This article is Sponsored Content. Written by Joe Edgar, CEO of TenantCloud and Rentler property management solutions that help landlords maximize revenue from rental properties.
I write this article from the Polish border town of Przemysl as I assist our Ukraine office set up a remote location here in Poland. The Invasion in Ukraine took the world by surprise even as we all saw vast amounts of evidence pilling up. Our Ukraine team has been amazing in pulling together resources to assist their fellow citizens in a struggle for survival.
The Russian Federations’ claim of being liberators is a far cry from reality as I have had the fortune of freely traveling all over Ukraine and meeting the amazingly welcoming people. I refer to it as the Hawaii of Europe, because of all the flowers both in the countryside and integrated into everyday life of a Ukrainian.
Though the conflict is happening on the other side of the globe than the U.S. the impact will be felt throughout the world and that includes the real estate market.
The housing shortages had already set records for home values and rents, with the average home price being near $400,000 and vacancy rates being the lowest since 1982.
The short supply of properties would be great if there were only 2 million people looking for homes, but with a growing population that isn’t the case. The U.S census estimates that we currently share this country with more than 332 million people. That is an increase in population of over 30 million people since 2006, but only 11 million new housing units created.
The U.S. has thus far not agreed to asylum for Ukrainians, but has allowed extended visa stays. Asylum will hopefully be granted soon as Europe is receiving a record number of refugees in a short amount of time. In 25 days the refugee count is well over 3 million and more coming everyday. As the U.S. and the world support Ukrainians during this difficult time it will also increase the demand for housing.
Rent increases, of course, are happening because vacancy rates are at record lows of 5.8%. Prior to the pandemic, the vacancy rate was near 7%, which had already pushed rents to record highs.
If rent was the only thing going up it would be bearable, but prices have been increasing across the board and energy has been leading the charge. As sanctions increase it will only add additional pressure on energy prices, which is a part of many goods and services pricing.
Groceries, apparel, lawn mowing, etc all take fuel to get to and from the store shelf not to mention the manufacturing equipment used to produce the goods. The higher the fuel cost – the higher the prices. As pieces increase we’ll see people moving into together instead of living alone. Household formation will be delayed longer and children will be living in their parents homes longer.
This will elevate some of the pressure on housing demand, but it will be false relief as it will only create a larger bottleneck for needed homes later.
To help slow rising prices the Fed has announced they will raise interest rates by a quarter percent and even hinted at more coming. This is most likely only the start as the Fed will try to outpace inflation with rate increases, but if the price level (base price of goods adjusted for inflation) increases then there isn’t a lot they can do.
The Fed uses interest rates to fight inflation by selling treasury bonds at a discount and taking the buyers cash and “burning” it. The less money in circulation – the more expensive it is to borrow money. The harder it is to borrow and less cash in circulation means less money for buying things. The fewer buyers in general pulls prices down or at least slows their increasing pace, which is to say slow inflation.
An increase in the price level is difficult to fight against as the underlying cost to produce the goods has gone up and therefore companies would go out of business if the prices were to go back down.
The price level can be increased from things like additional bottlenecks in shipping as the Black Sea from delays. Those delays can make their way through the global logistics timing and create supply shocks and products take longer and are harder to get.
Such issues can also arise from software and cyber attacks. Such attacks on logistics, shipping, and other related services. The attack on the Colonial Pipeline, in the U.S., created major supply issues for a few days and could have been much worse.
As the price level increases and interests follow – it will become harder to get a loan due to less money in the market and because the underwriting requirements will also become more stringent. Those who can qualify for a loan won’t have it so easy either.
The real estate market is still missing so many homes. Those who will be able to afford and qualify to buy a home will still see higher prices. This is mainly due to the lack of vacant homes available to buy or rent. There are an estimated 6 million homes in demand currently, but only about 2.7 million are vacant rentals and only 722,000 vacant homes for sale. Excluding a slight drop during the pandemic those are both at record lows.
Existing home sales won’t play much of a role in the equation for two reasons – if someone sells a house then they are going to need another one to buy or rent. Secondly, we just saw record low interest rates of the last few years and the vast majority of them were fixed rate loans. As home prices increase and rates increase then a home owner is building equity very quickly and thus the market is paying off their mortgage for them.
In such a market it pays not to sell, which will only push prices even higher. If the Invasion continues for a protracted period we can expect to see even more supply and price shocks which will make their way through the real estate market.
By Joe Edgar, CEO of TenantCloud and Rentler property management solutions that help landlords maximize revenue from rental properties.
