Given the good news we shared just last week about sales of pre-existing homes reaching a yearlong high, one might think all was rosy for the housing industry. Unfortunately, in recent years, that has never been the case, and there are reasons to fear that it might not be now, either.
There are myriad reasons why some are nursing a concern that February’s results are a false positive, but in short, they come down to the two simplest things in any financial industry: supply and demand.
It isn’t easy being a homebuilder these days. The prices of critical goods, like steel, lumber, aluminum, and plywood have increased 20-30% over the last year. That is thanks to the ongoing tariff war between America and many of her allies. An increase in materials cost clearly means an increase in build cost, which means either an increase in price or a decrease in supply. They are not being helped out by regulations, either, which account for about a quarter of the price of building a home.
Those costs come at a time when land prices are skyrocketing due to diminishing availability in major markets. And even if one can afford the land, they may not find anyone to build on it. Since the credit crisis of the late 2000s, many who formerly made a career in construction have moved on to more secure industries.
The cost of homes is increasing due to rising material costs, increasing tariffs and regulations, decreasing land availability and dwindling labor. But as long as the demand remains strong, we should be okay, right?
Not so fast, because demand is dwindling as well. It starts with market potential: decreased childbirth and restrictions on immigration mean fewer new people in the market (no, infants aren’t trying to buy houses, but with a decreased birth rate comes a decreased demand for single family homes).
As we discussed last week, retiring seniors are more likely than ever to rent, and millennials, many of whom saw loved ones lose their homes in the Great Recession, aren’t wild about the idea of investing in one themselves (especially when it’s so easy to crash on a friend’s couch. Hey, I’m a millennial myself. I can make that joke!)
Poor spending habits and increasing debt isn’t building lender confidence, either. And the new tax laws have created more challenges for buyers, especially in areas where the state tax rate is very high, as the Trump tax plan does not allow for taxpayers to deduct their state expenditures from their federal payments
Perhaps the piece-de-resistance of all this is that the rock bottom interest rates that are and have been in effect right now have not already spurred a housing resurgence. Those rates, according to many analysts, cannot sustain forever, and if they begin to increase, there’s no telling how low demand will go.
No Place Like Home
We’re not panic people at Unicorn Wealth. We just want you to have all the information you need to make smart decisions. If this has you feeling like you can’t possibly buy a home, that’s hogwash! You need to make the best decision for you and your family. We just want to give you some of the hurdles you’ll face in advance, so that you can be prepared for them and jump them like a champ!