On today’s show we’re talking about the tipping point of home valuations. This is really a discussion about situational awareness. It’s important to be aware of your surroundings. Most people would not walk alone in a dark alley in a rough part of town. It might be too difficult to have complete situational awareness to know whether it’s a safe move or not. The same situational awareness that would help keep you safe in a dark alley is what you need to stay safe as a real estate investor.
I’m starting to see an increasing number of people who are baffled by the rapid rise in home prices. The biggest factor affecting home supply is the lack of willingness to move.
I hear the same refrain over and over again. I love my neighborhood. If I sell, I can get a great price for my house, but where will I go? I can’t buy back into the area at a reasonable price. If I sell, I would have to move to a less expensive area.
This week, I had a conversation with a home owner in Dallas who said his house has gone up in value by $400,000 in the last two years. He’s willing to buy a larger house on some acreage in a less expensive area and cash out, and put the spare change in his pocket. A large family move is a daunting prospect. I’m hearing people who are contemplating making these moves, or have outright made the decision to move. One or two of these are interesting. But trends are the result of thousands of small independent decisions.
Real Estate markets are inefficient. They’re slow moving. They’re slow moving because people don’t move quickly. People move slowly.
Real estate has always been about location, location, location. The question is what does that really mean?
The definition is secular. It means different things to different people. For one person location means walking distance to their favourite coffee shop and grocery store. For someone else it means being close to their family members. For another, they want a view of the water and as much distance as possible to their closest neighbour.
It used to be the case that distance to work was a primary factor in deciding where to live. That is still going to be a major factor for the majority of the population. The number of jobs that are truly location independent still make up a minority of the working population. It’s a growing minority, but still a minority.
As the economy opens up, I believe we will start to see some mobility within the population that has been far below the annual averages over the past year of the pandemic. As people start to move, you will start to see more inventory of homes for sale coming into the market. The lack of inventory of existing homes for sale has been one of the largest factors driving the rapid increase in prices. Demand for houses due to household formation, and low interest rates, have both created a fear of missing out for new home buyers. New home buyers have been priced out of home ownership as prices have risen.
When you look at the rapid increase in values in some areas, coupled with the virtual freeze on movement that has been the story of the pandemic, I have to stand up and take notice.
When I know half a dozen people personally who are actively looking at rural acreage, I have to stand up and take notice. This is not a scientific survey by any means.
I can’t ignore a few data points like this. There is definitely something happening here.
I’m seeing migration at play. I’m talking to realtors who are looking for new supply. They’re looking further afield for that new supply. I’m talking to other developers who are seeing new demand in areas where demand was light in the past.