We are still funding in cash. Before the Pandemic, the United States economy was on track with the longest running bull market, record low inflation wages increasing, record low unemployment, and historically low mortgage rates. Even with all this good news, there was an underlying current dragging down the real estate market that was only exacerbated when the virus hit.
The inventory problem:
Even before the virus, inventory was running at historic lows. Inventory in December declined 12 percent year over year – or by 155,000 listings, according to new data from Realtor.com. That’s the largest year over year decline in almost three years. The number of homes for sale hit the lowest level since January 2018. This is even more profound in “hot markets” with Denver metro inventory declining 30%. Along with less inventory there is also a big “mismatch” of properties available at the desired prices. Inventory of properties priced under $200,000 was down 18.1 percent in December, while the number of available homes for sale priced between $200,000 and $750,000 declined 10.2 percent. In April, inventory in Colorado was down 50% for condos and townhomes. These trends are playing out throughout the country in desirable markets.
What caused the inventory issues?
There are long term structural issues that have caused inventory dilemma. This has been years in the making and is unlikely to resolve anytime soon for four primary reasons
- Conglomeration in hot markets: New high paying jobs are beginning to focus on the top 30 or so markets in the United States. These same markets are leading the charge in new residents including Atlanta, Denver, Seattle, Dallas, etc… The same cities continue coming up and this is where the shortage of housing is so profound.
- Rising land costs: With demand in the top 30 markets increasing, land is becoming scarcer and as a result more expensive further driving up development costs.
- Rising building requirements: As we learn more about better building technologies from more efficient insulation, to LED lights, to better ventilation and sealing of houses. All these items increase the costs to produce a home. These costs are passed on to the buyer further distorting the mismatch of desired home versus what is being built.
- Rising Labor costs: The downside of low unemployment is that it becomes increasingly difficult to hire skilled labor furthermore skilled labor is becoming increasingly expensive further adding to the price pressures on housing.
Then the virus hit:
2020 was already slated to be tough for real estate, then the pandemic hit in March further exacerbating an already tight inventory market. New listings became non existent and new construction basically ground to a halt. Banks have pulled back from new construction and builders have decided to sit on the sidelines to wait out the crisis. Many in the industry learned a stark lesson in 2008 and do not want to be caught with much if any unsold inventory. Even when the virus comes under control, it will take months if not years for construction activity to ramp back up. Furthermore with talks of a recession, many property owners will not trade up further crimping supply.
2020 will be a tough year even with a recovery
Unfortunately, I don’t see anything on the horizon that would change the current inventory picture. If anything, inventory could tighten even further putting more pressure on prices. With inventory constraints transaction volume is sure to fall impacting real estate pros throughout the country. Although late 2020 we should see a rebound from the virus, the lack of inventory is going to make 2020 a little less pleasant for real estate professionals.
Additional Reading/Resources:
https://www.foxbusiness.com/real-estate/us-housing-inventory-drops-december
https://coloradohardmoney.com/denver-real-estate-inventory-plummets-2019/
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all we need is our simple one page application (no upfront fees or other games).