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Even in the face of a global pandemic, the housing market in the U.S. has continued to perform exceptionally well. But with the events of the last recession not quite forgotten, many investors are wondering how long the good times will last.
The housing market moves cyclically, meaning that there will always be ups, downs, and flatlines, they’re inevitable. So as an investor, how can you better understand your housing market, the factors that affect it, and how to manage your investment strategy accordingly?
In this article we’ll discuss some of the key factors affecting the housing market, and explain what a “normal” real estate market cycle looks like, to help better understand the housing market for real estate investors.
Housing Market Trends
The housing market in the U.S. is influenced by a variety of factors. Some of the most common housing market trends are supply and demand, interest rates, consumer confidence, and government policies and subsidies. Here are more details on the major housing market trends that affect real estate investors:
Economy
The housing market tends to move in sync with the economy. When Gross Domestic Product (GDP) is increasing, median household incomes are rising, and inflation is under control, people tend to buy more homes. During an economic downturn, buyers become more careful about taking on mortgage debt, which can cause housing prices to remain flat or decline.
This is also local in nature, and if your local economy is suffering, so too will the housing market.
Interest Rates
Short-term interest rates are raised and lowered by central banks around the world to provide liquidity and pricing stability. In the U.S., interest rates are set by the Federal Reserve via the Federal Open Market Committee (FOMC).
If the economy begins to “overheat” the Fed will raise interest rates to make savings more attractive, which in turn decreases the money supply.
Mortgage Interest Rates
Mortgage interest rates are generally influenced by yields on the 10-year or 30-year Treasury notes, rather than the Federal funds rate. Treasury note yields can fluctuate based on the demand. Higher demand can push yields rates down, along with mortgage interest rates.
On the other hand, if there are few buyers for Treasury notes, yields may rise to attract buyers, causing interest rates to increase as well.
Housing Supply
Housing supply is created by builders and developers and may fluctuate from one location to the next based on factors such as the availability and cost of buildable land, labor and materials cost, and short-term financing costs.
According to a recent article from The White House, housing supply has not kept pace with population growth for the past 40 years. Reasons for the lack of housing supply in the U.S. include lack of available land, zoning restrictions, and an inadequate supply of housing for renters.
As housing supply lowers, this puts upward pressure on prices as there are less homes to meet demand. That is, if demand for housing is trending upward.
Housing Demand
Demand for housing can fluctuate based on the price point and the size of the home. As The White House report notes, even though homes are being built, there is a shortage of “entry-level” type homes in the 1,400 square foot range.
In addition to housing type, other factors affecting the demand for housing include local demographics, income, housing prices, mortgage interest rates, and the availability of credit. Check out DealMachine’s list of best cities for flipping houses, which consider some of these housing demand factors.
So if housing supply is low and demand remains high, as we see in most markets across the U.S., you’ll generally see a housing market trend toward a seller’s market. A seller’s market is characterized by high demand, high prices by historical standards, and multiple offer scenarios.
Inventory Levels
Real estate professionals use a metric known as “months of supply” to determine whether housing inventory levels are sufficient to meet the demand for housing. For example, if the number of homes listed for sale in a specific real estate market would sell out within 1 month, the market has 1-month supply.
As a rule of thumb, a balanced market has a 6-month supply of homes. Seller’s markets typically have less than a 6-month supply, while buyer’s markets have more than a 6-month supply of homes listed for sale.
Demographics
Demographics are defined by criteria such as age, gender, race, and income and education levels. For example, Baby Boomers born in the 20 years following World War II are now nearing or in retirement age, with many choosing to downsize by selling their homes.
Generation Z and Millennials are leaving university, beginning their careers, and starting families. However, the lack of entry-level homes combined with skyrocketing housing prices is pricing many first-time homebuyers out of the housing market, with younger people renting rather than owning.
Government Policies
Government policies and the tax code in the U.S. is generally very friendly to homeowners and real estate investors. Incentives such as first-time homebuyer’s tax credits, low down payment programs, property tax and interest rate deductions, and capital gains tax exclusions and deferrals help to make owning or investing in a home an attractive proposition.
Housing Market Cycles & Crashes
Although it may be difficult to believe, housing markets historically move through fairly predictable cycles of booms and busts. As a report from the Harvard Extension School explains, as early as 1876 observers have noted that the housing market generally go through 18-year cycles characterized by four phases:
- Expansion with new construction and declining vacancy
- Hypersupply with new construction creating more supply than demand
- Recession with vacancies increasing even more as new completions come to market
- Recovery with no new construction causing vacancies to decline
Housing market crashes normally occur when the demand and speculation driving home prices up comes to an end, causing demand to decrease while supply increases. Sometimes economic recession can lead to a housing market crash, other times the crash in the housing market can lead to a recession.
According to data from the Federal Reserve, the median sales price of houses sold in the U.S. has been steadily increasing since 1963. However, during that 50-plus year period, there have been 7 recessions and periods of declining housing prices.
Most recently, median housing prices during the Global Financial Crisis of 2007-2009 declined by nearly 20%. Millions of people lost their homes to bankruptcy or foreclosure, creating opportunities for well-capitalized real estate investors to purchase distressed real estate.
That said, trying to figure out a housing market crash timeline is almost impossible. What is a better strategy when trying to survive a housing market crash is to assume one is coming, and not to over leverage yourself in debt. That means keeping respectable loan-to-value ratios, with nothing above 80%, ideally 70% or lower. Explore tips on how to scale your real estate investment business with DealMachine’s real estate investing guide.
How to Analyze a Housing Market: 2022 and Beyond
There’s a saying in the investment community that past performance is no guarantee of future results. With that in mind, it can still be instructive to think about potential future trends in the housing market, especially for real estate investors buying and holding for the long term:
- Increasing lack of affordable and workforce housing may spur more government intervention or change the type of housing being developed.
- Rising housing prices and more people choosing to rent rather than own may create reduced demand for buying a home.
- Development of build-to-rent (BTR) single-family rentals and multi-family homes may increase to help meet the need for housing.
- Higher mortgage rates due to inflation and Federal Reserve “tapering” may impact housing prices and rental rates as investors focus on yield and ROI.
- Use of technology and AI will continue to be embraced by investors to streamline property management, increase asset values, and generate positive returns.
Closing Thoughts
Although housing markets are local, they are impacted by macro factors such as interest rates, demographic changes, the economy, and government intervention. Whether you’re wholesaling, buying and holding, or flipping, investors need to understand housing market trends.
Housing prices historically rise over the long term. However, the real estate market does move through predictable cycles of booms and busts, leading to housing market crashes.
By analyzing the long-term trends of the housing market, investors can better understand the potential investment opportunities in all phases of the housing market cycle.