Founder of Vive Funds, a unique multifamily investment firm specializing in curating high-quality assets for our investors.
Does anyone still remember the financial crisis of 2008? Too Big to Fail, bankruptcies, insider trading, junk mortgages, ninja loans and other esoteric terms were in the headlines this financially brutal year. It was a year many longed to forget, but also a year to remember valuable lessons learned. But have we learned those lessons, or are we forging new pathways to the same calamitous endpoint? Time will tell.
The Pandemic Housing Market
The pandemic lockdown resulted in many new habits, including working from home and homeowners’ resulting desire to improve the places where they were now spending significant time. This led to increased remodeling rather than buying or building. However, once the pandemic loosened its grip, the housing market took off. The classic supply vs. demand conundrum fueled by factors the world had never experienced before resulted in home prices moving upwards rapidly.
Labor and supply shortages coupled with cash flow issues put a damper on new construction, while delayed permitting, cash flow, loan approvals and inspection delays all churned up the perfect storm of supply lagging behind demand. While traditionalists would jump to a bubble view, I would urge caution in labeling this as a bubble.
Is this another 2008?
In 2008, predatory loans were the leading reason for bubble-like conditions. As demand increased, financial institutions loosened lending criteria, leading to some very unqualified buyers securing loans. Lenders and agents were underwriting loans for lucrative fees with little thought for borrowers’ ability to repay. Thus, many new borrowers flooded the market, leading to demand outstripping supply. Prices rose sharply, and all the conditions for a speculative bubble were in place. This artificially driven growth was not sustainable, and the bubble burst.
Current conditions are not driven by artificially created demand. New lending regulations following the 2008 bubble are strict, and demand is now fueled by the desires the pandemic kept bottled up for so long. Thus, rising prices, while initially seeming irrational, are not. I believe price rises will start to rationalize and will be sustainable over a long period.
My Take On The Real Estate Market In 2022 And Beyond
In my opinion, the current supply issues are due to pandemic delays rather than a market trying to achieve parity between supply and demand, as indicated by prices skyrocketing initially and moderating as the gap narrows. This is a discernible trend in the single-family market, one that I believe will continue through 2022.
As the owner of a multifamily syndication firm, I pay careful attention to trends in both the single family and multifamily market. In our experience, the multifamily market has been much more bubble resistant, and supplies, while disrupted, have not been as impactful as in the single-family market. Price increases have largely been driven by the creation of new well-paying jobs, the reluctance of the younger generation to be saddled with mortgage debt and a long-term pipeline established by developers. The yields from investing in multifamily are often significantly higher than what could be obtained in traditional avenues of investment. Since investors are putting money in asset-backed investments, the comfort factor is also much higher, and some of the price increases reflect this.
All in all, my take on the real estate market is that single-family prices will start stabilizing shortly, and price increases will moderate. This can be seen in data that suggests inventory is beginning to increase, giving the much-needed cushion against “irrational exuberance” (per former Federal Reserve Chief Alan Greenspan) in pricing. The Federal Reserve has started increasing interest rates, and this, too, will tamp down price increases. In my opinion, we will not see the bubble burst as we did in 2008.
The information provided here is not investment or financial advice. You should consult with a licensed professional for advice concerning your specific situation.