It’s a funny thing this economy of ours; this system of capitalism where the free market drives the movement, prices and value of goods and services. With real estate, too many homes means prices drop; not enough, prices rise. The same is true for the labor market. As the U.S. economy continues its slog forward, adding jobs at retail stores and restaurants, the unemployment rate keeps dropping; 6.1% as of last week. Yet very few would say they are making what they were before The Great Recession. The reason? The vast majority of the jobs being created are in the service industry and therefore not the high paying jobs we need to make life a little easier and allow us to spend a little more freely. Sure it is better that we work than not, no question, but the value of the American worker has never been lower and when you’re at the bottom, there’s only one way to go and that is up. How one wonders, is an American worker supposed to compete with a Southeast Asian country paying a dollar a day or an engineer or physician from India earning a fraction of an American engineer or doctor? Not since the era of the monopoly, when child labor was common and worker safety and a fair working wage, the rallying cry of organized labor, has the American worker been valued less than they are today. But that I believe, is about to change.
In the early part of the 20th century, American business saw more than enough workers to do the jobs required, especially by using women and children who earned much less than men. But labor law was a new concept. Once it took hold and sweatshops became factories, suddenly the American workforce gained the upper hand, able to demand a better standard of living, a higher scale of pay.
The root concept for this shift in the working man’s ability to command better wages, was the shortage of available labor, supply and demand. Take away the kids and now you have to pay someone who won’t work for pennies a day. It is this concept that we hopefully are finding ourselves on the precipice of once again: as the unemployment rate drops, competition for skilled labor increases. More companies are bringing jobs back from overseas because the quality is better here and the cost to move product from foreign lands is only going up. Making stuff here is proving more economical. This means an increase in demand for workers and increased demand for workers leads to better pay. As employers have to lure workers from one job to fill another, our salaries increase. A simple case of supply and demand. And as wages improve and income rises, so does everything else, including real estate.
I go into this rather extended history lesson to make the point that once the labor market breaks through the malaise of stagnant wages, our whole economy is going to get markedly better and owners of real estate will be one of the chief beneficiaries. A little wage inflation is a good thing and not the enemy of real estate.
I’ve heard many argue that the rocket ship rise in property values last year was an artificial boom; that it was fueled by investor cash and not an improvement in the real value of real estate or the economy. Even more argue that as inflation kicks in and interest rates rise, the cost to purchase real estate will rise as well and thus prices will have to go down in response to lower affordability. Further eroding property values, some even say, will be the alternative investments fixed income instruments like bonds will offer. Investors will divest their real estate holdings in exchange for the greater, more liquid returns that higher interest rates offer via U.S. Treasuries and corporate bonds. So the argument goes any way. It’s an interesting argument, particularly in the short term, but it ignores the fact that we all need a roof over our head; that the population is not getting any smaller and that as our wages increase, so does our ability to afford a little more mortgage, a little more house. Our ability to earn more has a direct impact on the value of real estate.
This leads me to the following suggestion: Go buy a house, especially one needing work. If you own one and would like a larger one, price your home to sell and upgrade. Now is the time. In fact now is an outstanding time because as inventory rises, (which is what has been going on for the past 12 months) there are more homes to choose from. More homes means greater competition and like the worker competing with other workers for one job, too many homes means prices for some homes will come down. Right now we are seeing that many of the homes coming on the market are coming on priced too high for their condition. Where upgraded and turnkey homes are still selling with multiple offers, homes needing a little work are not. They are priced too high and thus, sitting. The sellers of those homes believed that their homes went up equally with turnkey homes and this is simply not the case. Just as the demand for a computer scientist may be high, the demand for a field worker may not be. So while there is a shortage of upgraded, move-in ready homes, there is no shortage of homes needing work. These sellers are finding themselves competing for the same buyer. This means for these homes you’ve an opportunity to negotiate a better price. Once wages start to increase however, the demand for housing is going to increase and that darn supply and demand thing is going to lead to higher prices across the board. Right now, there is an opportunity to buy a home with a little sweat equity built in. You’ll have to negotiate of course, but with rates still ridiculously low, it’s an opportunity you won’t want to miss.