The Future of Real Estate

To buy or not to buy– that is the question on people’s minds, especially now, when interest rates are at record lows. There are certainly those who might be wondering if they would end up upside down on their property or stuck with something they can’t sell later on down the road. In instances like these, it sure would be nice to have a crystal ball gazer who can tell us the future of real estate. Short of that, however, we can only rely on industry experts to forecast their most educated guesses on real estate trends, the caveat being they are, after all, educated guesses and subject to the effects of a global pandemic and other unforeseen circumstances. Before we start trying to decide what will happen next year or a few years down the road, let’s first talk about what influences the real estate market and where the current housing market in the U.S. stands.

The Real Estate Market’s Influencers

There are several factors that affect the real estate market, but the big four as outlined by Investopedia are population demographics, interest rates, the general economy, and policy/governmental subsidies. We can also see micro-influences having big impacts in geographically small footprints due to local zoning changes and major manufacturing plants or other large businesses supplying a significant amount of jobs in a concentrated area. Therefore it is important to not only look at the big four but look at your local nuances specific to your property. Oftentimes the micro-influences can have a bigger impact on the timing of selling or renting your property for the best possible outcome. Let’s start with looking at the big influencers and turn to the micro-influences in the latter part of this article.

Population Demographics: Boomers and Millennials Making Moves…Or Not

The first- population demographics- is likely the most reliable and predictable of the four (the least susceptible to the “It depends” caveat). Experts are anticipating and seeing major movements coming from Baby Boomers (those born between 1946 and 1964) and Millennials (those born between 1981 and 1996). The Boomers currently own over 30% of US real estate. The last of the that generation will be retiring over the next 10 years, and while conventional forecasting assumes that many of those retirees will sell their properties and head for assisted living facilities or at least more manageable properties (read: condos), the Boomers have so far bucked that trend and opted to age in place, at least for longer than their predecessors did.

Two phenomena will affect Boomer real estate behavior as they age- Covid-19 isolation and the development of technology to facilitate independent living. Though there are some examples of the pandemic serving as a catalyst for Boomer real estate sales, the general consensus among industry publications is that Boomers have generally chosen for the time being to age in place, supported in large part by technology that allows them to do so, such as voice activated smart home controls, remote in-home monitoring by their grown children or medical professionals, and wearable tech, etc. This trend then is predicted to result in a surge of Boomer houses hitting the market, dubbed the “Silver Tsunami,” in the next decade or so, and when it does, then this current suburban sellers’ market will become a buyers’ market once more.

Next we have the Millennials, the presumed perennial renter. It turns out that Millennials are simply late adopters when it comes to owning property. In a marked about-face, the current housing trend for that generation is to move away from dense city centers and into single family homes in suburbia and beyond, where the same amount of money stretches much farther. With sheltering in place guidelines and companies offering long-term telecommuting options, the Millennial workforce is looking for more living space to balance their personal and work lives. So the combination of the Boomers opting to keep their homes for more years and the Millennials’ desire to own single-family dwellings has resulted higher demand outside of the city.

The great thing about the demographic criteria is that it helps us see through temporary crises. Every home buyer wonders things like “Am I buying into a Boston real estate bubble?” and “Will the housing market crash again?” There are a lot of factors that can play into questions like this. Government policies, consumer preferences, technological changes, the state of local infrastructure, market incentives, and more can all play a part in making the market hot or cold, which makes it tough to read the future of real estate like a psychic might. But with demographics, you can see the basic contours of what’s to come.

…And The Rest: Economy, Rates, and Policy

The remaining three factors contributing to the real estate market are more intertwined, but also more difficult to predict. The effects of the general economy are probably the most obvious. If the overall economy isn’t healthy, people might not be in a position to purchase houses or might be unable to continue to pay their mortgage. With the government subsidies or policies, the policy makers determine what incentives are implemented or not, like the Fannie Mae and Freddie Mac moratoria on eviction and foreclosures, for example, which is contributing to the low supply of houses available for sale, or first time home buyers’ grants as another example, to encourage people (looking at you, Millennials!) to finally take the real estate plunge. Interest rates are kind of an extension of being at the policy makers’ mercy. They play a role in who and how many people are able to purchase homes. Put simply, central banks/the Federal Reserve decide on the rates. The lower the rates, the more likely people are to take out mortgages and higher the rates, the less inclined. The tricky part about those three factors affecting the real estate market is that they largely depend on circumstance.

The Current Real Estate Market Condition

Before moving on to the real estate forecast, let’s take a look at the current housing market. At the moment, the real estate market is considered “moderately strong” in a report conducted by the National Association of Realtors, surveying over 4,000 realtors across the country and their experiences. The Economist attributes the current state of the real estate market to tighter financial regulations in issuing home loans as well as quick and meaningful financial government assistance during uncertain times. It’s a seller’s market in most suburbs, credit to an increase in purchase demand (record low interest rates, and a desire by much of the renting work force to move away from their city apartments or condos and increase their living and workspace) and a stagnant or decrease of property for sale in those desirable areas. The consequential bidding wars have resulted in maintaining or in some cases even boosting real estate prices as well as demand for new construction. The cocktail of which is why the housing market outside of cities, contrary to typical recession trends, is still doing well, or better than most probably thought during this Covid era.

While the current real estate market recovery looks like a “V” so far, but some experts say that by the end of 2020 and into 2021, the trend will look more like a “W”. The projections don’t anticipate a collapse of the real estate market necessarily, but rather will see a dip due in part to the seasonality of home-buying (cold weather tends to slow things down) before experiencing another climb. But the immediate future of real estate is still relatively uncertain, particularly taking into account other factors including what the government will look like, whether there will be another wave of Covid with another lockdown and even more unemployment. And without an economic rebound (read: good paying jobs) paired with the end of the year expiration of the foreclosure moratorium, the market could have a small probability or some iteration of the 2007 crash. Barring that worst-case scenario, industry experts forecast a stall at the end of 2020, and a very slow climb back through 2021.

Yet numerous economic experts have been wrong more times than we can count on five generations of peoples’ hands and toes. Some of these so-called experts haven’t taken into account how strong the economy was prior to going into this unexpected Covid crisis. The fact remains that prior to this recent Covid calamity, our economy was on absolute fire and growing faster than it had ever been in recent years. We had record low unemployment across America and Boston and the surrounding area was no exception. So it would stand to reason that the underlying economic positive influences we experienced in 2019 will return and in 2021 we will most likely see a return to companies spending more money to upgrade their infrastructure as many have paused during this year. Spending should stimulate more economic benefit so it will certainly be interesting to see how this plays out in our local real estate market.

The Real Estate Market Beyond 2020

And what about beyond 2020? What happens after the year voted as “The Absolute Worst” by the earth’s population is over? What’s the future of the real estate market? According to The Economist’s forecast, the US housing prices will continue to climb, with the caveat that the pandemic abates, which will have a direct impact on the economy itself. In an independent economic forecast, the Congressional Budget Office’s 2020-2030 Economic Outlook Report predicts general economic growth over the next 10 years, a decline in unemployment, and a slight rise in interest rates even with the pandemic. But if we are honest with ourselves it is very hard to make a real estate decision based on potential profit. Most real estate investments are made with shorter time frame horizons.

Ultimately, the answer to questions about the future of real estate is (frustratingly) “it depends,” especially after 2020. Whether you’re an optimist or a pessimist could ultimately come down to the specific factors of your needs vs. wants of purchasing. Certain asset classes of real estate will be challenged and some will soar. Certain neighborhoods will improve and some may suffer. Regarding the macro-events, you have to study the specific deal(s) you are interested in obtaining.

So with very cautious optimism, it would appear that the remainder of 2020 will see a dip in the apartment rental and multi-family market, with an upturn in early to mid 2021. We can all clearly see that there is a dramatic rise in the vacancy and availability rate of apartments in Boston. Some Landlords will have to decide whether or not they can hold onto their investment properties as they sit vacant or have to sell. Many landlords can’t keep their apartments vacant for long extended periods of time. We will have to monitor college and universities housing and school policies including how travel bans impact their enrollment. In Boston, we will need to look at the effects of losing some temporary international purchasing power and lease filling abilities of our local marketplace. Boston is an international city, it’s not immune to the ups and downs of our world theatre.

Boston will have some financial bumps and bruises in the real estate sector but the optimistic investor believes this will be short lived. The negative investor will probably view our current problems in a longer trending framework. Covid is clearly the biggest temporary driver in the mathematical equation and there will be big differences in the impact of real estate values depending on how long this situation impacts our lives. Real estate needs to be treated like any other investment and only you can decide what level of risk you can live with in the free marketplace. The bottom line is that a great deal on a piece of real estate is nearly always a great deal whether it is a good economy or bad economy. The bigger factor could be your timing and your carrying costs to get it to produce the outcome you’re looking for in terms of a winning mathematical formula. Under these circumstances, market timing could be a lot more important than other types of recessions. It’s important to monitor the real estate marketplace more frequently than during other types of recessions, one thing is clear, this is certainly a far different type of real estate challenge than we have ever witnessed in modern times.

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