). Although still a seller’s real estate market, higher rates at some point will slowly reduce demand, leading to increased inventory. Then those changes will have an effect on home prices. The timeline for all this to occur isn’t certain or guaranteed, but something will eventually happen.
Although builders are trying to construct more housing, many local governments and homeowners are seeking to block new construction. Moreover, inflation and supply chain disruptions and shortages have raised the cost of building by an average of $35,000 for single-family homes, creating an environment of higher prices for builders. Some are constructing fewer single-family homes.
More important, as has been erroneously reported, it was not the institutional investors buying up homes that caused the shortage, but individual investors looking for greater returns and increasing their wealth rather than leaving their money in their bank accounts where there is less risk and volatility than the stock market. From what I have researched there are more larger rental developments being created throughout the U.S. for current and future tenants, who will not be able to afford to buy homes. The demand and return on investment will be more lucrative for investors. The future will have more long-term demand from renters than ever before in history.
A key question is about the 1.5 months of available inventory locally. How long will it take for inventory to increase to normal six- to seven-month levels that will be directly related to a combination of higher interest rates affecting current and future demand? For now, I believe the American Dream is still alive and well, but for how long I don’t know, as the reality of higher costs become a wakeup call for the budgets of current purchasers and those entering the market this year and beyond.
I see buyers backing off and hopping back on the fence, leaving not only NYS and all the higher priced, higher taxed states to lower rates. I also see an opportune moment in time to sell and cash in with the highest prices to date, while demand is high and inventory low. I also see potentially more investors leaving New York state as new laws are being discussed in the Legislature about non- eviction rules and rent increases.
Philip A. Raices is the owner/Broker of Turn Key Real Estate at 3 Grace Ave Suite 180 in Great Neck. He has 40 years of experience in the Real Estate industry and has earned designations as a Graduate of the Realtor Institute (G.R.I.) and also as a Certified International Property Specialist (C.I.P.S). For a “FREE” 15 minute consultation, a value analysis of your home, or to answer any of your questions or concerns he can be reached by cell: (516) 647-4289 or by email: [email protected] Just email or snail mail (regular mail) him with your ideas or suggestions on future columns with your name, email and cell number and he will call or email you back.
