Why Higher Rates Could Save The Housing Market
One of the biggest issues facing the housing market today is a lack of inventory.
And, ironically, the very rate increases that many fear will tank the housing market may actually save it.
Investors Buy 18.4% Of All Housing
Redfin reported that investors purchased 18.4% of all residential real estate in Q4 of 2021.
3/4 of those purchases were “all cash.” And 3/4 of those purchases were for single-family homes too.
This is a huge proportion of the market, putting tremendous upward pressure on prices and making it much harder for the average homebuyer to compete in the market.
More importantly, Redfin is referring to large institutional investors like BlackRock – and not to individuals.
A lot of tinfoil hatters are claiming that these massive investor purchases are part of a “great reset” plan to take over the entire housing market and turn the entire world into renters.
But alas, the reason is probably simpler.
Investors are awash in cash and cannot find desirable returns for their cash anywhere else in the market – precisely because rates are so low.
But – with rates rising and the Fed sucking liquidity from the market (by ending QE and raising rates), two things could happen.
1. Investors will no longer be awash in cash and desperate to find returns anywhere they can find them.
2. Investors may be able to find decent returns elsewhere now that rates are increasing – including with just good old-fashioned Treasury Bonds.
Hence, investors could very well pull out of the market, eliminating a huge chunk of competition for individual buyers, aka our clients.
Owning A House Was More Profitable Than Having A Job Last Year
A few weeks ago, I blogged about the reluctance of sellers to list their properties in the face of so much uncertainty.
But – there is another reason sellers are hanging on to their homes according to various macro pundits.
And that reason is massive appreciation.
According to this Motley Fool column, homeowners made more from appreciation last year on average than the average U.S. worker made from his job.
This phenomenon makes it much less likely that homeowners will want to give up this source of perceived income – even if they know they can buy another home – because they just don’t want to risk losing a good thing.
But, if rates climb enough, demand could be dampened enough to slow down our out-of-control appreciation levels, and that could make homeowners more willing to sell.
I still think the market will hold though because of strong demographic demand (much stronger than in 2008), because of much less building in recent years (keeping overall inventory much lower than 2008), and because inflation and regulations have made building costs so much higher.
BUT – higher rates could definitely slow appreciation rates – and that could be a very good thing.
Higher rates and less QE could: (1) pull investor demand from the market; and (2) make homeowners more willing to list their homes.
And that could in turn alleviate our inventory issues.
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