Managing Uncertainty

Institutional buyers may cause instability

According to the Phoenix Business Journal, homeowners across the US are starting to get break up calls from Zillow Offers, offering them thousands of dollars to break off their contracts to sell their homes to Zillow. Regardless of the Zillow debacle, iBuyers like OpenDoor have flourished in our super-hot market. In some markets, iBuyers account for upwards of 10% of sales. If institutional buyers with deep pockets are in your market, expect instability if the market slows down and they start dumping inventory in 2022. I’m not saying it WILL happen, I’m saying you need to be prepared in case it does.

COVID is a persistent problem

The new variant out of southern Africa is causing havoc in our markets again. No matter where you fall on the vaccination discussion, that’s irrelevant, I’m only interested in how the ongoing pandemic affects real estate. If shutdowns happen again, it will negatively affect the economy. So far real estate has dodged a bullet during the pandemic, but if COVID surges its ugly head again, consumer confidence may plummet from COVID exhaustion. Keep a close eye on the virus to anticipate how it will affect your opportunities next year.

Inflation is steadily on the rise

For any of you who went shopping on Black Friday, you will have noticed that sales were lacking. You can thank inflation and supply chain issues. While demand for goods has skyrocketed, supply was not ready to meet it. COVID lockdowns in Asia, widespread labor shortages, and poor planning contributed to the supply shortage. Inflation has spread from used cars to energy, from rents to food to apparel. At the same time, wages are surging, which is great for employees, but it also contributes to inflation as companies raise prices to offset higher labor costs. Last month, consumer prices rose at their fastest pace in 31 years and economists are still debating when inflation will peak.

Inflation is good when it grows slowly at about 2% over the long run. Moderate inflation is the sign of a healthy economy. When consumers expect prices to rise, they buy NOW. Producers start to produce more goods, they hire more staff, and make more investments. All good. But left unchecked, inflation can escalate too quickly. To slow it down, governments will raise interest rates.

If rates go up, it reduces the number of qualified buyers, and it makes move ups more expensive. If we have a minor adjustment in rates, the market will see a minor slowdown. If we have a major adjustment in rates, the market will see a major slowdown. When you plan for next year, ensure you have a clear picture of which expenses are essential and which are discretionary. If we see a slowdown in the market, you’ll quickly know where to cut discretionary expenses. Which brings me to another point, you should be paying down your debts while interest rates are low, and you should look at locking in your own mortgage before rates rise. When you reduce your debts, you sleep better at night, regardless of what happens in the market.

The Canadian market is a case study

I read an article in Better Dwelling on the formula the Federal Reserve uses to identify when a market is in a bubble. The US Federal Reserve issued a warning that the Canadian real estate market is officially in a bubble. In fact, we may be in a bubble on a bubble. According to the Feds, when a market has five consecutive quarters of exuberant growth it is considered a bubble. Exuberant growth is considered irrational and based on emotions. Emotional buying is unpredictable and prone to rapid corrections. In Canada, we have now had six quarters of exuberant growth, but even before that, it wasn’t that long ago that we had a previous bubble that never burst. In reality, we are either in one very long bubble that started in 2015, or we are in a bubble on a bubble since it didn’t correct in between. The Feds say the Canadian market requires a correction; they just can’t tell when.