As we try to navigate a real estate market with record housing availability shortages the conversations by potential buyers, sellers and REALTORS are all speculating on when does the "Bubble Burst?" That is an interesting question because we are traveling unfamiliar ground. My speculation is there is no burst in sight, unless caused by an outside government causation, and that would be a calamity not a solution.
We have experienced a perfect storm that has created the market we are experiencing. It is unlikely it will be corrected any time soon. It began in 2007 with Congress passing the Sarbanes Oxley Act that changed our nationally required accounting for all financial institutions from Mark to Mark to Mark to Market which arguably created the housing market crash in 2008. I have several blogs explaining that so I won't go through it here other than to say it created an artificial market value collapse. But that flooded the market with depressed value houses and spurred a buy up by Wall Street buying the houses cheap and putting them into REITs as rentals and selling stock in the portfolio. This process ended up moving hundreds of thousands, if not millions of houses from private ownership into rental inventory.
Next part of the storm was the building industry. While the market was flooded with low priced inventory it made building for a profit nearly impossible. So builders, developers and contracting companies in all aspects of the building industry closed their doors. We lost 1.6 million people in the building business from 2008-2010. The industry has been building approximately 20 million homes every decade for many decades, but from 2008-2016 only built 5 million. Reducing the available homes that should have been here further.
Then add to this mix that the Millennials, the largest generation in history, came to prime home buying age. Yet, they were bottled up for quite some time because while the stock market grew during the time period from 2009 -2016 jobs and wages didn't. In fact, during that time, more 18-33 year olds, for the first time in history, were still living at home with their parents than on their own. New household formations, moving out on their own, that traditionally always ran 1.3 million a year dropped to around 300,000 a year every year during that period. So the pent up demand hit levels never seen before. During this time average household earnings dropped on average of 5,000.00 a year. For the first time in history, more business closed each year than opened, and labor participation rates dropped to record levels far lower than at the bottom of the Great Depression, one in five households had no one employed.
Starting in 2017 real wage growth happened for the first time in twenty eight years, and for the first time in that time, labor participation rates actually increased. So now the Millennials were released to start buying their first homes. But the homes didn't exist. The builder community finally got back up to their pre-crash numbers of 1.3 million new homes in 2018, but that didn't do anything but keep the gap from getting worse, it didn't reduce the gap. It is said that 40 million more homes must be built to just house the Millennials and legal immigration.
Wall Street has complicated the builders catching up. With the unprecedented government spending over the last two years, printing and velocitizing 80% of the nation's money supply in just the last two years. This has made investors terrified of having their money in cash because its value is evaporating in front of our eyes through massive inflation. Wall Street is also uncomfortable with commercial real estate, especially office complexes after seeing the Zooming of business the last couple years. So they are buying up single family real estate competing with buyers, but brining cash and not worrying about appraisals. Now they are compounding that issue by contracting with large builders for billions to build out entire subdivisions of new homes for the Wall Street investment houses to turn into REITs and rentals. There are only so many resources of manpower and building materials and this is not closing the gap on homes families can purchase.
With all this, it will be quite some time before this shortage gets corrected and brings balance to the housing market.
