Sunday, October 25, 2020

Shifting Real Estate Markets

It's interesting to read projections of various experts as they look toward the future of the real estate market. They seem to be seeing different factors or looking through different lenses, but that is to be expected. There are general trends, but in a county as large and geographically diverse as the US there are multiple markets and they don't always rise and fall in unison.

Escaping the Big City

In the past, we've discussed the exodus from the densely populated urban areas as many workers are now working from home and more than a few support business have shut down, either because there was no one to sell to or by dictatorial decree. The obvious result of this is the rapidly dropping cost of urban living. But there is more to this story – much more.

There is a trend among the affluent refugees to purchase vacation homes and live on vacation as the are no longer bound by commuting distances to downtown offices. Three cities in particular are experiencing this phenomenon: New York San Francisco and Miami. But to a lesser degree many other urban centers are seeing the same thing.

One such vacation spot is North Carolina's Outer Banks. It's a long stretch of barrier islands with nice beaches and elevated beach homes. Oh yes, and Kitty Hawk where the Wright Brothers made their first flight. According to the Outer Banks Association of Realtors sales this past September were up 120% over the same time last year. Even with the lock down stay-at-home orders and fear based mentality, residential sales on the islands are up over 30% for the year.

Beach Towns Aren't the Only Ones Booming

The National Association of Realtors tells us home sales overall were up 9.4% in September and median prices were up 15% year over year. People weary of urban living, the pandemic and various restrictions who have the dollars are taking advantage of the almost free financing and bugging out for more human friendly environs.

Of course this kind of increased demand pushes up the prices but it is in the process of depleting the available supply. The National Association of Realtors says there was only a 2.7 months supply of homes on the market. This is the lowest inventory level that they hae seen since they began this measurement in 1983, Elementary economics tells us that greater demand puts more upward pressure on pricing.

In middle America, Kansas has not been left behind. They are not on the extreme end of the scale, but they have just been chugging along despite the best efforts of the Chinese flu. They expect to see a 1% increase in home sales and 12% increase in new home permits with a 4.7 % increase in home prices this year and another 5.8% increase next year. There are always winners, even in uncertain times.

Of course, not every state can claim these numbers. Some have not been permitted to re-enter the American prosperity. Hopefully that will change soon.

How Long Will This Last

The folks at The Capitalist see the trend carrying into the new year as they see major cities hemorrhaging population. The folks at Fast Company are not so optimistic as they foresee a “dark winter”. Many economists have many opinions. What we see here is more evidence of the idea that if you would lay all the economists in the world end to end, they still would not reach a conclusion.

Not Everyone Is Participating

The retail and hospitality industries have taken a particular beating as people have holed up in their homes. Resort towns were turned into ghost towns. The Outer Banks, mentioned earlier, did not suffer the fate of more entertainment based destinations as the draw is more like relaxing at the beach.

There are people all over the country that aren't working that would love to return to their jobs. There are some jobs that are gone forever as many businesses could not survive the lockdown orders. Some who have never entered this part of the real world see all business owners as rolling in cash taking advantage of the poor defenseless consumer. Sure, some make a good living but they depend on the steady cash flow of customers coming through their doors. When that stops, many businesses close and people lose jobs.

On top of this, there are always those with economic difficulties that have their struggles, but this episode with the Chinese has multiplied their numbers dramatically. Then there are those who are working that just can't get approved for the low interest loans that are available to those with gold plated credit.

There will be cries for more low income housing as the eviction moratoria come to a close, Is this the best answer? I have to turn to the great American philosopher Groucho Marx when he told us, “Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.” We have seen more evidence of his wisdom in recent months to ever doubt his words.

Can Investors Help?

Some investors I know love Section 8 housing for the guaranteed payments they provide. Others won't touch them. I tend to fall into the latter cagegory, but that is a matter of personal philosophy, but it may be an answer for some.

Once people are back at work and generating some income, it may still be difficult for some to come up with the downpayment or even a security deposit. One approach some have taken is using a surety bond in place of a security deposit, if the income was there. It may even cover your risk better than just one months rent.

What about providing homes with owner financing? Almost by definition, many people in the position just described will have little to put into a downpayment. Perhaps they have something to trade, like a car or boat they don't really need, Some sort of bond may protect your investment in these cases too, although it won't provide the immediate income of the non-refundable deposit. Some thought and a little creativity may take us to the solution people are looking for. Never underestimate the ability of the American entrepreneur to find solutions to problems.

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