Why We Must Build

As seen in the April 2022 edition of “The Private Jet”.

Many investors are questioning the market and wondering if we are again on the precipice of a great decline. The reason is simple, the latest growth in housing demand has been substantial. Even though we think we use logic and reason to make our decisions – our emotions always get involved.

This housing market feels, in our gut, like the best housing market we have ever seen. Which logically makes it feel like 2005 when the whole world thought the upgrowth in the real estate market would never end. Let’s examine the reality.

Successful active investing requires understanding, grit, and action to prosper.

Successful active investing requires a great deal of knowledge and much of that knowledge is gained by boots on the ground. Being able to touch, taste, and feel situations allows for successful knowledge in any market.

Although markets will vary over time, the behavior of markets have similarities, especially when looking at the big picture or 10,000-foot view. Extracting data from the big picture, over time, will allow any investor to see patterns that help in predictive analysis. Some believe if the market is up, up, up it is never going to go down, and if the market is crashing it is never going to recover.

All markets go up and all markets go down and there is a way to profit in both, it takes understanding, grit, and action to prosper. Today’s questions are, when is it going to crash, and why will it never recover?

How did we get to the current shortage of housing?

Over 40 years of mortgage industry mismanagement by the federal government was the primary cause of the greatest real estate crash in history.

I can go into detail about how this happened, but that’s not what this discussion is about.

However, the response to the crash of 2007-2008 is the primary reason we have arrived where we’re currently at. The problem is we feel like the market is the same as 2005-2006. This is not the case, as we are on the opposite side of the crash.

We currently have a massive shortage of residential real estate; this shortage was brought on by the government’s response to the 2007-2008 crisis. Primarily, the massive supply of inventory from 2008 to 2012 and the Dodd-Frank act slowed the lending process which slowed the new home starts.

Feeling the Correction of the Correction!

What you’re feeling is the correction of the correction. If you look at your local market and almost every market in the U.S., there’s a shortage of residential real estate. This is the result of government intervention into the Lending process which eventually inspired ‘no document’ loans. In grade school, we were taught that for every action there is an equal and opposite reaction. The inflationary response in the market has natural causes but the government response has a much larger effect than government officials ever want to take responsibility for.

The slowdown of new home starts was the natural result of the market failure in 2007-2008, yet the government decided to multiply problems.

3 New Government Sponsored Problems Affecting Residential Real Estate ... Let’s take them one at a time.

There are more than three problems, but we will only be covering three. They are simply the response to COVID-19 affecting the supply chain, the government printing of money and pushing it into the economy, and finally the opening of the southern border to 2 million new residents in 2021.

Response To COVID-19

The response to COVID-19 became a worldwide pandemic, which in turn shut down businesses, thereby completely disrupting the supply chain. No matter what your thoughts on whether this was necessary or not, the result is a massive difficulty in producing new home starts.

Printing Currency

At the same time, the government has decided to continually print more currency. Increasing the volume of US dollars causes each dollar to decrease in value, this is how currency operates.

The shocking fact is that 1/3 of all the dollars in circulation in the history of the US dollar have been put into circulation in the last 18 months.

The result is too many dollars chasing too few goods and inflation naturally ensues. Printing money never decreases inflation even if Nancy and Joe believe it does!

Two Million New Residents!

Finally, with the relaxation of border control, a confirmed 2 million new residents entered the country last year. It has been my experience that whatever the confirmed number is, the reality is a multiple of that number. Depending upon the multiple used, there are anywhere between 4 million and 10 million new residents in the United States. Just for reference, the number of people living in my local market is around 120,000 residents. Houston, Texas has a population of 2.3 million. This means the U.S. has a new confirmed population increase approximating the size of Houston, Texas. By the way, there are only 4 cities in the U.S. with higher than 2 million population, New York, Los Angles, Chicago, and Houston.

Where do they live?

Most people put these new residents out of their minds, commonly thinking they have no place to live. The reality is much starker in that they are likely over-utilizing lower-valued tenancy (putting more people in smaller units), which is forcing a shortage in class D housing and anyone capable is moving up the chain. Class D moves to Class C, Class C moves to class B, class B moves to Class A.

The Current State of The Real Estate Market

This is the current state of the real estate market and why you feel like the growth of prices is not sustainable. I agree that the inflation growth is not sustainable, but inflation is here to stay and will slow as these problems are addressed.

The supply chain issues will eventually work themselves out, but the current government seems to have no capacity to understand or consider ending the printing of money on such a massive scale, and whether the government will end up closing the border in the next three election cycles is yet to be seen. But along with the feeling that the time for real estate is now, is also the feeling that political change is in the air!

Why We Must Build

In any case, the current shortage of residential real estate looks to be on the horizon for several years not months. I was speaking to an investor from the East Coast and he believed the shortage is so bad that the government will have to step in to help build housing.

Our Local Shortage

In our market, La Crosse County, Wisconsin, we currently have between 40 and 60 houses on the market on any given day. This has been typical for the last two years. In 2008, when I started in real estate the average number of homes on the market was between 600 and 800. This means that now we have somewhere between 5 and 10% inventory on any given day.

Pay Attention to Who Is Screaming... They are likely selling you a recessionary product.

I agree the crash is coming, the next crash is always coming. Even though your gut may be worried about 2022 being 2008 all over again, and many people are screaming negativity from the rafters, they are likely selling you a recessionary product.

I challenge you to challenge them with one question!

When?

The crash is always coming, followed by a market rebound and growth. Don’t miss the growth for fear of the crash.

— Joshua Dudgeon, CEO & Founder of Real Estate Investment Results.com