What do you see happening in the next 5 years?

[Marcus Auerbach]

Reading Ray Dalio's book makes me contemplate some more about where real estate is heading. Looking back at the last 15 years everything seems so predictable. New housing starts grew year over year and well exceeded long term averages. Loans became famously available to anyone who could for a mirror. People with no prior interest (or experience) in real estate started flipping brand new homes that were never occupied before. The hogs had gotten too fat, time for a slaughter. In hindsight it's easy too see.

I don't see any unhealthy development, at least not yet. For the last four years we had a stable economy, unemplyment keeps getting lower, continued low interest rates (anything below 8% is low) and a social trend towards renting (although millenials have started buying as of late). And most importantly a huge supply gap. 

Market inventory is well below a healthy supply of 6 months, generally as low as in the early 2000's, in many cases at an all time low. Locally speaking, in the Milwaukee suburbs we have about 2 months worth of inventory in the lower priced segements, which translates to almost nothing avaialble. Construction starts have gone up steadily the last years, we are back in the 1.2 million range, with even more permits pulled as a leading indicator for further gains. However, still well below the growth rates of over 2 million in the years leading up to the crash. Shortage of land and labor have been holding the industry back. 

Cost of construction has gone up so much, about 40% (depending on who you believe) in the last 15 years. Consequently new inventory is almost exclusive in the higher price ranges. What tightens up the market even further is that more rental grade SFR's than ever are being held by private investors and they are not thinking about selling. In other words, there is no new supply in these lower price segements and demand keeps pushing up prices.

The current trajectory will not last forever; the question is what will initiate a turn and how will that look like? At the moment (short of a national/global black swan type event) I see more of the same in the next years, just even more accelerated. Does anyone have some insights on what the long term trends might look like?