What Will Happen to the Real Estate Market in 2021?

7 Replies

We recently saw a strange pattern in the market. Houses are selling for significantly more than the asking price. We started asking…

What exactly is happening with the market and how will the pandemic trickle down to affect the real estate market in the future?



The Current Situation:

The market seems great right? Over in the 7 Figure Flipping Mastermind, we are both excited about the ‘bonus’ profit, and asking some very real questions. The market feels a little heated and inflated. Which prompts us to ask ‘how do you save yourself from the possibility of an overinflated bubble that feels like it’s waiting to pop?’

We ran our concerns by expert Terry Burger and he shared with us the data he is running to make market predictions. Terry says he combines data with human feelings. He gets a feel for not only the numbers but what people are currently going through, or the ‘pulse’ of collective emotion.

Terry is using market data and comps from 2018 and 2019 to make predictions.

There are 3 Major Factors to look at.



Interest Rates:

If houses are selling for 10-30% over the usual asking price you have to watch that inflation because it affects interest rates. For example if you can only afford a set monthly payment based on your income and if the interest rate on a $400,000 dollar house goes from 3% to 4% it decreases the price a buyer can spend on a house to get the same monthly mortgage rate, to about $355,000.

If higher interest rates become a trend, it starts to take out higher price points and you have to consider how that will trickle down. Those buyers are getting approved for more money because interest rates are so low, but when interest rates rise those numbers will drop and affect the market.



Stacked Inventory:

We are in the middle of a pandemic which would make you think it’s not a great time to sell your house. Has there been low inventory? We missed a summer selling season in 2020 at the start of the pandemic. Yet we are making up for lost time with record inventory. There is a pattern or a natural heartbeat to most yearly sale cycles. There is always one peak month in the market and it is usually June. In 2020 there were four solid months that came in higher than the highest peak of the last 5 years.

In November of 2020 we had almost 500,000 houses coming on the market at a time when it is usually the bottom of the season and it didn’t decrease in December. This is all odd considering you would think mid pandemic is a tricky time to sell a house and we expected numbers to go down. We had an increase of 70,000 houses on the market.

The thing to watch is the number of new listings coming on the market in 2021 and 2022.

We are going to be watching for inventory starting to stack because people want a piece of this action. People need to sell their houses regardless of whether or not it is a pandemic. Once we all begin to feel life is relatively ‘back to normal’ and people who were holding back put their houses on the market there will be even more inventory. Currently, we are not seeing that because people want to buy right now. The demand is higher than the supply at the moment.

The catalyst becomes ‘When does the demand start dropping?

The tipping point in the market can send us going in the other direction based on any one of many factors. We don’t however feel like this will happen fast so we have the opportunity to keep an eye on the market and prepare.



Change in Government Covid Financial Aid:

It will be interesting to see what happens when the government stops printing money and giving it away. People are not incentivized to work for lower salary jobs when they are getting unemployment and this trickles down to everything including mortgages. Renters cannot be evicted and when all this changes there will be a shift.

How long can people live in their houses for free? The government has been giving people opportunities to stay in their houses but if they must move they will be looking to sell and buy a lower price bracket home. This could potentially affect the higher-priced houses on the market.



What can you do?

Run numbers based on not the current sales, but comps from pre-covid years. Smart flippers are also stacking cash away from the huge sales now so they are prepared for any possible crash in the future. Enjoy the fruits right now but know it’s not going to last.

Don’t push the numbers and become aggressive. The idea that I have to have a certain number of properties or overbidding to meet 10 deals instead of your usual 5. It’s wise to be conservative during these uncertain times.

Minimize your holding time on flips. If you sell now while the market is hot you won’t be left ‘holding’ any properties if the market drops.

Be Conservative but don’t worry.

We think it is going to be another 12 months before we are even worried about the fallout from this. We have people in the real estate game now that still have memories of the bubble bursting in 2008 and they are proceeding with caution which will help slow down any quick deflations.



Pro-tip:

Moving forward keep your eye on:

Low inventory/ high demand, how people’s attitudes and financial coping mechanisms change regarding the pandemic, and distress sales.

The increase in supply we hope to see because of vacinations is from sellers who are also buyers. That is a net zero for the market. True supply is new construction and deaths; people live longer, boomers are not selling.

The US is short about 4,000,000 homes - that is the new construction undersupply since 2008 when many builders went bankrupt or scaled down. We have started building more, but the wrong kind (at least here in Milwaukee it's only luxury homes) and the cost is going up quickly (materials, supply chain.. not only lumber, which has quadrupeld).

Demand is comming from a shift in demographics: millennisals are now the largets group of home buyers, 82 million, 39 years old - they are not going back to rent. That is actual demand, that consumes additional houses. They don't have one to sell. 

I talk about this on my YouTube channel a lot, we have entered a new phase. This is not a temporaty situation, this market is here to stay. Ask anyone in CA how that works.

We have lost the ability to make new homes on scale, we don't have the trades, we don't have the land, we don't have the necessary zoning for high density, affordable Sf with city sewer and city water. Everything, at least in the Milwaukee area, is zoned for large SF on 1-5 acres with pricate well and spetic - 500 to 700k. That is not what we need. We need volume under 350k and it is physically impossible for a builder to do.

A lot of factors influence the market, like you have pointed out @William Allen - interest rates, goverment policy, money supply, stimulus, forbearance etc - but in the end it comes down to supply and demand. And that will take a while to balance out.

Capitalist markets are self regulating between supply and demand; of course we will expand supply, but that will take time (need more young people in trades..). The only other solution is that we reach a balanced market through price - one prices have gone up far enough, demand will be reduced and more people will rent, because it's cheaper. Right now thats still not the case in Milwaukee - much cheaper to own a home than to rent. I expect this to change over the next years.

A lot of great content in this thread so far. In the period preceding the Great Depression from 1921-1929, the money supply grew by 68.1%. In the past year alone we've seen the US money supply grow by over 30%. The detriment to our nation of using COVID-19 as an excuse to devalue our currency is going to be major. 

While I agree with you Marcus that this is a supply and demand issue in the short-term, we have to recognize that when the money printing spree slows down and eventually dries up no one knows what comes next. The Buffett indicator prices the stock market at the highest point in modern history. Real estate and bitcoin will continue to be my play, just don't get over-extended in this economy.

@Marcus Auerbach   Marcus your dead on.. its a lack of new construction

and for the exact reasons you mention.. 

the low price inventory has been dominated by investors as you know.. look at any major mid west rust belt city and take a look at where houses sell for 50 to 150 who buys those  90% are investors.. so there goes your affordable housing its lost to rental stock.. plus folks that want to own their own home generally wont buy in rental dominated areas as the issues are complex and schools not so hot.. 

Next in many markets is as you mentioned..  CITY HALL  land use laws  environmental laws.. Zoning laws  System development charges..  take the west coast for example were we work..  the cost to improve and get shovel ready for a lot not including the land is between 75k and 100k  just to do the streets and utls systems to modern standards which is generally speaking about 50k a lot  and then system development charges, which include sewer hook up water hook up park fee's school fees and so on is generally 25 to 60k per parcel.. So then you have to buy the land .. Land owners want double what its usually worth so they dont sell ( scarcity) you have cost of capital to bring the lot to shovel ready Then you have the build costs which from what I see might be as low at 75 a foot in parts of Texas and FLA for ding bat houses to 120 to 200 a foot for nicer stock..  So do the math.

We all know you can buy lots in the inner cities for next to nothing if not free.. Just look what Clayton Morris did in Indy and you can see the 1k dollar lots he talked people into buying.. these are still there..  But they are in neighborhoods that are renter dominated and the existing homes still sell for less than replacement costs.. so until those existing homes sell for more than they cost to replace you wont have any real building in the lower value areas unless its subsidized by Habitat or other non profits.. I saw one two weeks ago in south side Chicago some really nice stuff but no way the open market can build it when U can buy a fully rehabbed brick double for 220k or so or a shell for 50 to 70k .. there are thousands of vacant lots scattered throughout the south side of chicago that could be built on infrastructure is there.. but does not make financial sense..  

Ergo builders go to where they can build and make a profit and that is the 400k and up product generally speaking.. 

I do feel that some folks are going to jump into rental infill in these less than desirable areas because landlords will take the risk but homeowners simply are not going to burn their good credit and jobs to live on a street full of renters.. Just not going to do it.

@Jay Hinrichs our shovel ready cost here in Milwaukee is a lot less, but it is still impossible to build in the metro area for under 450k. I tried it and could not pull it off. And when I run an MLS search on all homes built in 2020 I can see I am not the only one!

Bread and butter for our builders is 500-700k (2,500+ SF ranches on 1+ acre)  and we are probably short some 80,000 homes - according to the Wisconsin Builders association we build about 1,600 per year; that's not going to do much. And that's the reason why I keep buying houses under 300k - they are like bitcoin, finite supply.

We have abou 300,000 millennials in the Milwaukee metro area, the oldest now turning 39 years old, that's 150,000 buyers (when married) and more and more of them are thinking about buying their first home. We sell about 11,000 single family homes per year (when we have inventory) - in total, that's mostly existing. And that is only the millennials, let's not forget about my generation (gen X) and the boomers. How is that going to work?

I have been scratching my head about how we are going to fill the supply gap. Supply should rise to meet demand, right? And the anser is we won't. The market will self correct, when you have an inbalance of supply and demand, but there is a second option: prices will go up, until demand goes down and the market has achieved equillibrium.

The idea that Milwaukee could be turning into a California type market is so absurd to me that I have not brought it yet on my YouTube channel - but there is a real possibility that is going to happen. Am I wrong??

Here is another radical idea, Milwaukee (and other cities on the great lakes) will become a climate refuge. People are moving out of California not only because of the taxes. They also don't want to smell smoke all summer and have to run a hepa filter in their house to have decent air to breath. My niece just moved for that reason to Seattle. We have huge amounts of fresh water, no floods, earthquakes, hurricanes - and even the winters are getting milder. 

Interesting times!

Originally posted by @Marcus Auerbach :

@Jay Hinrichs our shovel ready cost here in Milwaukee is a lot less, but it is still impossible to build in the metro area for under 450k. I tried it and could not pull it off. And when I run an MLS search on all homes built in 2020 I can see I am not the only one!

Bread and butter for our builders is 500-700k (2,500+ SF ranches on 1+ acre)  and we are probably short some 80,000 homes - according to the Wisconsin Builders association we build about 1,600 per year; that's not going to do much. And that's the reason why I keep buying houses under 300k - they are like bitcoin, finite supply.

We have abou 300,000 millennials in the Milwaukee metro area, the oldest now turning 39 years old, that's 150,000 buyers (when married) and more and more of them are thinking about buying their first home. We sell about 11,000 single family homes per year (when we have inventory) - in total, that's mostly existing. And that is only the millennials, let's not forget about my generation (gen X) and the boomers. How is that going to work?

I have been scratching my head about how we are going to fill the supply gap. Supply should rise to meet demand, right? And the anser is we won't. The market will self correct, when you have an inbalance of supply and demand, but there is a second option: prices will go up, until demand goes down and the market has achieved equillibrium.

The idea that Milwaukee could be turning into a California type market is so absurd to me that I have not brought it yet on my YouTube channel - but there is a real possibility that is going to happen. Am I wrong??

Here is another radical idea, Milwaukee (and other cities on the great lakes) will become a climate refuge. People are moving out of California not only because of the taxes. They also don't want to smell smoke all summer and have to run a hepa filter in their house to have decent air to breath. My niece just moved for that reason to Seattle. We have huge amounts of fresh water, no floods, earthquakes, hurricanes - and even the winters are getting milder. 

Interesting times!

Not to mention Beer  Brats  and fine cheeses  LOL  

 

Originally posted by @Marcus Auerbach :

The increase in supply we hope to see because of vacinations is from sellers who are also buyers. That is a net zero for the market. True supply is new construction and deaths; people live longer, boomers are not selling.

The US is short about 4,000,000 homes - that is the new construction undersupply since 2008 when many builders went bankrupt or scaled down. We have started building more, but the wrong kind (at least here in Milwaukee it's only luxury homes) and the cost is going up quickly (materials, supply chain.. not only lumber, which has quadrupeld).

Demand is comming from a shift in demographics: millennisals are now the largets group of home buyers, 82 million, 39 years old - they are not going back to rent. That is actual demand, that consumes additional houses. They don't have one to sell. 

I talk about this on my YouTube channel a lot, we have entered a new phase. This is not a temporaty situation, this market is here to stay. Ask anyone in CA how that works.

We have lost the ability to make new homes on scale, we don't have the trades, we don't have the land, we don't have the necessary zoning for high density, affordable Sf with city sewer and city water. Everything, at least in the Milwaukee area, is zoned for large SF on 1-5 acres with pricate well and spetic - 500 to 700k. That is not what we need. We need volume under 350k and it is physically impossible for a builder to do.

A lot of factors influence the market, like you have pointed out @William Allen - interest rates, goverment policy, money supply, stimulus, forbearance etc - but in the end it comes down to supply and demand. And that will take a while to balance out.

Capitalist markets are self regulating between supply and demand; of course we will expand supply, but that will take time (need more young people in trades..). The only other solution is that we reach a balanced market through price - one prices have gone up far enough, demand will be reduced and more people will rent, because it's cheaper. Right now thats still not the case in Milwaukee - much cheaper to own a home than to rent. I expect this to change over the next years.

I appreciated this thread Marcus. I'm a CA realtor (Sacramento capital area) and I agree with all you've said here. Unfortunately here in CA it's MUCH cheaper to rent than to buy and has been for a long time. I personally rented after my divorce because it allows me to live where I want for 1/3 of the cost. So to combat that I have multiple rental properties here and out of state......speaking of, if you have any good potential rentals in your area let me know.