When evaluating the current state of the real estate market across the country, it’s important to look beyond negative articles, social media posts, and videos that may create a sense of pessimism. Instead, one should analyze individual real estate regions on their own merits to gain a more comprehensive understanding of the industry’s condition.
It’s no longer sufficient to simply rely on national averages, as has been done in the past, and this applies not only to industry analysts but also to consumers of their insights. What has changed in recent times that makes this approach necessary?
Four Factors That Haven’t Existed Simultaneously
These factors are significantly contributing to the variation of real estate prices and price stability from one state to another.
- Extremely partisan politics and policies.
- Double digit real rates of inflation for the last two years and counting.
- Work from home becoming popular with job applicants, employees, and companies alike.
- New home builders are not over building, and mortgage lenders are more strict.
Partisan Politics and Policies
The prevalence of highly partisan politics and policies has prompted individuals to reevaluate whether their current state aligns with their personal and political beliefs. Some individuals are considering relocation for the first time, while others who own vacation homes, second homes, and/or investment properties in other states are also contemplating a move for their primary residence.
This partisan situation is causing pockets of high demand in states such as Texas and Florida, among others, resulting in a significant influx of new permanent residents. Many individuals are selling their existing homes in their home state and purchasing new homes in states they view as more compatible with income and lifestyle requirements. As a result of these moves, the states that people are leaving may experience a notable real estate market price corrections, while the states that they are moving to may see prices of real estate listings rise rapidly or remain relatively stable.
Double Digit Real Rate of Inflation
The current double-digit real inflation rate is having a significant impact on individuals and families, as their income fails to keep pace with the rising cost of living. Those who are not receiving wage increases to offset the effects of double-digit inflation and have the means and willingness to consider relocation are finding that moving to a state with lower state income and/or no capital gains taxes could improve their financial situation or help maintain their quality of life.
This could be another reason why the states where people are leaving appear to be experiencing notable market price corrections, while the states they are moving to seem to be weathering the economic and political implications more effectively.
Work From Home Posture
The shift to a work-from-home or remote work posture is particularly noteworthy given that it was not a widespread circumstance prior to the pandemic in 2020. I have observed many mainstream analysts not giving this trend sufficient attention or consideration in their assessments or theses about the real estate market. Although initially implemented as a mandatory response to the pandemic, the work-from-home or remote work model has proven to be very popular with both employees and their employers.
Businesses have been able to drastically reduce overhead costs, while employees have regained lost time previously spent preparing for and commuting to and from their place of work. Consequently, many people and businesses are not anticipating a return to “business as usual.”
This newfound flexibility is enabling individuals and their families to choose where they live while working, assuming their employers are amenable to this arrangement. As a result, individuals will tend to gravitate towards states with lower costs of living and little to no state income tax. This is yet another factor that may be driving the migration of businesses and people away from their home states to other states with pre-existing incentives.
More Strategic Home Builders & Lenders
New home builders are not flooding the market with inventory like they did leading up to the mortgage-economic crisis between 2006-2009. This irresponsible building led to a glut of inventory on the market, far outstripping demand they thought would be there, and led to a dramatic reduction in prices to clear inventories.
In addition to over-building, lenders were irresponsibly lax on underwriting guidelines and policies, leading to a situation where alot of homeowners were refinancing to pull out cash to buy one or more investment properties, typically using short term fixed ARM (adjustable rate mortgage) loans, or to use the cash from home equity to support whatever shortages existed to cover income gaps. This was a time when the majority of mortgage lenders were approving mortgages without verifying borrowers’ employment, income or assets. “Stated income” mortgage loans were common.
Meanwhile home owners/borrowers with stated income and asset loans experienced payment shock as rates adjusted up and the drop in prices eliminated the equity in their homes which they relied on through the refinance boom to cover income shortages. This scenario exasperated further decline in prices as those homes foreclosed or sold as “short sales.”
Today, new home builders are taking a more methodical and strategic approach to their plans, while mortgage lenders are underwriting loans more strictly, with a common sense approach and actually verifying income and assets using direct or third-party verification methods to mitigate risk.
An Example of a Buyer Considering a Move
Let’s take a moment to consider the scenario of a remote worker in California who owns a home and earns a six-figure income. Despite the convenience of working remotely, they could be paying up to 10% of their income in state income taxes.
In January 2021, the value of their home has substantially increased, leading them to contemplate selling it. With newfound wealth, they have the freedom to purchase a new home anywhere in the US. Due to the high taxes in California, they are likely to choose a state with little or no state income tax.
As they search for their new home, they will prioritize regions with top-notch amenities, either already established or with the potential for growth, to enhance their quality of life, such as Austin, Texas. This situation is becoming more common nowadays.
However, as more people like the one in this example rethink their living arrangements, it could have a ripple effect on California’s housing market, leading to a decrease in demand and a potential negative impact on real estate prices, while the new location this person decides to move to would be experiencing an influx of new residents looking for the same benefits.
What Are Timid Home Buyers to Do?
Homebuyers should not be overly concerned with national averages or speculation about market crashes. Instead, they should concentrate on evaluating the particular territory or area they are considering purchasing in and moving to. They should assess how the real estate market is performing on the ground in that location, and how it compares to the market conditions in their current area. This will take buyers more time and effort to uncover the information they need compared to prior years before 2020, but given the uniqueness of the market we are in, the effort will not only be necessary, but required.