Will 2022 be the year of the real estate market crash in America?!
By: Jack Ataalla - Economic Researcher - Exclusive for Charisma Daily
October 15, 2021
968 5 minutes read
Inflation… High prices.. Real estate collapse… Unemployment.. Interest rate.. And Pandemic.
Words that have come to our ears a lot lately, and who among us has not heard about the steady rise in the prices of goods and services, especially in real estate prices, which has affected all states.
Because of that huge rise in prices, talk began about the possibility of a real estate bubble, which threatens the collapse of the real estate market soon and the recurrence of the specter of the 2008 crisis, especially with the high rate of inflation to record numbers.
Many questions and different opinions we all hear, some of which are conflicting, regarding the future of the real estate market, which makes the seller, buyer and investor confused.
In order to answer these questions and analyze the real estate market, let us measure and analyze what is happening according to a scientific method based on economic theories and historical data to reach a correct answer in a simplified way.
Economic analysts use some data to determine the price direction of any service or product. Some of these data include the following:
– inflation rate
– supply and demand
– Prices of complementary and alternative goods
– interest rate
Inflation:
The world is currently swept by a global inflation wave due to the impact of the Corona Pandemic that extends so far, from which countries are trying to recover as much as possible.
And if we talk about numbers, the report of the US Department of Labor indicated that the Consumer Index (CPI), which measures the annual inflation rate, indicates that annual inflation has risen by 5.3% from August 2020 to August 2021
To be more clear, this means that the purchasing power decreased by 5.3% in just one year, which is considered the highest value that inflation has reached in the past 10 years.
The inflation rate is an indicator of real estate prices, as there is a rule in the economy that in case of inflation, a large number of investors resort to hedging tools.
It is the search for a safe investment pot in which money is invested to keep it from depreciating as a result of inflation. Therefore, most investors resort to investing in real estate or gold because they are in a permanent upward trend over time.
And there is always a positive relationship between real estate and gold prices on the one hand and inflation on the other hand, which means that a higher rate of inflation leads to an increase in their prices.
And also American society says,
the housing market gets sick but it doesn’t die.
Which means that the property is in a permanent upward trend, interspersed with some periods of the sideways trend for a temporary period, but it certainly will not be a crash trend, and historical data confirm this analysis.
Based on the foregoing, let’s talk about
Supply and demand:
As we mentioned earlier, the high rate of inflation increases the desire of investors to buy real estate as an investment pool, which increases and creates a large demand that is not matched by supply of the same amount, which is the so-called Excess Demand
And real estate, like any commodity, when demand rises, the price rises because there is no equilibrium.
At this time, the real estate market is called Seller’s Market because it is a perfect time for the seller to obtain a high price based on the lack of supply and high demand.
And if we talk about the numbers, Realtor’s report on the average real estate prices, or what is known as the (Median YOY)
It increased during the last year by 23.4%, which means that there is a high increase in demand that is not matched by the same percentage of supply.
And to know why there is not the same ratio between supply and demand, this takes us to understand the Substitute & compliment
The supply of real estate is carried out in two ways..
– Selling an existing property
– Building new real estate units
And for the construction of new real estate units, building materials are required, which are considered one of the complementary industries and feeders of the real estate market.
Building materials, like other commodities, are suffering from severe shortages in supply due to the Corona Pandemic which affected supply chains worldwide and caused what is known as the global supply chain crisis and caused a rise in their global prices, which affected the prices of construction and building and consequently unit prices for the end consumer.
All these factors combined pushed real estate prices to rise steadily during the recent period.
On the contrary, there are also some factors that push prices to the downside or reduce the extent of the rise, such as the interest rate.
When inflation occurs, the Federal Reserve uses the interest rate as one of the monetary policy tools to control inflation and to stop losses resulting from the devaluation of the currency and the lack of purchasing value.
And because many are not specialized in economics, we can explain the interest rate in a primitive – inaccurate way – but only for clarification.
If inflation is 2% (this means that the value of money decreases by 2% per year)
If a person receives a $100,000 loan during this year at 3% interest for a period of one year, the principal amount plus interest at the end of the year will be $103,000.
But because inflation is 2%, this means that the bank lost 2% of the 103,000 over the year, which means that it got only 1% interest, forcing it to raise the interest rate on lending to compensate for the losses caused by inflation.
In this vein, the higher the inflation rate, the higher the interest rate, which is considered a danger to investment in particular and the economy in general because it causes a rise in investment costs, which leads to an increase in the prices of all goods and services
Therefore, the high interest rate is not in the interest of the economy and is used as a tool for a period of time in order to restore.
As we mentioned, higher interest rates will lead to higher mortgage , which will result in the inability of a certain segment to buy homes because they can’t afford the high interest rate or can’t qualify.
Consequently, the demand for real estate will decrease, which will push the Demand & Supply to the point of price equilibrium, and this is what started to happen in some areas in the different states.
Therefore, the upward trend can continue to rise, but not with the same speed and force as in the last few months because there are other factors that push it to become more flat than up.
A final factor in determining the price of the property is that not all the market is the same, but there are different price levels
So there can be an upward trend at one price level for a large segment that is Affordable and at the same time a sideward trend at another price level.
In addition to taking into account other factors such as the effect of the foreclosure rate on the supply of real estate
And it is not only the economic factors that affects supply and demand, but also stability, political trends, taxation, budget allocations, unemployment rate and minimum wages also greatly affect and therefore must be taken into consideration.
In the end, taking all these factors together gives an indication of the future direction of prices only if all other factors are kept constant.