Not all real estate is created equal, especially if rates continue falling

There is a housing crisis, but the alt-financial media get it wrong again
The big myth. Housing will never be affordable ever again and any program intended to make housing affordable will only make it more expensive

Despite all the gloom that the alt-financial media spread regarding residential real estate, one sector continues to shine; starter homes and working class real estate.

There is gloom and doom however for two groups; for first-time home buyers and renters. This will not change.

Think about this.

  • Housing stock in the lower half is most likely not affected by the tax law changes.
  • The Federal Reserve has begun to make it clear that they are not going to raise rates. Mortgage rates have dropped by 1/2 percentage point since November. I believe that mortgage rates will continue to ebb (in contrast to the consensus). This means higher demand and further restricted supply.
  • Government guaranteed mortgages subsidize rates and lower the buyer cost of capital. Thus, banks can lend at very low rates. There are no changes planned to these subsidies.
  • Despite rises in new home construction, the total numbers still lag what is needed on a yearly basis, and the total deficiency in supply has grown by a decade of severe under-building.
  • Imagine what will happen when the global economy rolls over and the central banks are forced to promulgate further unconventional policy.   This money will only find its way into assets. Despite all the talk of QE termination, the major central banks, in aggregate, have yet to unwind in any meaningful way.
  • Because of its growing energy sector, the economy of the United States continues to move forward. If the U.S. did not have all this growing oil and gas output, U.S. GDP growth would be as anemic as the rest of the developed economies and the U.S. would be in the same situation as Europe. As of now, China and the U.S. are supporting global economic growth.
  • This new-found energy independence of the U.S. is lifting all dollar-denominated assets. Look for this phenomenon to continue.

Here’s a link to a story that increasingly has become typical around most areas of the country.

We’re talking affordable homes in the Tri-State. [Evansville, IN]

You might have found it is becoming harder to buy a home fit for your family. Real estate experts tell us there’s a severe shortage of inventory in the market.

“The housing market has shrunk tremendously,” F.C. Tucker Real Estate Broker Carol McClintock said.

Many buyers say they were forced to settle because of the shortage.

“Yes, she is completely right,” recent Evansville buyer Morgan Locher said. “There are no houses on the market right now (or not enough) in that range [$140,000 to $220,000]. We had to rush into something we didn’t even love just because it was all we could afford in the market right now. All the houses we loved sold that day, with multiple offers,” Locher said. “Most were insanely over what we would’ve offered.”

’Severe’ shortage in housing market, says local real estate agents – Evansville, IN (2/5/19)

Of course, there are many overpriced areas in the U.S. and these areas are already out of reach to the average worker. But the prices of these higher-end areas have been greatly impacted by the change in the tax codes and the cap on interest rate deductions. This has been one of the primary causes for the drop in higher-end home demand. The starter home segment actually benefits as it’s now relatively more appealing.

Oregon needs about 150,000 more homes to meet residents’ needs, according to a recent report by Up for Growth, a national coalition that promotes higher housing density close to workplaces, stores and transit.

The discrepancy between supply and demand means rents and house prices are higher, people pay a higher percentage of their income toward housing, more people are homeless and more people are at risk of becoming homeless.

Legislature wrestles with high rents and housing shortages – Corvallis Gazette Times (February 9th)

I receive at least 3-4 calls a week from investors and prospective home owners looking to see if I would sell and receive another 3-4 mailings a week for the same. The demand is fierce and only continues to grow. In the Greater D.C. area starter-home prices have increased much more than the higher-end. Rents continue to grow in this stable area. As a result of higher rent rates, capitalization rates have remained relatively stable.

Yes, it is gloom and doom for many areas of housing, but not in the areas that the alt-financial media overlook.