Month: December 2022

Categories
Real Estate

What Does the Fall in Personal Wealth Mean to the Housing Market?

According to the latest Federal Reserve report, total US household wealth dropped to $143.3 trillion in the third quarter of 2022. That’s a slight drop from $143.7 trillion in the previous quarter and $150.1 trillion at the end of 2021. 

The Fed, which determines wealth by deducting total debt from total assets like savings and stocks, identified a drop in stock prices and a rise in inflation as contributing factors.

While investors recorded a $700 billion gain in their real estate worth, there was an opposite and unequal reaction as their stock portfolios lost $1.9 trillion in value. Losses in the stock market in 2022 accounted for almost all the $7 trillion in wealth lost by Americans this year.

Between June and September, the Fed hiked interest rates from 1.50% to a range of 3.00% – 3.25%. The Fed’s efforts to slow the economy and cool down the home price inflation have hit the housing market hard, which is vulnerable to changes in interest rates.

The Fed also reports that the total amount of cash held by households, which they calculated by adding up their savings accounts, checking accounts, and money market funds, remained relatively stable at approximately $18.4 trillion in the third quarter of 2022. Compared to its first-quarter high, that is a decline of over $134 billion.

Consumers saw a slight increase in their money market funds and current account but a decrease in their savings and time deposit accounts. The Fed needs people to cut back on spending to bring inflation down. So, what does all this mean for the housing market?

Impact of Drop in Household Wealth on the Housing Market

American households’ wealth is intrinsically linked to the property market’s health. A fall in household wealth could lead to severe impacts on the market.

Decrease in House Demand

The National Association of Realtors (NAR) reports that the annual sales rate of existing-home sales dropped to 4.4 million in October, down from over 6.5 million in January. That is the ninth consecutive month the market is experiencing a drop.

Potential homebuyers trying to save for a down payment on a house in today’s market will feel the strain even more if their net worth declines, fuelled by the expected rise in inflation and cost-of-living crises.

On the other hand, homeowners with more disposable income tend to look at the big picture when making significant purchases. In economically challenging times when their wealth dips, such as this, they usually delay purchasing homes to protect themselves against economic uncertainty.

Drop in House Supply

Because of a decline in the number of potential buyers, builders naturally slow the development of new properties. That makes it more difficult to find a new home, leading to a rise in the price of the scarce product (buildings), which may be a deal breaker for potential buyers.

The construction of new homes often provides a glimpse into the housing market’s future. A glance at the latest data from the Census Bureau shows that the adjusted annualized rate of housing starts in the US fell 4.2% from the previous month to 1.425 million in October 2022.

That was lower than the 1.41 million predicted by the market. Starts on detached single-family homes decreased by 6.1% to 855K, while starts on multi-family dwellings decreased by 0.5% to 556K.

Higher Mortgage Rates

The Fed continues to increase interest rates to curb inflation, increasing the cost of borrowing, including mortgage loans for potential homeowners.

Mortgage payments can add hundreds of dollars to a household’s monthly budget for a 30-year mortgage loan, and most individuals are hesitant to make such a huge commitment when they see their net worth drop. 

Households might delay their home purchase if mortgage interest rates continue to rise. Valuations firms also believe that getting loans may become more challenging as lenders’ perception of risk increases because of these uncertainties.

Low Home Values

After reaching a record high of $413,800 in June, the NAR reported that the median sales price of an existing home dropped to $379,100 in October. The law of supply and demand states that product prices tend to fall as demand decreases; a weakening demand will lead to a fall in property prices. 

With less interest in purchasing a property, fewer people are searching for the same number of properties. When the demand drops, sellers would have to accept a lower price than they had hoped for or would have received in a highly competitive environment.

Households are also more likely to feel the effect of outside variables, such as stock market fluctuations, which might lead to hesitation in purchasing decisions. In short, there will be less interest in buying houses, leading to lower pricing.

Rising Foreclosures

According to ATTOM’s Q3 2022 US Foreclosure Market Report, foreclosure filings increased by 104% year over year, affecting 92,634 properties.

Many households usually file foreclosures when their net worth tremendously falls, and they struggle to make ends meet. It will lead to many families losing their homes to foreclosure because they cannot keep up with their mortgage payments.

Moreover, lenders have tightened their requirements for who they would extend credit to in light of increased foreclosures. To qualify for a mortgage today, a borrower needs a strong credit score, a manageable amount of debt to their income, and a sizeable down payment.

 

What can you do as a Real Estate Investor?

Although the real estate market is currently in the dark, it can provide some stability for investors when household wealth falls. Here are some activities investors can engage in:

  • Shifting to rentals: During a downturn, fewer people will spend their money on a property purchase. However, everyone still needs a place to stay, and their only choice is rent.
  • Buy and hold: Home prices do not automatically decline when the net worth of households falls. However, if a property market crash cools out because of a drop in household wealth, you can buy homes at lower prices and later recover your investment when the market returns to normal.

Final Word

Generally, when the net worth of households falls, it can significantly impact the housing market. It can lead to decreased home demand, low inventories, difficulty finding financing, and low home values and foreclosures. That makes it harder for families to buy homes.

However, there are still meaningful activities real estate investors can engage in, such as switching to rental units and buying and holding, ensuring they score a profit in turbulent times.

By Gurpreet Singh Padda, MD, MBA, MHP

Categories
Real Estate

How Do The Events of 1971 Affect Real Estate Today?

Something seismic happened in 1971 that drastically changed the economic climate, the effects of which you can still feel to date.

1946 saw the introduction of the post-war international monetary order, the Bretton Woods Agreement, which lasted till 1971. They decided that the US dollar would be a reserve currency that foreign governments could redeem for gold.

The US dollar was tied to gold, pegged at an exchange rate of $35 per ounce, the so-called Gold Standard. All the other international currencies were pegged to the dollar, which they hoped would be an effective hedge against competitive devaluation of currencies and boost global economic growth.

In 1971 however, the US government stopped the Gold Standard after learning it had insufficient gold to cover all the dollars in circulation. President Nixon temporarily decided to pause gold redemption, but the system collapsed entirely in 1973.

Since a lack of gold supply couldn’t stop them from printing more money, they couldn’t resist the temptation to print more money. That saw the US system change to a fiat currency system, which devalued the dollar.

As a result, more people decided to diversify their assets by investing in stocks, real estate, and bonds, which were relatively safer. That saw a rise in GDP and real estate prices, but wages remained the same, a trend that persists.

Real GDP, Real Wages, and Trade Policies

Studies show that home prices correlate with GDP per capita by 95%. In the long run, their growth trends correspond. After 1971, the real GDP rose due to increased productivity, but there was no change in the worker’s wages, and there was a rise in the real estate price.

Government tax policies can also boost or impede demand for real estate. Real GDP growth affects real estate as it is the primary driver of fees and rates. Real estate, finance, and insurance investments contribute directly to GDP growth by 21%. Since 1971 the GDP trend has been high, leading to increased real estate investment.

Home values change vs. Income change

The house value change has risen compared to income change since 1971. From 1971, productivity increased, the inflation rate increased, and home prices increased due to inflation, but wages stagnated.

Government tax policies can also boost or impede demand for real estate. Real GDP growth affects real estate as it is the primary driver of fees and rates. Real estate, finance, and insurance investments contribute directly to GDP growth by 21%. Since 1971 the GDP trend has been high, leading to increased real estate investment.

Home Values Change vs. Income Change

The house value change has risen compared to income change since 1971. From 1971, productivity increased, the inflation rate increased, and home prices increased due to inflation, but wages stagnated.

 

Interest Rates

When considering investing in real estate, one of the key factors to consider is interest rates. Demand is affected by a change in interest rates: demand increases when interest rates go lower and vice versa. You should note that a rise in interest rates leads to an increase in the cost to obtain a mortgage, lowering demand as before 1971.

Income Gains

Since 1971, the gap between the average American and the affluent seems to grow even wider. The income inequality and wealth since 1971 are due to massive asset appreciation. Wealthy individuals decided to invest in real estate due to its profitability, but the less affluent couldn’t keep up, further widening the inequality once appreciation kicked in.

The consumer price index vs. Real Estate Measures Inflation

Inflation leads to high mortgage rates due to increased interest rates by the Central Bank, which will lead to an increase in rental rates; increased inflation since 1971 has increased the consumer price index. This is good for real estate investors.

The graph below illustrates how house prices are compared to minimum wage. The minimum wage adjusted to inflation shows that it has declined over the past few decades. Less than 2% of the people in the workplace earn minimum wage.

Interest Rates

When considering investing in real estate, one of the key factors to consider is interest rates. Demand is affected by a change in interest rates: demand increases when interest rates go lower and vice versa. You should note that a rise in interest rates leads to an increase in the cost to obtain a mortgage, lowering demand as before 1971.

Income Gains

Since 1971, the gap between the average American and the affluent seems to grow even wider. The income inequality and wealth since 1971 are due to massive asset appreciation. Wealthy individuals decided to invest in real estate due to its profitability, but the less affluent couldn’t keep up, further widening the inequality once appreciation kicked in.

The Consumer Price Index vs. Real Estate Measures Inflation

Inflation leads to high mortgage rates due to increased interest rates by the Central Bank, which will lead to an increase in rental rates; increased inflation since 1971 has increased the consumer price index. This is good for real estate investors.

The graph below illustrates how house prices are compared to minimum wage. The minimum wage adjusted to inflation shows that it has declined over the past few decades. Less than 2% of the people in the workplace earn minimum wage.

Hyperinflation

Financial asset inflation is today’s most significant cause of inequality, hence monetary expansion. Because investors need an asset with an intrinsic store of value is essential, there was a decline in using fiat money and an uptake in financial assets investment such as stocks and real estate.

Many hold their wealth in financial support, which causes wealth stratification because most people cannot access financial assets. Due to higher productivity, the GDP rose, and real estate prices soared.

It thus meant an increased rate of hyperinflation. When inflation rises, some investment vehicles, such as real estate, appreciate, which is an advantage for real estate investors.

How Long it Takes to Save for a House

With the increased GDP and real estate prices, most people used their savings for real estate values due to their stable income. The personal savings rate fell, and people had to work more and longer to save for a house.

Most younger people are starting at a disadvantage. It is more expensive to get an education or assets that increase in value because of inflations, such as real estate or stocks. Many build their financial base by storing it in depreciation currency in the short term.

In 1971, for instance, a new house cost an average of $25,200 while the average annual income was $10,622. In 2022, the median house price is over $400,000, but the average income is slightly above $54,000 annually. Even if you were to use the current GDP per capita calculated by the World Bank, that figure is $69,287, well below the 1971 figures.

Income Growth vs. Income Inequality

Moving away from the gold standard incentivized the government to print more money, encouraging investors to find other ways to store their wealth. That increased asset price inflation since 1971 due to people holding their wealth in assets.

Investing in stocks, bonds, and real estate is the best financial tactic because the more assets you invest in, the better because, during inflation, you will gain.

This system affected the balance of economic equality since it made the rich wealthier and the poor poorer. The rich will gain during inflation due to their investments, while an average American will spend most of their dollars on rent, groceries, and insurance.

Since 1971 income inequality has increased significantly, meaning those who invested in stocks and real estate became richer.

Final Word

Because the US shifted from the Gold Standard in 1971, which allowed the government to pursue a fiat currency system that allowed them to print money at will. That created some instability, so most investors opted for more solid investment options such as stocks and real estate.

These promised more reliable paths for wealth growth because of asset appreciation. Even though wages stagnated, real estate investors can rely on real estate investments as a store of value because they hold intrinsic value and likely will appreciate.

By Gurpreet Singh Padda, MD, MBA

Categories
Real Estate

Property Tech: Massive Opportunity for Entrepreneurs

Just like many other sectors of the economy, technology is taking root in real estate. Using technology has become such a buzzword; it has earned the moniker proptech (property technology).

Although it’s in its infancy, experts envisage that proptech has a bright future. Future Market Insights predicts it will expand from its current value of $18.2 billion in 2022 to $86.5 billion by 2032. Here is why you should consider integrating proptech into your business. 

What is Property Tech?

Proptech refers to using technology in real estate. It aims to help customers and businesses optimize how they conduct real estate transactions such as buying, selling, researching, marketing, and managing real estate assets.

Benefits of Proptech to Entrepreneurs

Like other sectors, the real estate market would inevitably undergo a technological revolution. Here is a look at some benefits of prop-tech to entrepreneurs:

1. Increased productivity

Investors handled real estate transactions offline in the pre-digital era, which was inefficient and slow. However, because of advancements in property technology, all of this is accessible online, keeping all parties in the loop with greater ease.

Additionally, using data analytics technologies in proptech can help real estate professionals make better property-related decisions and streamlined portfolio management.

2. Improved communication

In the past, it was challenging for buyers and sellers to communicate during real estate transactions because they handled many deals offline.

Proptech can make all transaction data accessible online, streamlining communication between all parties. Property owners may also improve their communication with clients and give them timely, relevant information with the help of property technology solutions like chatbots.

3. Transparency

Traditionally, most real estate deals were closed in person, which made it difficult for buyers and sellers to find up-to-date information on transfers.

There are several ways in which proptech can increase transparency. For instance, it can provide information that enables consumers and corporations to make informed decisions regarding properties. It can also facilitate transparent and effective communication between buyers and sellers.

4. Improved marketing

Previously, you could only find property listings in print or via word of mouth, limiting its ability to reach a broader range of potential homebuyers and tenants. However, online real estate listings are accessible to a much wider audience because of technological advancement.

Moreover, you can use virtual reality, virtual staging, and other proptech tools to provide prospective buyers with a more in-depth look at a property without requiring a site visit.

5. Improved turnover and occupancy rates

Before proptech, property owners had to rely on a small pool of potential customers to sell or rent their units. However, with advancements in property technology, investors can now leverage online resources, such as online listings and social media, to attract potential clients. 

Landlords and property sellers can save time and effort by using proptech tools, such as smartphone apps, that make it easier for them to manage their properties and keep tabs on tenants, potential customers, and sale agreements.

How Proptech is Changing Real Estate

Here’s a look at some of the growing trends in Proptech:

1. 3D printing

3D is no longer constrained to printing small things in a studio; some 3D printers can create an entire house. Presently, 3D printing’s primary application in the property industry is in construction, explicitly printing building components like walls, work surfaces, floor tiles, and other functions.

However, it has become necessary in modular building, enabling more economically priced, environmentally friendly, and versatile building materials and prefabricated structures. 

2. Online listing

According to NAR, 43% of homebuyers search online for available properties. A real estate business is at a significant disadvantage if it doesn’t list its available properties online. Use pictures and videos to create an immersive experience for web visitors.

3. Internet of Things

According to a poll by Statista, 42% of respondents admitted they are optimistic about Smart Building technology, while 56% said they have already felt the effects of technological advancements.

The Internet of Things (IoT) describes a network of connected devices and systems that exchange data and instructions in real-time. You can even use the IoT to create smart homes with various connected devices you can manage remotely.

Besides automating property controls and taking care of routine maintenance, modern IoT systems may also identify faults and defects and optimize environmental performance by modifying operating systems depending on the actual or expected use. That leads to less energy usage, cheaper maintenance, and better air quality inside your property.

3. Blockchain

You’ve probably heard of blockchain when a conversation about Bitcoin and cryptocurrencies broke off. It refers to a distributed digital ledger technology that you can use to streamline real estate transactions, including renting and selling.

For instance, you can utilize the blockchain to make a distributed ledger of all your real estate deals, allowing streamlined monitoring of transferring property ownership. You can also use blockchain to create smart contracts. The blockchain can store and automate contracts when parties meet specific conditions.

4. Crowdfunding

Budding real estate investors that do not have deep pockets can take advantage of crowdsourcing. These are platforms where many investors can raise money to purchase a property.

Thereafter, professional property managers will take over the management and maintenance of the property, so the investors don’t have to worry about taking care of those responsibilities.

5. Big data and analytics

Big data describes extensive or complicated data sets that are too massive for conventional data software to process. A McKinsey research found that machine-learning models used in real estate applications are 90% accurate at predicting rent rate changes and 60% at predicting changes in other property variables.

That knowledge about market or customer behavior provided by big data can aid in pricing, identifying market trends, and weighing the risks and rewards of an investment. Analytics allow investors to build homes with the features the target occupants want, ensuring steady occupancy levels.

Final Word

Proptech is still a relatively new byword in real estate, but its benefits are evident in helping develop, sell, and manage properties. It helps to integrate it now to reap its benefits and ready your business for the future when it is more prevalent.

By Gurpreet Singh Padda, MD, MBA, MHP

Categories
Real Estate

What 2023 Promises for Home Prices in Your Local Housing Market

The annual inflation rate in the US was 7.7% for the 12 months ending in October 2022, and for the third week in a row, the 30-year fixed mortgage rate stayed above 7%. After several years of ups and downs, no one is quite sure what the local housing market has in store for 2023.

The housing market in the US is currently experiencing a significant slowdown. However, experts have different opinions and forecasts regarding the impact of the economy on home values in the US in the coming year.

Here is a look at predictions made by major financial institutions, research firms, and real estate investment companies on the 2023 home prices. 

Wells Fargo

According to their latest predictions, median prices for single-family homes throughout the country would fall by 5.5% between now and the end of 2023.

Their economists predict that the median price of an existing single-family home will rise to $385,000 this year, an increase of 7.8% from last year but much less than the 19% annual increase predicted in 2021.

The analysts also expect the median home price to drop to $364,000, a decrease of 5.5% from this year. They forecast a 3.3% increase in prices in 2024, bringing the median price to $366,000 by that year’s end.

Morgan Stanley

This major financial institution is the most recent member to join the growing group predicting a housing correction in the housing market.

Its analysts predict that 2023 will see a decrease in home values throughout the United States’ most expensive housing markets due to the impact of rising mortgage rates. Morgan Stanley forecasts housing prices in the US will drop by 7% by the end of next year.

Zillow

Zillow issued a bold prediction during the hectic spring house-buying season, claiming that US home prices would increase by an additional 17.8% between February 2022 and February 2023 due to the Pandemic Housing Boom.

It, however, reported that property values fell in 117 local markets throughout the country between May and August. There were 36 markets where the drop was more than 3%. These marketplaces fall into two categories: expensive tech hubs like San Francisco or overheated boomtowns like Austin (7.4% decline) and Boise (5.3% decline). 

Although property values fell in 117 markets this summer, they increased in 779 others. These increases were especially noteworthy in East Coast cities like Miami (up 4.1%) and Myrtle Beach, South Carolina (up 4.5%).

Going by current trends, Zillow forecasts a 2023 housing price decline in some areas while gaining traction in others. Zillow revised its house value prediction downwards between August 2022 and August 2023 from 2.4% to 1.2%. 

According to Zillow’s researchers, recent home market indications show buyers are holding back while affordability barriers remain as high as they have been in recent memory, prompting the downward revisions.

Home prices in Boise and Phoenix, for example, fell sharply last summer, but Zillow predicts a slight recovery in those cities in 2023. Zillow forecasts an increase in Boise and Phoenix home values by 4.3% and 1.7% over the next 12 months.

Zillow also predicts that property values will decrease in 271 locations throughout the country between September 2022 and September 2023 while rising in 607 markets and remaining unchanged in 19 others.

Goldman Sachs

In August 2022, Goldman Sachs forecasted that the housing market would decline further in 2023, with home price growth coming to a complete halt, averaging 0%. They expect that by October, prices will slip down further.

According to an analysis posted on the investment bank’s website, their analysts, using their G-10 home value model, predicted that home prices in the United States will fall by 5% to 10% due to rising mortgage rates from their recent highs.

The economists warn that the housing market could fall even more than their model predicts because of the dire signals from home price trends and housing affordability.

Moody’s Analytics

As of August and again in September, Moody’s Analytics lowered its prediction for the US housing market. According to Fortune, Moody’s forecasts a peak-to-trough decline in US home prices between 5% and 10%, but the organization is also watching what it considers highly overvalued property regions, where it expects reductions of 10% to 15%.

This forecast has its basis on the assumption that the US will not enter a recession. Moody’s Analytics chief economist Mark Zandi estimates a 15%-20% drop from peak to trough in home prices in the event of a downturn.

Fannie Mae

According to Fannie Mae, several economic indicators indicate a possible recession in 2023. Doug Duncan, senior vice president and chief economist at Fannie Mae noted that the Fed’s efforts to combat inflation have the intended impact on the housing market.

Duncan anticipates the housing slump to persist through 2023 due to rising mortgage rates and property prices, making purchasing a home challenging for many people. However, Fannie Mae has given no negative annual forecast for home prices in 2023.

CoreLogic

According to the S&P US home values tracking CoreLogic Case-Shiller Indices, prices nationwide soared by 13.5% in August 2022 compared to last year.

The index predicts home prices will remain unchanged month over month from August to September but will rise by 3.2% year over year from August 2022 through August 2023.

Final word – Will 2023 be a buyer or seller market?

Real estate has been a seller’s market for two years since the epidemic struck. However, recent economic changes seem to suggest the tide is shifting.

The rising cost of borrowing has significantly reduced the affordability of purchasing a property. The housing affordability index published by the National Association of Realtors shows that existing-home sales have declined for seven consecutive months through August.

Many economists, researchers, financial institutions, and investment firms predict that home prices across the US will drop by at least a few percentage points, possibly as much as between 5% to 15%, in 2023. Significant declines will likely occur in the more expensive markets.

Further, there is still limited inventory in the market, and considering the unfavorable market conditions, builders will likely scale down production. All this points to a market that will probably maintain equilibrium without tipping drastically toward one side or the other.

By Gurpreet Singh Padda, MD, MBA