Why is the housing market doing so well, despite interest rates at 23 year highs, crushing inflation and so many other factors that should have reduced home values? Discover the one big reason why the housing market is, and will continue to be, rock solid:
2023 Housing Market
Many predicted that as interest rates doubled, the housing market would collapse, and while interest rates have done just that, the housing market has remained strong. In fact, US housing values have climbed 4.5% in the past 12 months. How is that possible? The answer is very simple, yet incredibly powerful! And by understanding this one key factor, you will grasp so much about residential real estate investing and make better decisions as an investor.
Market Prediction Come True
In December 2022, I provided an explanation of Real Estate Investing in 2023 and in it, I described that the housing market would be steady this year. And that's exactly what happened! How did I know that? As you may know from other trainings, I make it very clear that it is extremely difficult to predict the future and to therefore avoid trying. However, I also knew this one crucial component of the real estate market and that's how my "prediction" came true. Once you understand this one big idea, you too will have a tremendous command over understanding residential real estate.
The Hedgehog Concept
To best understand this incredibly powerful point, we need to start with a lesson from one of my favorite business books, Good to Great by Jim Collins. In Chapter 5, Jim introduces the Hedgehog Concept. It comes from an essay by Isaiah Berlin called The Hedgehog and the Fox which is based on an ancient Greek aphorism whereby the fox knows many things, but the hedgehog knows one big thing. In the essay, the fox has many creative and crafty ways in which to attack the hedgehog but the hedgehog has one big defense and that is to roll up into a ball of spikes. Every time the fox mounts an attack, the hedgehog rolls up into a ball and the fox must call off the attack. The hedgehog's one defense is more powerful than all the creative ideas of the fox and that's exactly what's happening in the housing market.
Housing Market Hedgehog Concept
The lack of inventory is the housing market's hedgehog concept and the one big thing that is trumping all other negative factors. Inventory refers to the amount of available houses for sale relative to the number of buyers interested in purchasing. National inventory levels are at record lows, causing real estate prices to increase, even while interest rates have doubled. All of the fox-like attacks on the housing market have been defeated by the hedgehog defense of low inventory.
Why Inventory Matters to You
Inventory levels do not simply matter on a national macro-economic level, but deeply apply to you as an investor, in your local market and on your individual deals. Every time you do a deal, you should study the inventory, or review what other competitive properties are listed on the market. If you have almost no competitive listings, then you know have low inventory and your deal is going to be much easier to resell, regardless of high interest rates or whatever other economic problems may emerge from the time you close until the time you want to sell it. But if there are a lot of competitive listings, then you may want to reconsider buying it unless you really get a good deal on it. Inventory is the biggest of the biggest factors to evaluate on every deal you do.
What if Inventory Levels Rise?
If inventory is the hedgehog and we have low inventory right now, all that would need to happen to defeat the hedgehog would be a rise in inventory. However, how is inventory going to climb? Let's explore the three main ways that housing inventory could drastically increase and why all three have a very low likelihood of impacting inventory levels:
- New Home Building: Builders have tremendous headwinds that are preventing them from building mass quantities of new homes profitably. The cost and difficulty of reliable, quality labor; the drastic increase in the cost of building materials; the rapid spike in the cost of buildable land; the cost and hassles of overcoming local building regulations and the massive roadblocks created by NIMBY (not in my backyard) neighbors have all combined to slow down new home building. Builders will continue to build as much as they profitably can but they are throttled down so significantly that they won’t significantly impact inventory.
- Homeowners Begin Selling: Very few homeowners are selling because interest rates have doubled. They have 3-4% interest rate loans and if they sold their current home, would potentially have to move into a new home with a 7%+ interest rate loan, which would be . Why would they sell and get a 7.5% interest rate loan? So homeowners aren't selling. And this is a huge contributing factor for why we have low inventory.
- Foreclosure Tsunami?: Pundits have been predicting a foreclosure tsunami in America for many years but it has never materialized. In fact, foreclosure rates are at historic lows. And even if foreclosures rates doubled, tripled or quadrupled, foreclosure rates would still be incredibly low! However, many people are struggling financially right now and the statistics are staggering. American's now have $1 Trillion in credit card debt for the first time in history and 56% of Americans can’t cover a $1,000 emergency expense with savings. Some argue that many people are just a few months away from maxed out credit cards and the inability to make their next house payment so the foreclosure tsunami is inching closer than ever. But, many of those struggling the most financially are renters, not homeowners and also, most homeowners are paying much lower house payments thanks to a low interest rates on houses they bought before the market climbed. Furthermore, even if there was a rise in foreclosures, they would get gobbled up by local investors and institutional Wall Street firms that are buying thousands of houses for long term rental purposes. Therefore, no matter how you slice it, foreclosures isn't going to contribute to a drastic increase in inventory.
Every Successful Investor Has a Mentor
Real estate is complicated. Tackling real estate investing on your own will end eventually leave you struggling in confusion. That's why every successful investor has a mentor. Get your mentor here: Freedom Mentor Apprentice Program