Continuation of Holmes on Homes

No Crash Today...but what would it take?

What will it take to bust a real estate market? We already know this - a large supply with little demand. So let’s do a deeper dive on that and see if we can make some predictions on if or when that will happen. To queue up this story, we need to give some background on a few topics first and see if those worlds will collide.

THE RETURN OF NEW CONSTRUCTION

Ah yes...one of our culprits in the lack of current inventory is that builders stopped building after the ’08 bust. Through no fault of their own of course as it’s hard to build homes when you’re out of business. You know this storyline from our past articles but in short – it took until 2019 to get to a normal/average amount of new construction starts. That was 10 straight years of below average inventory creation. While we’re at a normal level of construction starting today, we’re still well below the amount of homes needed. So it’s going to take some time but new construction is back and on track.

RECORD NUMBER OF SALES

So this is an overlooked detail in our housing inventory in years to come. Think for a moment about the normal trend of buying and how long people stay in that home. We generally start to see turnover on the early side around 4 to 5 years and on the long end 8 to 9 years. Not to say that anything is normal after covid but generally speaking people don’t sell a home right after they buy it. There’s going to be some lag in the time it takes for that home to become available for sale again. Take that concept and let’s add another layer… a record number of people bought homes in ’20 and again in ’21.

Take a peek at the chart of closed sales in the last couple of years to give this some perspective.

Not only did a record number of people buy homes but they did so with all-time low interest rates of 3% and sometimes even lower. I can’t imagine that this record number of ownership changes is going to culminate in listings anytime soon. With interest rates bouncing between 5% to 7% in the last 6 months and uncertainty in the cost of a purchase, it would make sense that people will want to stick around a bit. Of course, life circumstances, wants and needs will always dictate the need for a new home eventually. So it’ll take some time but those record numbers of buyers will eventually sell. Can you see the picture building here? New construction gets inventory back on track and building. You have a record number of buyers that will want to sell at some point in the next 5-10 years and wait, there’s more…

CORPORATE AMERICA

You’ve seen us chat occasionally on this topic and it’ll be interesting to see how this plays out for the long term. Corporate America is buying homes at an unbelievable and never-seen-before rate. Instead of buying and holding commercial real estate or large high-density buildings, corporate America is coming after single family homes and they’re doing it quickly. Of course they are.. with rents as crazy high as they’ve been, it was only a matter of time before corporations wanted in. They can bundle 1,000 single family homes across the country and treat it the same as a 1,000-unit building. I’m sure you’ve read articles or listened to the news with a similar message and it’s no secret.. they’re out to replace the mom’s and pop’s investor. I read an article recently that BlackRock put a fund together for $1B (that’s B for billion) for residential home purchases. That’s a lot of money but they’re also the world’s largest asset manager with $10T (yes, trillion) under management. So what’s a couple billion in homes.. ah.. no biggie.

So they’re coming for single family homes and they’re a huge part of single family ownership. My question is – what will happen when they’re done with residential real estate? What will happen if rents flatten or go down.. what will happen if it’s less profitable in the future? Do you think Corporate America will think twice about selling assets that are not profitable or less profitable than before? No, of course not. So it begs a simple question – what would happen if the largest home owner in the country wants to sell their homes? And we’re talking about tens of thousands of homes all across the country.

This is an x-factor that’s going unnoticed and not talked about – the future potential of one owner selling a massive amount of homes. Now we’re talking massive shift potential in the market!

So what happens if these worlds collide? Simply put – inventory would be back and more than ever! New construction can get us caught up eventually. Slowly but surely, that will happen. You have a record number of buyers in the last 2 years that will eventually want to sell. It’ll take 4-5 years but that will start to happen. And the x-factor of Corporate America – if they jump on board of selling instead of buying, which will happen at some point – it could lead to the largest shift in inventory ever and that’s something that demand will never be able to manage… no matter how low rates go.

Will that happen? To be determined of course if they’ll collide together but all 3 of those factors will happen independently. Let’s just hope not all at once!