The Housing Market’s Heartbeat

Record-breaking growth can't last forever, they say. After a year of record home-price growth, unimaginably low-priced commercial property cap rates, as well as stiff competition in both residential and commercial markets, a lot do wonder if the real estate market will crash in 2022?

Some do say that we have been bullish from 2012 and all the way up to 2020, but the sustainability of it was put into question. In all things in life, especially in investment, the market, and the prices of goods, services, and stocks, we must take note of the cautionary number of yellow flags that must be consistently monitored.

The market is changing faster than it ever has. With so many things changing in the market these days, it’s really important for investors to stay on top of the economic situation so they can make good investment-related decisions. On the other hand, there has been this overwhelming narrative that there are not enough houses in the US. That is the assumption. If the claims are true, it is always great to hear about people’s opinions, especially if they can support them with facts.

It is helpful to listen to people who have other opinions about this topic, and any or all other relevant topics for that matter. The analysis of population growth, supply, and demand, can definitely affect the housing market. Therefore, it is extremely important to keep up with the changing times.

At present, the supply chain issues that we are now experiencing contribute mostly to COVID. The pandemic-related challenges we have at present have actually pumped up prices of goods and services in the market, including housing. This type of movement in the market is being pegged as yellow flags and not red flags; It just indicates how much uncertainty there is in this market. But that doesn’t necessarily mean that you have to stay out of it. It just means that you should be cautious, stick to fundamentals, and think about the long term.

To understand what yellow flags are compared to red flags in real estate, there are things you can try to watch out for like too much construction in the market, a sudden influx of crowdfunding platforms, and affordability. These are the three yellow flags that come up top of my mind. I think they mentioned that people won’t want to move because they locked in super low rates and now the rates are creeping up, too. Check this podcast out. I promise that it will be worth your while.

So, now that we have discussed yellow flags, let’s talk about red flags in real estate. The most obvious real estate red flag is a listing price that is simply too good to be true. Another is that the seller has not lived in the house for too long, or if the seller is also the listing agent for the home. Another obvious red flag is perhaps when a ton of homes in the same neighborhood are up for sale. This should make you ask why homeowners from that area are wanting to leave all at the same time. This usually indicates that the sellers are extra-motivated, which should certainly make you wonder why.

There are also things that an investor has to know, study and research about the market prior to engagement. Investors must get information and must get educated from licensed agents or financial advisors. This will at least curtail some risks and gain much-needed protection before any investment is made, to limit unnecessary or excess risks.

If we go a bit back, say around 2005 to 2006, the market was hot, and a lot of speculative buying was going on. People were seen buying properties that they didn’t have the money to pay for. Some were even buying properties with no money down. How were they allegedly getting this done? Apparently through availing of exotic mortgage products. It was a raging party and only a few people were sober!

What is the concept of these so-called, “exotic mortgage products?” In sum, ​​​​an exotic mortgage is a type of home loan that offers lower monthly payments in the first few years but is considered high-risk. Why? Well because of its difficult-to-understand terms and higher future payments. People often use exotic mortgages to buy more expensive homes than they otherwise could afford. When that fad slowly faded out, something had to give. To prevent the market from crashing, the government shoved money into the system.

What follows after that is quantitative easing. For everyone’s benefit, “quantitative easing,” means the introduction of new money into the money supply by a central bank. To some, the perspective of this act is that politicians learned that they could create a stimulus. This stimulus would then make the government look good. How? Well, the economy usually performs better when money is being fueled in it. This is basically what happened during the crash.

And now we’re in what appears to be a stimulus addiction and whoever turns off the monetary plugging into the market is going to be blamed. Look, investing in assets is based on leverage, and that is the overall confidence of investors in the economy. No one wants to buy a house if they think that the economy’s terrible. Right? Therefore, I’d have to say that perhaps a certain degree of dependency has been created. It had to stop, and so legislation was passed.

Since, buyers or potential investors had to show, and prove, the ability to repay their mortgage. The mortgage industry is much more prudent and their underwriting is not going to be exposed to the same risk. This includes those who are into fixes and flips.

In any case, no one can really forecast rates accurately, more so the market. On the other hand, the nice part about real estate is that everybody cares to some degree because we all want shelter over our heads - eventually.