2007, But Not Really
Everyone has heard about real estate, with many investors buying REITs or houses as a long-term investment. Some of you might know about the housing market because of the 2008 recession, which is fair. The return on capital is the main goal for real estate investors as property value goes up, or investors can buy real estate they feel is undervalued, renovate it, and sell it for a higher price. It is a bit complicated, but economists agree that the housing market is a handy indicator of our economy, and a necessary part, too.
In 2020, the housing market exploded, partly due to the COVID-19 pandemic. With interest rates at 0.25 percent, and mortgage rates at an all-time low, it makes borrowing money to pay for the house much easier. Mortgage applications have gone up by more than 30 percent, and millennials are the main ones taking advantage. Current homeowners have also started to refinance homes due to the low rates, giving many an advantage. The prospect of working from home has played an important role, with many leaving urban areas to buy homes in cheap, suburban cities, which caused home sales to jump by 21 percent in June when lockdowns were lifted. Once again, current homeowners are benefiting heavily from the current situation, with property values rising nearly 10 percent as demand has completely outpaced housing supply. Along with that, the rise in inflation is also increasing property values. The current housing boom is the biggest since 2006, which might seem scary, but economists are confident that it won’t repeat as people are putting more money on down payments, mortgages are stricter, and the low supply is keeping prices stable.
On Tuesday, the April housing report came out. Housing starts fell by 9.5 percent, which simply means the number of houses that started construction. This comes as commodities like lumber have seen a massive increase in price, and inventory is extremely low. The virus has had its downsides, disrupting supply chains in the housing market that determine whether there are shortages. Everything going on is hurting first-time homebuyers, with the homeownership rate projected to decline from about 65 percent to 62 percent in two decades, while also hurting youth buyers and minorities. The meteoric rise in prices causes inequality between current homeowners and first-time homebuyers, which is important because owning a home is key to having wealth.
However, analysts and economists are confident that the supply chain issues can be resolved, and this was all highlighted by Home Depot’s earnings report. In their earnings call, they felt confident in the housing market, and felt it would become stronger as months pass by. Home Depot also shut down worries about the lumber prices, and convinced investors that their future projects would get them to benefit from home improvement projects. If demand can stay, the housing market will continue to flourish when things are straightened out. What do you think about the housing market?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.