All you hear these days is about how white-hot the real estate market is. Ask anyone sitting on the sidelines and they’ll tell you they’re waiting for the crash. Ask anyone in the hunt for a home to buy, they’ll tell how difficult it is. So, this begs the question: Is there some method to determine the future of the real estate market? A crystal ball as it were, a Rasputin-like secret window into the real estate future? If you want some indication, may I suggest that you look no further than the rental market.
If you’re examining the rental market in cities like San Francisco or Manhattan, you would get the sense that the real estate market is soft and that they’re in for a correction. You could even argue that the correction is already underway and may even be seeing the beginnings of a rebound (Contact Tim Here). You’d come to this conclusion I speculate, because the percentage of renters to owners in these cities exceeds 50% according to Bloomberg. And since rents are declining big time, you’d have to say real estate values will follow. Since the pandemic, renters in the city want to be in houses or townhomes with a yard rather than apartments. Work mobility is also allowing people to leave the city for the wide-open spaces and this in turn is putting pressure on urban rent for apartments but single-family homes not so much. But what about the suburbs?
Let me share a couple real time, real life stories that I am ankle deep in as I write this. My good friends and former neighbors recently opened escrow on their home in Woodland Hills. Both have amazing careers, stellar credit and reserves that make them the perfect tenant candidate. So, their home is closing soon and since it’s so hard to find a home to purchase, the decision was made to rent for a year until the perfect home comes up. Simple right? Uh, not so much. Would you believe if I told you… (pardon the channeling of Maxwell Smart but I couldn’t help myself), that at $4,500 a month, my clients were passed over for another applicant? (View Listings Here) I couldn’t believe it, so we began increasing our budget. A home just around the corner from where they used to live came up for rent. Incredibly that home just a couple years ago might have rented for $3,800-4,000 a month, but now is asking $5,500 a month! I saw that and thought, you’ve got to be kidding, but my friends are getting nervous, so I called. “Sorry Tim, we have 5 applications and the landlord is selecting this morning.” I was told by the Realtor. What the…? Now I’m scratching my head.
It’s hard to imagine there being so many people willing to shell out $66,000 a year in rent. I mean you have to earn near $100K to pay that. As our search continued, we found ourselves applying sight unseen for homes for $6,500 and $7,000 a month. So far, a week in, we still have not found a place. For up to $7,000 a month! Whoa… something is going on here. Maybe when Freddie Mac said in 2020 that we as a nation are short some 3.58 million units of housing given our population rise, they weren’t kidding!
My son Adam is working on his PhD. He’s changing schools and moving to Golden, Co. At first, he thought he’d buy but the market for 5% down buyers is pretty much impossible since the average days on Market in the Denver Metro is 4. Thus, he went to Colorado on spring break to find a suitable house to rent. Apparently, the situation there is not dissimilar to ours here in Southern California. Multiple applications for every new listing. He came home unsuccessful and really concerned. What’s a dad to do? Well, being that I am in real estate and have long advocated buying income property in college towns, I decided to partner up with him and set out to buy a home. After a few unsuccessful phone calls to Realtors, I called on a listing held by Lisa Reich with ReMax (reach Lisa here – she is terrific) and she agreed to show me her listing virtually. It wasn’t for me, but over the course of 10 days I identified a home in Golden and successfully negotiated what I believe to be at, if not under, market value. Now granted I am a professional, but I’m still just a buyer in a foreign land so to speak and had to win the bid like everyone else. The point is though, I was able to buy a home more easily than I could find a rental for my son. That’s incredible. It’s actually easier to buy a home than to rent one!
Now you may argue that to buy you have to have a down payment etc. etc. but come back to the question I originally posed: is there a way to predict the future of the housing market? I would suggest that while not a definitive nor perfect soothsaying crystal ball, looking at the state of the rental market is a pretty good indicator of the housing market. And when it’s more difficult to find a rental even at exorbitant prices than it is to buy, real estate prices are still going up and going up a lot. Because no matter how you look at supply and demand, it can’t be cheaper to own than to rent and until it is again, home values are going up.