An article by Ferdinand Ruaño, the 'Wallstreet Developer'.
The real estate market is on fire!
A couple of weeks ago the S&P Core Losic Case Schiller Home Price Index (Index that
Measures the Performance of Residential Housing Prices) grew by 20% annually,
Residential Home Prices have Increased 10% or more for 10 consecutive months. The annual average for the past 5 years has been 5%, in other words, the Growth Rate has doubled and this has caused the speculation of a Real Estate Bubble in the U.S.
The last time we had a market similar to this was in 2004-2005. At that point in history, the prices of residential houses had risen by27 consecutive months at a rate of 10% Annualized. When this happened in September 2006 the bubble begins to deflate.
In this article, I will explain why we are not in a Bubble and on the contrary I see the development of a Super Cycle of 10 Years in the Market of Goods and Rice.
Here are the reasons why we think and believe in this opinion.
A) The 2004 – 2005 market was inflated by lender policies and irresponsible behavior and without financial foundations of fiscal prudence.
B) The greed of the banks led to overloading interests and commissions to
easy money exchange. (At that time the interest on a mortgage was one
C) The result was that of an extremely leveraged consumer
and very little margin for error in your Personal Finances.
D) For the fourth quarter of 2007, the mortgage debt payment in
ratio to net Income rose to a record 7.22%.
E) Immediately afterward, for the first quarter of 2008, the economy began to give
signs of weakening and the consumer began to fail in the payment of his mortgages creating a waterfall effect and embezzlement in the “Pools” mortgages sold to Retirement Plans, Banking Firms, Investments Firms, and many Foreign Sovereign Funds.
The Real Estate Market Status in 2022
The story is totally different for 2022. Loan standards have been reviewed by the “Dodd and Frank” Act and underwriting practices have been much more restrictive and cautious. In other words, the system is more regulated to avoid what happened between 2004 and 2006 which produced largely the beginning of the “GREAT RECESSION”.
Today interest rates are 3.75% on the 30 Year Mortgage. This represents half of the interest cost in 2004 -2006 and thus creating a decrease in the mortgage payment respective to the available income (DEBT/INCOME) to 4% also practically half of the period of the bubble.
Although the Housing Market is Superlative, we must consider that it is due to solid fundamentals totally Opposite to that of the 2004 Bubble –2006.
There are currently demographic and lasting conditions that will affect at least 5 years more as described above. In baseball language, it would be that we are in the 2nd Irring in a game of 9 entries.
Here are today's conditions
A) “Millennials” and “Baby Boomers” are creating one of the largest new construction demands of the past 50 years. Millennials have developed a great reputation for Postponing, important events, such as weddings, children, and the purchase of a home or house. Now they are doing all this because they make economic and seem logical under the current socioeconomic status.
This develops a demand event of more than 10 to 20 million new potential buyers for the next decade. At the same time,
tens of millions of Baby Boomers are looking to downsize their current residences for smaller homes for the freedom to travel and live more comfortably on a predictable budget. This combination of circumstances must last for the rest of the decade.
B) Financing costs are extremely attractive today (see graph). Although for this year there is a possibility of 4 interest hikes still attractive Buy vs. Rent, since the monthly payment
combined with Accumulated Equity gives meaning to owning real estate as an investment and capital management strategy. Of course, the increase in interest rates will reduce demand a bit, but still, demand will exceed supply by much.
C) After the "Crash" of 2008 in the real estate market, developers were very shy about new construction for several reasons:
1.- New financing regulations as new codes construction.
2.- The consumer with the financial crisis developed an apathy to long-term financial commitments. Especially when the foreclosures and property seizures were the order of the day. For this reason, the developers directed their efforts to rental properties and multifamily residences. New residence construction lagged behind and in the background for 10 Years.
This phenomenon has created dislocation and imbalance between supply and demand. ccording to Stephen Kim an Analyst at Evercore ISI: “The Industry will need more than 2.5 million units of new construction to be able to correct the current imbalance”. Currently, the data indicates that the Production Rate between 2001 -2020 has been 1.3 Million Units per Year. It would be necessary to increase almost double the annual production for 10 consecutive years to balance the deficit!
D) Covid-19 changed the world. One of the most pronounced changes was the highlight of the importance of housing. This is because it is the place where we not only live, but we work, we exercise and we see movies among other activities. Also, Covid-19 I raise awareness of the Importance of space and Social distancing which a residential home is a perfect place for the whole family.
This has caused the following consequences:
A) There is a shortage of new housing estimated at 6.8 million nationwide.
B) The Increases in Residential and Multifamily Rents have Increased to its highest level of change, if we look at the last 40 years.
C) Most Apartments and Rental Housing are in 97-98% Occupancy.
D) The average number of days for a dwelling to obtain a contract “Pending” is 9 days or less.
E) Based on Zillow Home Value Index Increase over 18.4% Annualized.
F) Based on Zillow Observed Rent Index Increased 12.9% Annualized.
To End, In the Year 2012 the most famous Investor of WALL STREET Warren Buffett of BERKSHIRE HATHAWAY told CNBC of Financial Television) “If I had a way to buy several hundred of thousands of Residences and I could Administer them, I would buy them all and
I would rent them for decades.”
Author: Ferdinand Ruaño
'The Wall Street Developer'
CEO of Private Equity Solutions