What has been happening in the world of real estate?
Real estate prices have not stopped climbing since the pandemic started. The markets are up, unemployment is down, consumer spending is up, and personal income is up. There are lots of key economic indicators showing progress, growth, and recovery from the government shut downs. The truth is we still have a long way to go before all the jobs lost due to the pandemic are recovered. Yet, with so many jobs not recovered, how come the real estate market has not slowed down? One of the main reasons is that 88% of those who lost jobs had incomes of $100K or less per year. People who earn more than that make up the majority of home buyers, so home buying never slowed down. In the meantime, inflation and price appreciation have started to take their toll. Have you been to the gas pump lately? The cost of corn, baseball cards, Bitcoin, and other consumer goods or noncash investments have all gone up.
Housing Shortage Continues
All trends are showing that this is not a real estate bubble like the run up to 2008. One powerful infographic explains the supply crisis very succinctly. The number of housing units built by decade in the United States has been 20+ million units over the last 50 years until the 2010s. The 2008 financial crisis scarred homebuilders, developers, and bankers alike. Home building became even harder, and this has put a damper on new construction, and we are finally starting to realize the impact. With supply of homes for sale in our county at historic lows (there were 354 active listings in San Luis Obispo County at the time of this writing), we can attest to the fact that the housing shortage is rampant. The cost to build has also skyrocketed lately, with the cost of wood going tripling and quadrupling for some construction materials. How are we going to meet the need for housing in California? Obviously, making it easier to build and approving more sustainable developments would be one easy way to help the housing crisis.
First Time Buyers Have More Skin in the Game
Another reason this real estate market is not a bubble is because buyers have much more skin in the game than they did in the run up to 2008. Take a look at the infographic below which shows the percentage of buyers who put 0% down or 20% down and had second mortgages in 2006 versus in 2020. As you can see, the number of first time buyers putting 0% down in 2006 was 40.9%, whereas in 2020 it was only 10.6%. The banks have become extra strict with all of the requirements from the Dodd-Frank Act. The number of Adjustable Rate Mortgages is down from 38.1% in 2006 to 2.3% in 2020. This means that buyers have more skin in the game and are less likely to default.
Wave of Foreclosures Highly Unlikely
Delinquencies for mortgages are not expected to flood the market with inventory when the foreclosure moratorium comes to an end. Of all the loans in California, only 5.5% are in default. If those mortgages which are seriously at risk did end up making it to the market, the number of foreclosure properties would make up 5-10% of the total listing inventory. Compare this to the number of Bank Owned (REO) units that were on the market in 2009. At the time, 60% of all listings were foreclosed properties. The current number of homes in foreclosure is a really small number of units, and only 13.8% of those delinquent do not have a plan to remedy the default. This means that the majority of home owners were able to renegotiate their loan, add the default to the back end of the loan, or bring the loan current. There is unlikely to be a wave of foreclosures or REOs hitting the market to alleviate the shortage of homes available.
Final Summary
The housing market is doing exceptionally well. The buyer demand continues to remain strong with historically low rates. The housing market is outperforming 2019 and we are on track to outperform 2020. Right now is an extremely exciting time to be in real estate. There are tremendous opportunities that are creating massive wealth for our clients. We want to hear from you. What are your real estate goals for 2021? What do you want to do? Are you living in your perfect home? If not, we can help you with that.
Contact us anytime!
Owen and Camille Schwaegerle
direct call/text: 805-215-5063
email: owen.schwaegerle@kw.com
website: https://schwaegerleteam.kw.com
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