How Real Estate Investors Benefit from the Current Housing Shortage

The answer to that question is “yes,” which is why it will be a long time before real estate values do anything but continue to appreciate. Demand in Ballard Global core real estate investment markets of Austin and Miami is unprecedented. Here are a few of the several demand factors at play here:

• People are moving to both cities: While various migratory trends were happening before the pandemic, the realization for many professionals that they could do their jobs and raise their families anywhere in the country has unleashed a wave of in-migration to desirable markets. In particular, people are leaving high-cost, high-tax places for other metro areas that have the amenities and lifestyle they want but with the ability to still buy a house, have room to grow and raise a family. Californians are flocking to Austin; northeasterners, especially New Yorkers, are flooding into Miami-Dade and Fort Lauderdale.

   

• Low interest rates make it easier to finance real estate purchases of all kinds. Even though we have seen interest rates rise this year, we are still in a period of time of relatively low interest on housing, historically. The Federal Reserve’s monetary policy is in a slight trap of its own making, as levels of government debt post-pandemic are now very high and servicing that debt is only sustainable if interest rates remain low over a long duration.

   

• Money doesn’t sit still: One of the societal outcomes of the pandemic was a great renovation boom as people fixed up and expanded houses. People couldn’t travel – indeed, international travel, in particular, remains very muted – and most people were and still are working from home, so having a nice home became paramount. One of the great untold stories of the past two years is the extent to which improvements have been made to existing housing stock and the degree to which new housing is simply nicer, more luxurious and as a result pricier than it was before.

These demand trends have driven shortages but are of great benefit to real estate investors. And for the first time since the Korean War – in other words for 70 years – issues having to do with supply are also fueling price appreciation and creating advantageous conditions for real estate investors. Here are a few of the supply trends:

• Pandemic-related shortages. During 2020, the initial sharp economic downturn caused real estate developers, and indeed multiple related industries from appliance and HVAC manufacturers to roofing and lumber suppliers, to dramatically cut their orders. When demand bounced back earlier than expected, everyone was unprepared. Beyond that, multiple global ports, factories, mills and suppliers have been forced to shut down or limit operations as COVID affected job sites and production.

   

• Trade-related shortages. Even before the pandemic, trade tensions and new import taxes were causing disruptions in supply chains and increasing costs. Ports, shipping lines, trucking and rail companies, and manufacturers of all kinds were already in the middle of a complicated diversification process to find new suppliers and sources when the pandemic broke out. For homebuilders, there are shortages of all types of construction supplies, from lumber and shingles to windows and appliances. As of October, 2021, the delivery times for large kitchen appliances is anywhere from four weeks to four months, according to Consumer Reports, and by mid-summer of 2021 lumber prices had skyrocketed by 500%.¹

   

• Labor-related shortages. As noted above, this trend was acute before the pandemic. Now it is a crisis. There are 6% fewer truckers in America than before COVID. The U.S. Labor Department reports a shortage of over one million construction workers nationally. And local shortages in hot markets are even more dramatic. Austin metro alone has spent more than $7 billion on new residential construction in recent years according to a report in August, 2021². At the same time, the region only has 44,520 construction workers to complete the high volume of homebuilding.

   

These issues affect all types of construction, not just single-family homes. A recent study by the Federal Reserve Bank of Dallas also shows these same trends are having a dramatic impact on the multi-family sector, with rents expected to rise dramatically on a continuing basis through at least the end of 2023³ Already, multi-family residential had the highest price appreciation of the four commercial property types tracked by the research firm Real Capital Analytics, at 10.5% a year as of July 2021. Even industrial properties recorded a 9.5 percent price gain over the past 12 months as demand for warehousing, logistics centers and other e-commerce related commercial property rose.

Housing of all kinds is experiencing an unprecedented level of scarcity, a demand and supply fueled gap, that will take years to balance. According to housing industry publication Supply Chain Dive, the Co-CEO of Lennar, one of America’s largest home builders, said at the end of September 2021 that the entire homebuilding industry is facing labor constraints and shortages — particularly of “engineered wood, windows, garage doors, paint and vinyl siding” — that were limiting any ability to keep up with real estate demand. “They [shortages] are intermittent, and they are not over yet,” Jaffe said on Lennar’s earnings call. “In many ways, it’s truly a game of whack-a-mole, creating a traffic jam. Like cars, the construction process is backed up, creating a chain reaction of delays that cascades from one trade to the next.”⁴

Eventually, of course, these issues will be resolved. But no one in the industry expects shortages to improve in the near future. In addition, economic history suggests that the newly elevated prices for everything from materials to labor will become the “new normal” even after the shortages end. Overall costs will increase, and prices will adjust accordingly.

For investors, these extraordinary developments augur well for a solid continuation of price appreciation for at least the next several years. When today’s shortages are combined with demographic, social and economic trends nationally, the trends in markets such as Austin and Miami begin to look more like the San Francisco Bay Area in the 1980s or metro New York in the 1960s, increasingly densely populated hubs of energy and dynamism that attract people and business, driving price appreciation in only one direction: upwards.