Let's discuss real estate, specifically the real estate market versus the Fed.
In this piece, I'd want to highlight five points about real estate and what the Fed is doing.
Although they don’t have the current data, NAR released an article on April 20th, reporting a 2.7% decrease in home sales for March.
Here is what it says: “Existing-home sales fell for the second straight month in March to a seasonally adjusted annual rate of 5.77 million. Sales were down 2.7% from the prior month and 4.5% from a year ago.”
And, “the median existing-home sales price rose to $375,300, up 15% from one year ago,” according to NAR.
It is quite a significant dip in home sales, but it is interesting to note that the median prices rose.
In an article by the NAR this April 27th, they say pending home sales are down by 1.2% in March, but “pending sales rose in the Northeast and fell in the other three regions.”
In this article from Yahoo! Finance, according to Reuters, “The Fed wants to cool the U.S. housing market. Here's what that feels like”, the story goes on to explain why people want the Fed to do this to slow down the market.
But I want to highlight these two parts.
“Record low inventory over the past couple of years also means there is plenty of pent-up demand, particularly among Millennials ready to set up a home, whose share of purchases has been growing,” according to the article.
So, even though the Fed is going to continually raise the rate throughout this year, there is still so much demand that it is still driving prices up.
“Meanwhile, data from the Realtor’s group shows the share of all-cash sales was the largest in nearly eight years in March, a sign supply is being gobbled up by institutional investors or second-home buyers,” Reuters says.
This means that investors and second-home buyers are competing and raising the demand for real estate.
This chart by Reuters shows the number of homes for sale in the market, and around a long recession before 2010, there was a high inventory of homes.
Then all of a sudden, it started dropping except for a little uptick at the end of 2022. This shows where we are at, that the demand is significantly high, and the supply is low.
As we start seeing the interest rates rise, what will happen with real estate, and what will be the new normal for the rest of the year?
I don’t think that the market is going to crash anytime soon. If anything, as you can see in this article by Market Watch, four economists and a few real estate professionals that were interviewed expect to see a transition [for the real estate market] to a new normal.
But what is considered the “new normal”?
Short term
According to the article, pros don’t expect home price growth to slow down much in the near future.
“Bankrate.com analyst Jeff Ostrowski: ‘Because inventories are so low, home prices are likely to keep rising at a double-digit year-over-year pace through May. Just looking at housing trends, it seems prices will cool a bit but not significantly,’” Market Watch reports.
Long term
“‘At some point, the cost of buying a home will deter enough buyers to let inventory begin to catch up with demand and bring home price growth back down to earth, but there is plenty of fuel left in the tank as home shopping season kicks into gear,’ says Zillow’s Bachaud,” according to the article.
We are now in May. And, you know what happens during the months of May, June, and July. These months are typically the hottest times that people buy homes.
This is why we will still see an uptick. We don’t know where this will end up, especially after the Fed raised the rates. But what we do know is that prices will continue to go up.
I want to end this with an interesting opinion piece from the Wall Street Journal. It is a response to Scott Kaufmann’s letter where he says it is better to invest in stocks instead of real estate.
The opinion piece disagrees and says, “My parents bought a house in 1984 for $325,000 with 10% down. It has more than quadrupled in value. Yes, the S&P 500 is up 2200% since then. But since the subsequent expenses were no more than rent, the profits on the small down payment are approximately 45 times, or double the S&P return. Perhaps dividends bring the relative profits closely into line.”
I think most of us forget that real estate is an amazing long-term investment. It forces us to save this equity in our homes, and it is going to continue to grow [in value] over a long period of time.
