Where is this Market Headed?

The last twelve months have arguably been the most difficult for our nation in quite some time.  Almost every American was impacted personally, financially, spiritually and emotionally.  Not since 2008 and the “Great Recession” have we experienced such a sudden impact to our quality of life and way of living.

As we start trying to get “back to normal” and look to define what the new normal really is, we are seeing something pretty incredible happening in the real estate housing market.  An almost “perfect storm” has created a housing boom the likes we haven’t seen since we recovered from the 2008 crash.  One could argue we never really had a crash this time around when COVID-19 spread like wildfire across the nation.  There was a drop for a short period on the residential side with heavier impacts being felt in the commercial office, hospitality and retail sectors.  However, once people knew they wouldn’t be going into the office for a long while, many became instant buyers in resale and new property.

So, why was it easier to not only rebound from the pandemic, but actually exceed growth from pre-COVID levels?  Well let’s start with the obvious, and good news.  Mortgage interest rates dipped below (and are still hovering around) 3% and people continue buying and refinancing at near record levels.  This was the first part of the storm and is showing no signs of changing any time soon.  Next, people have cash and are putting 30%, 50%, and even 70% down payments or even paying cash for the entire purchase.  Significant equity in existing homes is allowing people to sell their existing home for more and buy bigger and better. With bigger homes, buyers can live, work, eat, and play all without leaving the comfort of their home.  As a seller life is good… but for a buyer, well not as much.  Yes rates are down, but prices are at an all-time high and supply is extremely scarce.  Homes are flying off the plate and buyers are bidding 10%, 20% and even 30% above asking price with escalation clauses, waiving of appraisals and inspections, and basically doing whatever it takes to get that property.  In my local area of Fairfax County Virginia, buyers have 200+ showings in a two day period with 2-3 dozen offers.

So, will the bubble burst again?

From what I am reading and experts are saying… maybe?  There is a significant froth to the current residential market.  Builders and contractors are also seeing unbelievable price escalations on materials (lumber, steel, etc.) along with significant supply chain challenges.  The good news is that you don’t have to shiver after thinking of the Big Short movie/book again.  Banks are being very disciplined and not leveraging like they did in 2004-2008.  My guess is “sub-prime loans” are probably the dirtiest of words in the banking world right now.  COVID-19 has and is creating a pent up demand which is also causing extremely high prices and low supply.

So, what happens when the music stops?  My best guess is things will come back to “normal”.  The key is discipline, especially if you are a real estate investor.  The golden rule still applies “buy low” and “sell high”.  Don’t get caught up in the hoopla and please don’t buy thinking this is going to last 3, 5, or 10 years.  History proves that doesn’t happen. I think we have a good run for about two more years and then the high will wear off.  Have fun while it lasts but be careful.  All the best.

John Rubino

COO and Founder, JID Investments LLC