The supply and demand dilemma of the real estate market
In most healthy real estate markets, reduced supply leads to increased demand and all is well. For the most part, that's still the case today, but today's market is very different from what it was in the past. Limited supply and increased demand have instead created a problem.
Hot markets
According to the National Association of Realtors, home sales hit a nine-year high in 2015. For a more current snapshot, real estate sales increased by 0. 4% in January 2016, while the median home price rose by 8. 2% to $ 213, 800. The hottest markets for home prices?
- Portland, Oregon: 11. 4%
- San Francisco: 10. 3%
- Denver: 10. 2%
With unemployment at 4.9%, wages growing 2.5% over the past year, and the average 30-year fixed rate at 3.65% versus a historical average of 6%, it seems like real estate is in a perfect place. These low mortgage rates won't last forever, which has helped spur demand as potential homebuyers want to lock in low interest rates while they still can.
With all this bullish information for the real estate market, something could go wrong?
Real estate market risks
While there are many potential home buyers who want to lock in low interest rates, there are more potential home buyers who are being squeezed and therefore unable to make a purchase. The problem is that limited supply and the aforementioned competition lead to price increases that are not affordable for most consumers.
On the supply side, listings for January are down 2% year over year. According to the Consumer Confidence Index from the Consumer Conference Committee, consumers planning to buy a home in the next six months are currently at 5.3%, down from 7.4% in January. Furthermore, the average homeowner is not trying to upgrade their home due to a lack of confidence in the economy. If you're wondering where this lack of confidence comes from, that question can be answered in more than one way.
First, raw materials and redundancies collapse throughout the energy sector. Anyone who lives in related areas like Texas and North Dakota fully understands. These layoffs will lead to reduced incomes, which will then hit consumer spending and housing construction. Will this deflationary trend be geographically limited?
Second is China, which is exporting deflation. Most Americans only know that China is in economic trouble, but it's more trouble than announced, including bank fraud, market manipulation, excessive debt and overcapacity. China has been the big growth driver for the global economy for more than a decade. This can no longer be relied upon.
Third is the strength of the U.S. dollar, which is negatively impacting multinational companies.Most Main Street consumers may not know this, but if they work for a multinational company, they are already worried because they know cost cutting could be around the corner – with reduced headcount the best way to cut costs.
Fourth, the Federal Reserve is running out of ammunition. This theory can be repeated, but it needs to be repeated. Let's add a little tidbit on this round up. Even John Maynard Keynes believed the effectiveness of monetary policy waned over time.
Fifth is simply an underperformance of the stock market, which has a psychological impact on consumers.
Let's assume you're still not sold that real estate could be a higher risk than is often claimed in the media. If this is the case, consider two quotes below.
Industry Quotes
Ralph McLaughlin, chief economist at Trulia, an online residential real estate website for buyers, sellers, renters and real estate professionals, recently said, "The real takeaway from the numbers is that demand is high despite high demand. The future looks somewhat subdued for home buyers. "
Nela Richardson, chief economist at Redfin, a residential real estate company that provides web-based real estate database and brokerage services, also recently said:" So far, sales have been irrefutable for price increases, but this is not sustainable. A slowly recovering economy, unless the stock improves. "