Residential Real Estate Boom or Bust in 2022
The economics behind the residential real estate market are now more than ever blurred by some new variables that are changing the core fundamentals of price prediction.
For almost 7 years after the market crash in 2007, the demand for housing was restrained by the strong hold of depreciation which in return created strategic foreclosures. These strategic foreclosures, where homeowners elected to intentionally default of their mortgage in order to walk away from being upside down in value, placed more downward pressure on the housing market.
In April 1, 2009, the government authorized the Home Affordable Refinance Mortgage, to give homeowners who were still upside down in value the opportunity to capture a lower interest rate, while ignoring the adverse appraised value.
By 2013, the implications of the market crash on most homeowners was minimized and we began to see residential home sales begin slow but steady climb back to normal.
A very significant change took place with the on set of Covid-19 shutting down the economy, interest rates fell from 3.5%-4.0% down to 2.25% on a 30 year fixed rate.
Having a surplus of cheap money, coupled with the governments election to fire up massive spending and stimulus, the housing market entered a new age of rapid demand and growth.
In addition to normal rising demand given low rates, there is now a surplus of international investors buying homes site on seen due to their expectation of capturing a healthy return on investment.
Welcome to the age of mass corporate buyers of residential real estate. Just in the state of Florida, corporate buyers are purchasing approximately 20–30% of home sales.
Will the market crash?
The trillion dollar question comes down to a few fundamentals that we should watch out for. There are three forces to be considered in evaluating this question, interest rates, property value trends, and corporate buyers.
In consideration of interest rates, having an interest rate of 2.25% on a home with little to no appreciation versus having an interest rate of 5% with 7–10% appreciation says it all. Mathematically speaking, I would take the higher interest rate, right?
Looking at property values, given the demand is still very high and supply is very low, even in a rising rate market, I do not see this a significant threat to derail this real estate boom.
The only concern I can see, is that corporate buyers are treating residential real estate like it is the stock market. These are unregulated institutions, that now hold a large share of the market. The question is what happens if these corporations, experience financial hardship, or intentionally elect to create a sell off?
While it would be catastrophic to the value of real estate they own, if by chance they mismanage their funds, or other conditions arise where they must unload real estate holding fast, I would suspect we could see pockets of devalued residential real estate.
The concern is, it only takes 3 or 5 homes to be sold in a fire sale storm within a neighborhood to quickly drive down appraise values. If this were to happen, much like 2007 but on a smaller, we could see small pockets of real estate values start to implode with strategic foreclosures.
Placing close attention to residential real estate sales, and corporate buyers demand for residential real estate is where we must keep our eyes over the next year to come.
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