Real Estate Is So Expensive
It is, it is expensive compared to two years ago. Interest rates have gone up 2 percentage points. Home prices have gone up 30% or more in some areas since the start of the pandemic. I woulda-shoulda-coulda bought then. If you did, you are sitting on an incredible opportunity to capitalize on equity growth and put it to use building your financial future. If you didn’t, what are you waiting for? The bubble? I get that. With prices this high and affordability growing out of range, buyers will back out, supply will increase and prices will drop.. right? That makes sense. Until you think about how much more inventory is needed or how much demand has to drop off or how cushioned our housing equity really is.
Inventory for Denver’s 11 counties stands at 2,221 units as of the end of March. At the peak in 2006 there were just over 26,000 active units for sale. How do you 10X inventory quickly? We simply can’t build our way out of this… new construction is only 10% of the existing inventory given recent shortages, and only 9% of that 10% is move in ready. How about getting more inventory by getting people to move. But they are locked into 3% interest rates and/or would have to spend more to get the same size home… not compelling for most and people aren’t anxious to move. And then there’s the Baby Boomers, they’ll move. But with the equity they’ve built up, they can put themselves in a better financial position with a reverse mortgage, allowing them to age in place. I’m not trying to be Debbie-downer.. just pointing out that inventory will not flood the market creating a bubble like environment.
How about those buyers? Millennials have kicked purchasing into high gear making up 43% of homebuyers today (up from 37% last year per NAR) with their largest age group at 30 yrs old. They’ve not only aged into homebuying, but see home prices continuing to go up and don’t want to miss out. Remember their parents, the Baby Boomers, they have stockpiled a record $35 trillion and in many cases are helping Millennials with down payments. I am seeing a lot of gift funds with our clients. We also have the Gen Z group right behind them making up 20% of the population eager to get a foothold on building wealth. These kiddos are determined to make an impact and secure their future.. I know.. I have three of them and they are on fire! In addition to the generations working in our favor, we have strong qualified buyers. Denver buyers have an average 741 FICO and 73% LTV per Black Knights most recent report. The United States additionally has a forecasted population increase of over 100 million people by 2100, as people migrate from Europe and Japan (per a UN report). All of this is not even including the investors who are trying to buy up as many homes as they can to turn into rentals.
What if those investors sell or the recession comes and people can’t keep their homes? Could we see discounted homes for sale or the dreaded “F” word (foreclosure)? Unlikely purely based on the equity that has been stock piled. The average equity position today is 69.2% including 40% of all homes owned free and clear. Homeowners gained $3.2 trillion in equity in the 4th quarter of 2021 alone. Here in Colorado, the average homeowner gained $75,000 last year alone. (Side note.. the median household income in Colorado is $75,231). Real estate is hyper local. Some areas will not fair as well. Some areas could lose value. But overall, real estate would simply sell at market values for anyone needing to get out, not the “hair on fire” discounts we saw in 2008.
I get that it’s harder to save up, to bid over asking, to win the deal… which is why my team is all in on maximizing every buyer strategy. But the idea of waiting for prices to come down or until my lease is up or until I’ve saved 20%, hurts my soul. Home prices have gone up, over time, real estate always goes up. So jumping in even if you have to sacrifice “the perfect home” supports a longer term strategy. I teach a class called Building an Investment Empire. I was blessed to also teach this class for high school economics students. The power of real estate doesn’t work unless you jump in.. and in this market jump in with both feet. The power of real estate is real. The example below uses very conservative factors to prove the point…. 3.6% appreciation and 1% rent increasing over a 30 year period yields the opportunity for a $13,000 a month rental income stream and a net worth of almost $6.5 million..
Bottom Line… It’s Time To Get In and Stay Creative
The spring/summer months are coming and we will continue to see more inventory. Rates will continue to go up until we push into a recession. When the recession comes, rates will drop a bit and demand will spark… along with home prices. We’ve seen it in the stock market.. today’s investors love buying on the dips. So if your buyers missed the equity gains of 2020 and 2021; let them know we might see that again as rates drop and buyers buy putting pressure on the continued historically low inventory.