How Did We Get Here?

I’ve been doing a lot of reading in the past week. I get frustrated with the authors of real estate articles who focus on the problems we’re facing, without offering solutions. I want to start by talking at a 30,000-foot level about how we got here, so you understand the many forces that are causing the inventory shortage.

So big picture … how did we get here?

1. Low interest rates are increasing demand
   Historically low interest rates have made it attractive for more people to enter the market or move up. All indicators from both US and CAD governments are that the rates will stay low for the foreseeable future.
2. Millennials are entering the housing market
   The largest chunk of millennials are now hitting 30 and are ready to enter the housing market. Even though affordability is an issue, low interest rates are keeping them in the game.
3. Institutional buyers are gobbling up houses
   Large investors with deep pockets are shifting their focus from commercial properties (which have been challenged during the pandemic) to residential properties (which look safe in comparison). I read this week that investors are now buying up 20% of all homes in the US. This is even higher in iBuying hot spots like Nevada, Texas, Florida and Arizona.
4. Investors are hedging against inflation
   With the threat of inflation looming, one of the best hedges against inflation has always been real estate. Knowing this, savvy investors are moving some of their portfolios into investment properties. We call this residential income (duplexes, triplexes, etc.).
5. Fixers and flippers are on the hunt
   With skyrocketing sale prices on properties, small contractors are on the hunt for diamonds in the rough, barely fixing them up, and reselling them for a quick profit. Recently I’ve seen listings advertised to “Buy the property as is for X or we can fix it up and you can buy it for Y”.
6. New construction cannot keep up with demand
   New home construction releases pressure on the market, but we can’t meet current demand. After the 2008 recession, many construction laborers left the industry and didn’t come back. Now there is a shortage of skilled laborers. My friend owns a roofing company and pays his laborers $24/hour and he can’t find anyone!
7. The supply chain in broken
   When the pandemic started a year ago, many of the manufacturers slowed production due to anticipated decline in the demand. The exact opposite happened. Let’s use lumber as an example. When the virus hit, mills paused production and now they are way behind. Add to that the Asian beetle infestation in British Columbia and we have a critical lumber shortage causing excessive inflation.

Most of these forces are invisible to real estate agents. They understand the market has changed, that prices are skyrocketing, and they are losing out in bidding wars, but they never know who they are losing out to. With limited inventory, low mortgage rates, and a huge influx of investors, the current market conditions will continue for a while.

One of the exciting things about being a real estate professional is constantly working in a changing environment. Just when you get a handle on the current market, something will happen that changes the direction of our economy. There are always geo-political and financial forces that are beyond our control. The secret to staying ahead of the pack is to quickly identify changes and pivot to meet new challenges. Simply put … I’ve learned I can’t change the economy, I can only change how I respond to it.

WHAT ARE THE SOLUTIONS?