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Is the Federal Reserve helping?
The federal reserve has pumped a huge amount of money into circulation since the start of the COVID pandemic – around 35% of all money currently in circulation. At the same time, housing prices have shot up and are now about 35% overvalued. Is this just a coincidence or is there a direct connection between these two facts?
There’s no doubt that the policies of the federal reserve have impacted both the broader economy and the housing market. By keeping interests rates low and purchasing assets, the Fed has made it easier for buyers to obtain mortgages and has stimulated housing demand. This influx of new money into the system has certainly contributed to rising home prices.
Other factors
However, I don’t think it’s quite as simple as just pointing to the money supply. Housing is complex with both supply and demand factors at play. We’ve been chronically under-building new housing for over a decade, especially in booming areas. This limited supply coupled with strong demand from millennials has put upward pressure on prices. So while Fed policy has absolutely been a factor, it’s not the only one.
Are current housing prices valid or just a bubble fueled by the Fed? It’s hard to say definitively, but I lean towards thinking prices are too high right now and due for a correction. Home prices compared to incomes are at historic highs, even exceeding the 2005-2006 bubble. This suggests homes are overvalued. Now, maybe this time is different, but looking at the data, it seems we are set up for a slide in values like we’ve typically seen after past rapid run-ups.
Correction ahead?
I expect a significant correction coming in housing, perhaps 15-20%. The higher prices rise, the steeper the eventual drop. And based on past cycles, the next downturn could be severe. This will likely create some pain and turbulence in real estate, especially for over-leveraged investors and cash-out refinancers.
As for the future of real estate professions, I’m skeptical of claims that realtors as a whole face extinction. The industry will evolve as new technologies emerge, but knowledgeable agents provide value guiding both buyers and sellers through transactions. Discounters may grab some market share, but the demise of traditional brokerages is overblown. The NAR will need to adapt to changing consumer preferences, but still has an important role to play.
Time to step up
The key for real estate professionals is to lean into changing technology while still providing personalized advice and local expertise. There will always be demand for trusted advisors in the high-stakes world of real estate. Though market corrections loom in the near-term, real estate remains an essential service in society and a solid career choice long-term.
Let me know if you agree or disagree with my perspectives! I’m open to counterarguments and data that strengthens or challenges my points. Real estate is complex, so I don’t claim to have all the answers, just my thoughtful take based on the trends I’m seeing. What are your thoughts?
