Sticks and Bricks, Ep. 3: Market Dynamics in Real Estate Economics
Welcome to my world of luxury custom home building! I’m Sherwin Loudermilk, your host at Sticks & Bricks Podcast, where we explore the intricacies of creating dream homes.
In each episode, we delve into the nuances of building science and construction business practices by interviewing industry leaders.
In our latest episode, I had the pleasure of welcoming Chad Wade, a long-time friend and partner at Cornerstone Mortgage Group.
Chad and I have shared a professional journey that spans over two decades, starting from our days as tennis partners to building our respective businesses side by side.
Chad brings a wealth of knowledge in finance and lending, making him the perfect guest to discuss current market dynamics.
In our conversation, we dive into real estate economics, focusing on employment, the consumer price index (CPI), and the supply-demand balance.
This episode is packed with insights that can help you navigate the complexities of today's housing market.
Listen to the Full Episode
Here is a summary of some of the topics we discussed on the podcast episode.
Introduction to Market Dynamics
In real estate economics, market dynamics are influenced by a variety of factors, but three stand out for their direct impact on the housing market: employment rates, the consumer price index (CPI), and the supply-demand balance.
Understanding these elements can provide valuable insights into the market's direction and help you make smarter investment decisions.
Employment and Its Impact on Real Estate Economics
Employment rates are a fundamental indicator of economic health.
High employment rates generally lead to higher consumer confidence, which in turn boosts demand for housing.
When people have stable jobs, they feel more secure in making significant financial commitments like buying a home.
In recent years, we've seen fluctuating employment rates due to various global and national events.
For example, during the COVID-19 pandemic, unemployment spiked dramatically.
However, as the economy has recovered, we've seen a resurgence in employment, which positively impacts the real estate market.
According to the Bureau of Labor Statistics, the unemployment rate in the United States was at a low 3.6% as of May 2024.
The low unemployment rate translates into more potential buyers in the market, driving demand for homes.
As a result, builders and sellers can often command higher prices, reflecting a robust market.
The Consumer Price Index (CPI) and Real Estate Economics
The consumer price index (CPI) measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
In simpler terms, it tracks inflation and how much more or less we're paying for everyday items compared to previous periods.
Inflation affects everything from the cost of building materials to securing a mortgage with favorable rates.
When inflation is high, the cost of living increases, and this can lead to higher interest rates as the Federal Reserve tries to control inflation by making borrowing more expensive.
In April 2024, the U.S. CPI rose by 4.2% compared to the previous year.
This increase indicates higher costs for goods and services, including those related to real estate.
For example, higher inflation can lead to increased costs for building materials, which can impact the overall cost of new homes.
For buyers, higher inflation can mean higher mortgage rates, making it more expensive to finance a home.
Supply-Demand Balance in Real Estate Economics
The balance between supply and demand is perhaps the most visible and immediate factor affecting the real estate market.
When demand for homes exceeds supply, prices tend to rise. Conversely, when there is an oversupply of homes, prices may fall.
Currently, we are experiencing a tight housing market with a low supply of homes available for sale.
According to the National Association of Realtors, the housing inventory at the end of May 2024 was at a 3.2-month supply at the current sales pace.
A balanced market typically has about a six-month supply. This low inventory means that buyers are often competing for the same properties, leading to bidding wars and higher prices.
The Role of Fed Rate Hikes in Real Estate Economics
The Federal Reserve, or the Fed, uses interest rate hikes as a tool to control inflation.
When the economy is overheating and inflation is rising too quickly, the Fed may increase interest rates to cool things down.
Higher interest rates make borrowing more expensive, which can slow down consumer spending and investment.
In the context of real estate, Fed rate hikes have a direct impact on mortgage rates. When the Fed raises rates, mortgage rates typically follow suit.
Higher mortgage rates mean higher monthly payments for homebuyers, which can reduce affordability and dampen demand.
For instance, the Fed raised rates several times in 2023 and 2024 to combat rising inflation.
As a result, mortgage rates climbed, reaching an average of 6.5% for a 30-year fixed-rate mortgage in May 2024.
This increase in borrowing costs can deter potential buyers, leading to a slowdown in the housing market.
However, it's essential to remember that these rate hikes are not permanent.
They are part of the natural ebb and flow of real estate cycles.
As inflation comes under control, the Fed may lower rates again, making borrowing more affordable and stimulating demand in the housing market.
Practical Insights for Homebuyers and Investors
1. Monitor Employment Trends
High employment rates typically lead to increased consumer confidence, which boosts demand for housing.
For example, when more people have stable jobs, they are more likely to invest in homes, driving up property prices. This trend is evident in cities like Austin and Dallas, where job growth has spurred housing demand.
Keeping track of employment trends in your area can provide early signals about market movements.
For instance, if a major employer is expanding or a new industry is emerging, it can lead to increased demand for housing in that region.
Conversely, rising unemployment rates may signal a potential downturn in the housing market, offering strategic opportunities for investors.
2. Stay Informed About Inflation
High inflation can increase the costs of goods and services, which in turn affects the prices of building materials and mortgage rates.
Homebuyers and investors should monitor inflation trends to understand their impact on purchasing power and housing costs.
High inflation can erode the value of money, making it more expensive to finance home purchases.
Builders, too, face higher costs for materials and labor, which can translate to higher home prices.
3. Assess Supply and Demand
The balance between supply and demand is a crucial factor in real estate economics. When the demand for homes exceeds the supply, prices rise.
This is currently evident in many U.S. markets where housing inventory is low.
For investors and homebuyers, understanding local supply and demand dynamics can guide your decisions on when to buy or sell.
In markets with low inventory, sellers can command higher prices due to increased competition among buyers.
Conversely, in markets with high inventory, buyers may have more negotiating power and a wider selection of properties. Analyzing local market reports and trends can provide insights into these dynamics.
3. Plan for Rate Hikes
Federal Reserve policies on interest rates significantly affect the real estate market.
When the Fed raises rates to combat inflation, mortgage rates typically increase as well, making home loans more expensive.
In 2023 and 2024, the Fed's rate hikes led to average mortgage rates climbing to 6.5% for a 30-year fixed-rate mortgage in May 2024.
Planning for potential rate hikes is essential for both homebuyers and investors. Higher mortgage rates mean higher monthly payments, which can affect affordability.
If you anticipate rising rates, locking in a mortgage rate sooner can save you money.
Tune in to OUR Sticks & Bricks Podcast
Chad and I had an in-depth discussion that dissected market dynamics and importance of understanding employment numbers, consumer price index (CPI), and supply-demand balance.
We also spent a considerable amount of time talking about Fed rate hikes and their impact. This was just a summary.
I encourage you to tune in to my podcast, Sticks & Bricks, for more in-depth discussions on such topics.
A big thank you to Chad Wade for his insight and contribution to the podcast. I would also like to acknowledge the ICONS of Real Estate podcast production team for helping me get Sticks & Bricks off the ground.
Join us as we explore the dynamic world of real estate cycles and uncover the secrets to successful home building and investment.
Listen to the Sticks & Bricks Podcast.
