How will Covid19 impact the Real Estate market?

How will Covid19 impact the real estate market?

In a nutshell, it will accelerate the preexisting conditions that we had before this crisis.  A mismatch between demand and supply everywhere. We will still have low-interest rates and home prices are going to go up in most categories. Which is going to speed up the need for the government to step in and remove bureaucracy and remove the constraints around construction in California.

If we go segment by segment, let’s look at the downsizing market. For many older baby boomers when they move out of their homes they are looking for a one-story home with no stairs, a little bit of a yard, and in a walkable community. However, this product does not exist right now in California. Or it doesn’t exist at enough volume for these boomers to let go of their older homes and move into these communities where it’s more affordable and less to maintain. So that’s one large segment that has not been targeted by builders and the government has not been supportive to help these builders develop more inventory.

On the other side, we have the move-up buyers. Obviously the move-up buyers are impacted by the fact that the baby boomers are not moving out as well as the fact that it’s very hard to build here in California. So builders are trying to maximize the number of properties they put in the land. Therefore, the yards are smaller, the properties are stacked, two stories, three stories, and it’s not what these young families are looking for in a home. We are experiencing one of the biggest baby booms we’ve ever had in our history – the biggest since the baby boomers. So, the need for more space in a home is very, very strong.

We can learn from how other states are handling this situation. For example, in Texas, Arizona, and Florida there are big properties on half an acre, 3000 square feet for around $600,000. This does not exist here in California, but this is what California needs. Part of this COVID-19 impact is going to be the fact that a lot of people are going to be able to work from home. As a result, you’re going to see a lot more young people asking their companies, even taking less money, to go live in the different states where there’s more affordable housing. With space where they can live the lifestyle they want, raise their kids the way they want and still be working for companies here in California.

The first time home buyer market is also being squeezed by the fact there’s not enough inventory. Builders have been focused on the higher end and mid-tier, so they have not produced a lot of homes for the first time home buyer segment.  

At the same time, you have the move-up buyers stuck in starter homes so there’s a constraint in inventory at every level. And we have not seen builders come in the last 10 years and feel confident to build more inventory for these missing segments. 

It also takes such a long time in California to get the okay for builders to build.  When they can go to a different state and produce a lot more and sell much faster.

So the pressure on interest rates that has been the focus of the last 10 years was to create lending programs for first time home buyers and keeping the interest rates low.

These solutions only help in the margins, because even if the interest rate is zero today, a lot of people are not going to afford these homes because values are going to go up. As long as supplies, constraints, and demand are strong, we’ll still see home prices increasing. And we’ll see this hyperinflation here in California for certain. The constraints around building and supply with low-interest rates are going to push those prices up, lower the affordability, and won’t solve the preexisting conditions we had around the difficulty of building in California. 

Over the next few weeks, I will be talking about trends like this. Send in your questions and I’d love to share more content around whatever you are curious about.

 

 

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