With the S&P Case Shiller numbers out today for May 2021 (Case Shiller lags 2 months in their reporting) showing unprecedented year over year appreciation in all 20 Cities they follow, all we can do is shake our head. It’s been and still is an incredible run. Managing Director Craig J. Lazzara put it this way, “A month ago, I described April’s performance as “truly extraordinary,” and this month I find myself running out of superlatives.” While there is some evidence suggesting a slowdown in the offing, with new home sales numbers hitting a 14-month low and inventory up a little. Lawrence Yun chief economist for NAR said last week, that “We may have turned the corner on inventory. There is a softening in the demand.” But he went on to say sellers are “getting 3 offers instead of 10.” I don’t know in what world 3 offers is in anyway “turning a corner on inventory.” Moreover, I’d suggest that this is temporary due to summer always being slower, and the freedom to take a vacation for the first time in 2 years has got people distracted and traveling. Have you been to an airport lately? No, naysayers this market still has plenty of room to run.
While it is true inventory has risen slightly and sales are slowing, I would caution those who are predicting a turn in the market. The fundamentals that got us here are still in play. Moreover, and this is evident when looking at the Shiller graphs, if you take out the high and low peaks of Great Recession and draw a trend line from 1996 to today, it’s unmistakably obvious that we are actually below where we would have been in the absence of the subprime meltdown (Contact Tim Here). This suggests the market still has legs to run and it makes sense when looking at the factors that got us here. Perhaps most significantly, low interest rates for what has turned into an extended period of time, have changed the cost of home ownership irreparably. This low cost to borrow has allowed unprecedented appreciation and now that the cow is out of the barn, it’s not going back. Toss in the trillions of dollars of stimulus you find that even in the face of a crippling pandemic, the economy is running red hot. A strong economy always manifests in real estate price gains. Moreover, inflation which is like the shadow of a hot economy, always lurking just behind, also affects real estate values. People think that inflation affects all asset classes but somehow excludes real estate. This is absurd. Rising interest rates combating inflation affect real estate values but not inflation. A rising tide raises all boats. Besides, rising rates is not our situation. Rates remain at historic lows.
Then there’s those damn demographics: The Millennials starting household formation and buying homes, the seniors aging in place, the afore mentioned insufficient supply of new homes to meet a growing population and the pandemic that has changed our need for space and allows for workers to push out to new areas… this is how we’ve come to this spot: Tremendous real estate price appreciation (View Listings Here). In fact, the movement of people from expensive areas to less expensive areas, be it California to Idaho or Los Angeles to Westlake Village, has exacerbated the unprecedented appreciation we are experiencing. Big state dollars and big city dollars bid up properties in lesser expensive areas because by comparison to their place of origin, those areas represent a bargain. We are seeing this all across the country and this coupled with the need for more space, is all thanks to the pandemic. But even before the pandemic, the demographics were going to take us here. It’s just more intense and more dramatic and probably faster because of the pandemic. Technology changes and job location flexibility was going to come someday, it just happened faster with Covid. This all begs the question, “What is going to cause this to change?” As I say in the title, you never hear the one that gets ya, is never more true than when it comes to guessing the real estate correction. The most likely answer is interest rates. When interest rates rise in an effort to slow the economy and stave off inflation, affordability and subsequent property appreciation is going to get crushed (Check out our YouTube page here). When this happens, people will find they can’t afford the new price metric and they’ll stop buying. Then as the economy sinks into its inevitable recession (never a question of if just when and how severe,) we will see a price correction when people find themselves forced to sell due to job loss. But that is not now and that is not anytime soon.