The real estate market has been trending up massively since 2020. Do we really think it can keep up at this pace? Houses are up over 16% nation wide just in 2021. Last time we saw this, was in 2008 and we had a market crash. So… are we thinking the same thing is going to happen this time around in 2022?
It is definitely possible! It sure could have a correction or a crash. Anything is possible and I am not going to say yes or no for certain. We had record low interest rates in 2020 and 2021 to stimulate buying. This was allowing massive amounts of money to change hands with low interest rates being locked in. I have heard for every 1% of interest rate increase or decrease, it is viable to see a increase or decrease of 10% on real estate cost, to make up for a similar monthly payment. Since, most people buying homes are individuals or families who are buying them to live in as their primary residence. They are concerned mostly with their monthly payment and what they can afford. So, if interest rates are high, market prices for houses need to be lower to accommodate for similar monthly payments. If interest rates are low, market prices for homes can be higher. So, as interest rates increase, we could see market prices for homes to decrease accordingly. However, that is also not a guarantee, just a speculation from some professionals in the real estate market.
Second, there are real estate stages. I will attach a picture for individuals to review. Right now we are in phase 2, the expansion. We still do not have increasing vacancy or supply, so we have not reached phase 3 yet. However, if we look at the market trend, it looks like there could be a recession in the future.
On the contrary, we could see prices continue to grow or stay similar. I say this because we have an explanation for why prices sky rocket the past 2 years. Here is why:
- Interest rates decreased for more stimulation in the market, which allowed for prices of homes to increase. So, if interest rates do not severely increase, we could stay at similar prices.
- Inflation has skyrocketed, the federal government has printed 80% of the money in circulation since January of 2020. This means we went from 4 trillion dollars in circulation to 20 trillion dollars in circulation. Here is a link to one of my sources
- There is a shortage of housing right now, driving demand in the market
With these three points, it does not seem unreasonable for prices of homes to increase. It does not seem unreasonable for prices of everything to increase, considering we have to make up for 80% increase in the circulation of money with no new production.
My feelings on the topic, if we look at the chart for the real estate cycle, I would believe we are on a road to recession. If we look at the contrary points I made, which are not taken into account in the real estate chart, it makes sense for prices to be inflated and for them to continue or stay at their elevated prices.
We are in a very weird time right now and if we look at history, we could be in for a recession within the country if the government lets the economy run its course and does not keep bailing us out with buying and selling more bonds and printing more money. We can discuss that in another blog though.
For now, I continue to buy real assets like real estate as long as the numbers make sense. I believe with how insane inflation is right now, I would rather have my deflated dollar in an appreciating real asset then in cash in my savings account losing money. Please comment below with your feelings on the topic.
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