Blog with MAE Capital

California Re-Opening Affects on Real Estate and Mortgage Rates

June 21st, 2021 10:11 AM by Gregg Mower

Well, here in California we are one of the last states set to re-open on June 15th, politics aside.   What will this mean for the red-hot Real Estate market?  We are currently still experiencing a shortage of home listings on the market, and we have demand still exceeding the supply of listings.  What will loosen up the market and get Real Estate back to a normal where the average person can get into the market?  What effects are inflation having on the market?  In this blog, we will be exploring the possible scenarios that could happen with a re-opening and what those consequences are.   

First, we need to ask why are people not willing to sell their homes and will it change?  In my opinion, I think the main reason, from what I am hearing from our clients, is that there is nothing to move up to.  Simply put, if they do sell their home where will they go if there are no homes for sale in the area they want to move to.  People have a fear of being homeless or paying more than they can afford and with no other homes to move to this is a major problem when it comes to freeing up inventory.  This is what is called an inventory shortage where demand for homes exceeds the supply of homes for sale.  Builders are trying to meet the demand, but the rising costs of materials are making the cost of building homes more expensive thus home buyers are getting less home for more money.  So, for a potential home seller moving up becomes a lateral move, not an improvement so they hunker down in their current homes waiting for the market to change.  Another phenomenon we are seeing is that older homeowners who would have sold and moved down are not doing so and staying put in their family home as it is cheaper to stay in a bigger home with low property taxes than it would be to move to a smaller home and have to pay more in property taxes, especially in California.  Those that have decided to move from the family home, we are seeing, move out of state where taxes are lower and property prices are cheaper, again not so good for the California economy.   

Another economic factor that we are dealing with is inflation.  This will keep people in their homes as well when they realize that the new home, they would qualify for is on the same level as the house they are selling making it foolish to sell and move.  In addition, inflation makes the cost of goods and services more expensive, so for potential move-up buyers inflation makes their income go far less and the costs of living is more expensive in their current home.  If you are paying more for food, gas, and consumer goods, and your income is not going up as fast, it makes the money you have, get eaten up quicker, so saving money becomes more difficult.  Inflation also makes building costs go up and the prices of new builds go up as well as we talked about earlier.  People want to feel comfortable before they make a move up to a higher mortgage payment and this is another factor why people are not putting their homes on the market.  We are in a territory never seen before, so as the government enacts monetary policy and new taxes and spending we will not see the end to this volatility for a long time.  

Looking to the future when California is fully open what will we see?  The first major problem we will see is the fact that California is keeping the extra unemployment benefits ($300 extra per week) until September 11, 2021.   What this is doing, and will continue to do, is to keep workers from going back to work where they would be making less money working than staying on unemployment.  To analyze this phenomenon, we must first look at the jobs people are not going back to work at.  These jobs are generally restaurant workers and retail workers and entry-level workers.   The workers that have not been working and receiving unemployment and the extra $300 a week have been taking their extra money and investing in the stock market and Cryptocurrency; thus, we have seen record highs in the stock market and crypto’s, this will go away when the money goes away, and they have to go back to work and begin paying bills with their earnings.  So come October, when this will be felt, we might see a stock market correction.  If we get a correction in the stock and equity markets people feel less secure as their investments will be considerably less than they expected forcing people to look to the equity in their homes for the extra money other than the stock market.  This may force some to sell their homes or it will hunker them down even more and possibly refinance their home again.   Then looking to those millennials that have been living at home for the last year and a half will have even less opportunity to move out as there will still be no homes to move into and this will keep demand strong for homes even at higher prices.  

Not knowing what will happen in the immediate future as things re-open, we do know that over time Real Estate is one of the best investments you can have.   So, what will pop the Real Estate Bubble this time?  We are looking at economic times we have never seen before coming out of a worldwide pandemic.   We are currently experiencing inflation, and, in the past, the Federal Reserve (the Fed) has raised interest rates to combat this, however, the Fed has said that they will not raise interest rates until possibly sometime in 2022 keeping rates low to keep the economy moving forward.  The fear is that we will have “Stagflation” which is inflation with a stagnant economy.  I am also taking into consideration that in October of this year the interest rate markets and the stock markets look 90 days ahead, so if inflation is still out of control in October in 90 days it will be 2022 and that could cause or help a stock market correction and higher interest rates.  To get people to sell their home they need to feel comfortable with their current financial situation and until that happens, we will see people hunkering down in their current home until they feel comfortable enough with their personal finances to sell and move up.  Hopefully, the re-opening will do that with people going back to their offices and business and can enjoy profits again and the supply chain of goods and services can catch up and inflation cools off.  

This is all a guess based on what people will do.  The thing is we do not know how the re-opening will affect Real Estate yet, but we know the demand, as it stands today, will be there until prices or interest rates rise to a point where the demand goes away.  We do know that low-interest rates always help real estate sales but that is not what we are looking for as we have enough demand, we just do not have enough inventory for the demand, and it will take a while to catch up and for builders to build and for sellers to feel comfortable selling and moving up or down.   What I do know is that the more money the government puts into the economy the higher inflation will go.  We have seen this already and sadly the dollar has gone down against every major currency in the world.  Although it is nice to receive money from the government it has become more harmful than helpful to the overall economy.  If this government spending trend continues, we will continue to see inflation and if the Fed doesn’t raise interest rates inflation will continue unchecked and everything will cost more.  As we see monetary policy and spending come from the Federal Government, we will see the overall direction of the housing market evolve.   The market watch will be month-to-month as we watch the economy and government policies.  If you have been on the fence about refinancing this is the time, without a doubt, as interest rates will go up and that you can bank on, and my best guess is this will happen around October of 2021 so get in now if you need money or think you will need money as the price of money has never been cheaper.  In conclusion, what we know for sure is that interest rates will be heading up, Real Estate demand will remain high until prices go too high and income can’t keep up with inflation and we know that Real Estate is a proven investment over time so good luck and let the team here at MAE Capital Real Estate and Loan walk you through the Real Estate and the Loan process.   

Post-Script June 21, 2021:  The Fed has announced that they will keep interest rates low until 2023.  This seems really unrealistic unless inflation slows down dramatically in the next several months.  If this is actually the case we have seen this before in the early 2000s when the government kept credit flowing by allowing the subprime markets to flourish for years after they should have and that led to the "Great Recession" starting in 2008.   I am not saying that will happen but it sure points to that.  The longer the Fed holds the market in an overheated nature the longer the correction will be in the future.  

Posted by Gregg Mower on June 21st, 2021 10:11 AM

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