On this call, I want to take you through the documented, economic factors that are impacting today's real estate market and give you some "Talk Tracks" to use use in your conversations with your clients. These talk tracks will allow you to set expectations with your buyers and sellers which will make the process as manageable as possible for you and them. It's an extremely competitive market which is really difficult to navigate. It will be much more difficult if you and your clients don't fully understand the economic factors driving the craziness.
Before I start, it is important to remind you that I am not economist. I am an editor. I take what I read, listen to and bring you information that I feel is necessary for me to know as a leader. This call is my attempt to teach you what you should know operating daily in this market. I cannot predict the future but if I could, I'd be the wealthiest guy on the planet. I will be referencing the following blogs, reports, podcasts and websites during this call. The information I throw at you today could change so I am discussing what I have learned up until this morning:
Sotheby's International Realty - Luxury Outlook - Dated January of 2022
Goldman Sachs Podcast: "What's Ahead for the Housing Market" – recorded January of 2022
Tom Ferry: Breaking Down T3 Sixty's 9 Most Important Trends for 2022 - February 16, 2022
Brian Buffini Bold Predictions #308: recorded December 2021 and dropped January of 2022
NAR 2021 Home Buyers and Sellers Generational Trends Report
Statista Research Department: https://www.statista.com/statistics/1041889/construction-year-homes-usa/
US Census Bureau
Let start with some historical facts:
1980 -1989: 12.14 million homes built (US population in 1980: 226.5 million) /1980: $76,400 avg /3.0M units sold/13.74% avg interest rate
1990-1999: 12.49 million homes built (US population in 1990: 248.7 million) / 1990: $149,800 avg/ 3.3 M units sold/10.13% avg interest rate
2000-2009: 14.56 million homes built (US population in 2000: 281.4 million) 2000: $207,000 avg/ 5.03M units sold/ 8.05% avg interest rate
2010-2019: 6.9 million homes built ( US population in 2010: 308.7 million) 2010: $272,900 avg/ 4.18M units sold/ 4.69% avg interest rate
2020-2021: Housing starts not fully reported (US population in 2020: 331.4 million) 2020: $391,900 avg /5.65M homes sold/3.11% avg interest rate
2021: $453,700 avg (natural trend line. Housing price growth was relatively stagnant from 2014-2019 especially) 6.1M homes sold 3.09% avg interest rate towards the end of 2021.
2019/2020 - The imbalance of supply vs. demand for housing started to show signs of life in late 2019/early 2020 as millennials started to enter the market after taking a pass from 2010 to 2019. Many of them saw their parents and friends struggle during the housing bust of 2007 to 2012 so they lacked appetite until the fall of 2019.
March 2020 - Covid hits -The Dow dropped nearly 3000 points on March 16, 2020. (CNBC). Real estate firms were preparing for 2020 annual sales to drop by up to 70%. By late spring/early summer the market started to show signs of life as the consumer started to plan for a lifestyle dominated by a pandemic. The consumer realized that their housing situation was the most important part of their lifestyle. Their need for a larger home outweighed the risk of contracting the virus so they started shopping. By July 2020, the market was in full swing in almost all areas.
July 2020 to today has been the hottest real estate market in a generation.
5 reasons for the low inventory, high demand market we've seen since July of 2020:
- Low supply because of the lack of home construction between 2010 through 2019. CNBC reported that the US is short 5 million homes.
- Significant imbalance of supply and demand. Pent up demand with millennials buying their first home because of high affordability with low mortgage interest rates. They came off the sidelines in droves, overwhelming the market. "Millennials are entering the home-buying market en masse, shedding their title of the “renter generation” as they reach new life milestones, with 4.8 million millennials turning 30 in 2021. And they’re increasingly relying on wealth transfers, according to real estate agents."
- An extreme amount of money in the market to deploy. "Nearly US$70 trillion will be passed down from older generations between 2018 and 2042, according to data from market-research firm Cerulli Associates, and more millennials continue to use their share for real estate, with home showings becoming more of a family affair. "
- Migration to desirable, lower cost and suburban markets made possible because of remote work opportunities.
- The desire for improved lifestyle focused on not just the primary home but also the second home and investment properties.
So, here is the challenge. Inventory issues are here to stay for the foreseeable future which will have an impact on first time buyers and move up buyers for the following reasons:
- Real estate is a sexy investment: hard assets are a popular hedge against inflation.
- Supply chain issues: But for developers, a sudden spike in the price of construction material, compounded by a chronic shortage of labor, can change the entire calculus of a project. Even a shortage of basic appliances like stoves and refrigerators is slowing things down. “The thing we’ve been seeing the most problem in getting is actually the appliances. You can pay whatever you want to pay, they just don’t have them. Delayed building deliveries mean that developers’ equity remains tied up in existing projects, rather than invested in new ones, further slowing down the new-construction pipeline and leaving builders to assess whether new projects are financially feasible at all. It could be 2024 or 2025 before we see some kind of pickup in new supply. The entire economics of building a building has really been turned on its head, and it’s going to take a number of years to heal. Then once it heals, it will take a number of years to get the supply.” Quotes from Sotheby's International Realty's Luxury Outlook.
- Lack of skilled trade labor: The 2008 recession, the lack of education and push to trade labor, stereotypes and a retiring workforce is leading to skilled labor shortage (plumbers in Seattle are making $200,000 a year). Lack of skilled labor is making it difficult to supply housing inventory.
- Buyers, especially millennials, prefer move-in ready: Turnkey properties that are move-in ready and don’t require major renovations or repairs are also increasingly attractive to millennials, particularly those looking in the luxury space. “Most millennials don’t want to do work on a property to avoid dealing with the challenges of getting permits, paired with the mentality that they’re too busy working and value time with friends over remodeling or taking on a big project,” says Greg Fulford, luxury real estate agent, Sotheby’s International Realty–San Francisco Brokerage.
- Municipalities have made it hard for developers to build large scale developments. Land is not readily available. Municipalities are making it harder and harder to build. It takes 5 years give or take to build a large project from idea to completion. So, new large-scale developments are not going to be the immediate answer to the inventory issues in most municipalities. In Chicago, many large developers have left for alternative markets like Nashville and Phoenix.
- SFH permits and starts are way up but will not solve the inventory issue for a decade. The builders just cannot build fast enough.
- Technology Not Disruptive: homebuilding and brokerage is similar/same to 30 years ago (subcontractors are still on job sites building the product and brokers are still representing clients in the field to sell properties). Technology has improved the information flow of the transactions and project management process but not to the point where you can scale the transaction without people involved.
- Decreased affordability due to inflation and higher interest rates will not drastically impact demand. Overall transactions might cool just a bit but because of lack of supply, "You will have 3 to 4 offers instead of 15."
So, if you look at basic Economics 101, supply drives pricing. Increased supply is nowhere to be found in the immediate future which means that there will be upward pricing pressure. All we can do as agents is share the current stats and market conditions with our clients. I've given some broad, national views, but you need to look at the hyper-local stats in your market. Jameson agents, you've got the Market Snapshot reports our marketing department puts out quarterly.
There are some major footnotes and opportunities from today's call for you, the broker, to use moving forward:
- If you have not pivoted to a mindset of an extended, low inventory market, you need to make that mindset shift now.
- Remember, transactions are closing over the last year and a half at the clip we've never seen before. Yes, it's difficult for you and your clients but I would take this market any day over the distressed scenario we saw from 2008 through 2012. (I had my real estate heart attack in February of 2008 when I knew I had to pivot or not survive.)
- Know your role. You are not an economist. You are not a financial advisor. You are a real estate broker, and your fiduciary responsibility is to help your buyer clients identify the best possible property and terms for them. On the list side, your fiduciary responsibility is to help your client identify the best possible buyer and terms for their property. Your responsibility is your client.
- If you have strong relationships, you will win. If you haven't started focusing on your Hot List, Warm List and Top 100, you need to start.
- For your "Warm List" clients that are not ready for "competitive" reasons, you need to stay in touch. This market will slowly shift so be there with them and be ready.
- If you are stressed, your clients will be stressed. This market is tough and you need to professionally navigate your clients through this low inventory environment.
- There is never a better time to be a true professional with your fellow brokers.
- Setting proper expectations with your clients is extremely important.
So, how do you communicate this to your clients? What are your talk tracks in your initial consultations? Here are my suggestions (use your own words):
- "Mr and Mrs Client, I am not an economist nor am I a financial advisor. My job is to help you identify the best possible, available property for you. All I know is that there is a significant supply and demand imbalance which will continue to drive pricing." (pick your favorite talking points from above)
- I am going to do my best to get you the best possible data on all your properties of interest.
- "The market is extremely competitive. It will be frustrating unless you know what you are getting yourself into. We could write on 5,6,7 offers or more before we find your home. We could find your home on the first try, too. What we do know is that you have to be ready and be aggressive. "
- We have to act fast. There will be no time for review of contract. Let's go over that now and make sure you understand all of the business terms that we will need to negotiate. Also, you need to identify your transaction team in order to move fast when we do identify your property.
- "If the timing is not right, there is no need to even enter the market until you are ready to go. The reason? The market will be completely different now compared to when you will be ready."
So, my point is: You need to set the proper expectations with yourself before you can properly represent your clients. They need to know the playing field they will be involved in. If you set proper expectations with yourself, your clients, provide an extreme amount of value, stay calm and be part of the solution, you will win in this market.
