04 Jun Why the Housing Market is NOT Slowing Down.
Why the Housing Market is NOT Slowing Down.
Even though we’re in a recession real estate values keep going up month over month. I’m going break down why I don’t see the housing market slowing down and why I don’t see the home values coming down.
What we are seeing in Southern California is a lot of home buyers waiting to see whether real estate values are going to come down before entering the housing market.
If the stock market is any tell, you can clearly see the stock market has regained its value. It’s touched around 3000, on the S&P and we’re seeing the same level of growth in real estate as well.
One of the big reasons for this growth is the housing supply issue. COVID-19 did not create new issues it essentially just accelerated or exacerbated the existing issues from before the pandemic.
What I’m talking about here is the lack of supply in terms of homes. Whether it is from the builders creating new construction or lack of resale on these new construction homes.
Since 2008 we have experienced a slow down in the rate of construction and we’ve seen how builders have been hesitant in terms of bringing in new inventory. And even when they have created in new inventory, it was, little by little, and it was focused on higher-end residences.
Builders have been trying to figure out how the market is going to behave since the 2008 real estate crisis so they didn’t really invest in building a lot of new inventory.
These builders were buying a lot of land, but they were not getting permits needed to build on that land. I would say probably around 2013 – 2014, was when the new construction really started to pick up, but a lot of the focus was on the high end.
We saw homes between, 900k to 3 million being built very aggressively. The demand was there because people felt comfortable and confident that we were in a rising market. Those values have gone up so far, some have gone up 100% since 2012.
So builders have slowly started focused on the mid-tier homes as well as the entry point.
The reason why this is starting slowly is the market is very competitive and these types of homes are low margin. The demands are always going to be there so builders want to maximize the high-end market first before they move to the next one. But there are challenges throughout this process. We’ve experienced a lot of ups and downs in the markets, which has created a little bit more uncertainty for builders.
Which causes a slow down in building during this time. We had, 30% less inventory being built than what we need just to match the demand that is existing every year. In short, we’re building 30% less than what we need.
Here in California is even more problematic because we have the issues around permitting, environmental studies, and how long takes for projects to get started and get completed. Even land issues in terms of access to land and the cost of land. Compounded by the disconnect between the demand for what the buyers want and what’s available.
Many buyers are looking for a big yard, a pool, a good size properly. Most move-up buyers want a family house, where they have a big yard for the kids to run and grow. The aging population wants a one-story house preferably with a good-sized lot.
However, neither of these two products have been built by new builders. Most of the inventory that matches these needs has been very, very slowly coming on the market.
The bottom line is we’ve seen a shrinkage in supply while the demand just keeps kept growing.
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