Joseph is CEO of TenantCloud and Renter, property management solutions that help landlords maximize revenue from rental properties.
Home prices continue to rise at once unthinkable rates as housing demand continues after the 2020 lockdowns. People are starting to move around the world and across the country.
The move sparked the “Great Resignation,” impacting today’s real estate economy and once again causing once small and sleepy towns to explode. Sitting in traffic and an office cell all day is now replaced by a lakeside cafe and a Zoom call from the park bench.
Such migration to the countryside should lead to less demand in the cities and more in the countryside. But not in this market.
As a country we are made up of people and we all need a place to live. As the population grows, we need to build new houses in a ratio that matches population growth. The ratio of annual population growth to new dwellings built was close to 2:1 in 2006. That is, we built a new house for two new people in the population. The ratio was 5:1 in 2008, but the construction slowdown caught up with us in 2012 and we started building again.
A combination of slowing population growth and increased house building has lowered the ratio to the lowest it has been in the 21st century – currently being at one new home for every 1.6 people added to the population. Another thing that puts pressure on housing supply is the modern family structure – it has changed. Single adults living alone are the fastest growing type of family in the country. Alarmingly, this means even more adults looking for accommodation in an already saturated market.
If you are an investor, this means real estate is in short supply and demand is high. If you are considering selling or buying real estate, it may be worth considering the impact these differences in supply might have on your investment. Selling now will probably leave you with a windfall of cash, but then you’ll have to find something to do with that cash – and if it’s to buy another rental, you’ll most likely find yourself in a bidding war.
Not only do you stand to lose this battle, but interest rates are now rising rapidly, and your current rental loan may be a much cheaper interest rate than what you can currently get.
Higher interest rates may discourage potential buyers, but higher prices have not yet deterred them. Since 2020, homeowners’ net worth has increased by more than 4 trillion dollars and amounts to more than 25 trillion dollars. By comparison, it was slightly above $14 trillion at its 2005 high and $8.2 trillion at its 2012 low.
So with all that equity in real estate, one might wonder if one should sell now and pay off one’s mortgage, then run away with the money. It might sound like a good strategy if you were sitting at a blackjack table in Las Vegas, but in the real estate industry during times of inflation? Again, this may not be the best time to leave.
Inflation kit records in the first quarter of 2022 and with supply problems persisting, consumers may have no choice but to pay more for what they want. Fuel prices are now setting new records, which are factored into all prices as they are used to produce, ship and deliver almost all goods and services.
A savvy investor might see this as an opportunity. Leveraging an existing property portfolio to purchase new rentals provides an opportunity to extend and lock in long-term interest rates on an asset that is scarce and rapidly rising in value.
In 2021 alone, house prices rose by almost $50,000 for an average home in the United States., which is higher than the annual average US citizen salary. If values are growing faster than wages in a single year, it should be obvious that you want that growth on your side. Especially if you’ve managed to lock in a longer-term interest rate.
If you’re one of the millions of people who happily refinanced or bought a home with a fixed mortgage during record low interest rates, you’re probably not looking to sell anytime soon. Two things that help pay off mortgages are fixed interest rates and inflation, as long as you don’t sell. Of course, this fact will only make even fewer homes available for sale.
Selling your house now and paying off your fixed mortgage would probably be a mistake. Inflation would work against you instead of working for you by paying off your mortgage. Net cash proceeds would only come with agent fees before you realize you want to park the money in something that will rise with inflation: real estate.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific situation.