Last week I viewed a segment of NBR on PBS. The reporter, Diane Olick offered an example of a high-end home for sale in Denver, Co. It appeared on the market that Thursday and by Saturday it had 37 visits to view. It was listed for $587,000. It had a contract by Monday.
She demonstrated that this is still a seller's market. The reason is because there is limited supply. You can get high prices. Low interest rates help the market. However, the Federal Reserve has indicated that there will be at least three rate hikes this year. Mortgage rates are rising with 5% on the horizon. Historically, this is considered a low rate, but home prices are well above wages received by middle and low level workers. As you will see, entry level homes are eroding at a rapid rate.
She goes on to say that buyer's in this current atmosphere will have to endure at a minimum, of at least two rejected offers before a successful bid. The above contains two real estate warnings and more will come as you continue, dear reader.
Skylar Olsen, a senior economist with Zillow says, "The actual supply side of the market is stable. The problem has been our growing population and builders adding only one-fourth of new homes in relation to the historical average."
In numbers, today we add 1.25 million homes and in the past, the number was well over 5 million. Inside the numbers are more alarming numbers. Most of those new additions are either high-end or multifamily. Entry level homes which is the starting point in real estate ascension is lacking, terribly.
Consider for example, the level of multifamily homes in 2017. The number reached a 40-year high with completions jumping 46%. This is more than double the long term average according to Real Page(RP).
Greg Willett of RP says, "Builders are adding the wrong type of homes. They are going hard into the luxury category and not affordable area." He goes on to say what builders cry about, "Land scarcity with high costs, the rising cost of materials and labor."
Builders have concluded that the above costs are similar everywhere and there is no profit margin in affordable, thus luxury is the winner.
Toby Bozzuto, the CEO of Bozzuto Group repeats this warning. He understands the situation. He realized from studies that the middle and low class buyers are trapped by high rent costs. This blocks their ability to save for a down-payment. In many areas they spend 50% of income on rent. In addition, there is a limited number of rentals available and as such, landlords can continue to raise rents. I have stated the same concerns and I point the finger at the Fed. They do not include shelter in their inflation matrix. This is why they claim that we have not reached our 2% goal. So much BS!
Bozzuto handles 70,000 units and it is no wonder that most fall into the high-end category. He does have a concern that this will effect the real estate market in a negative way. Non-luxury rents continue to rise because even with last year's additions, the market is vastly unsupplied with pent-up demand. Bozzuto fears this will hurt the normal progression in housing from smaller homes to larger residences. I agree. When higher interest rates hit the market, the pool of buyer's will shrink. This will result in declining sales which will hurt housing values and real estate in general. This will ultimately hurt the economy. It will also hurt the concept of the American dream of home ownership. Not good.
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