By Dan Polimino
No doubt about it, this has been an incredibly difficult market to predict. Like the old saying goes, “just when you think you’ve seen it all….” The dynamics of this market are fascinating to study and watch. I’ve been in the business 16 years and have been an owner of three real estate office in three different states, and I’m always amazed at the macro and micro factors that are at play in any particular real estate market. I guess if you hang around long enough, you’ll see it all or maybe you won’t. So, let’s get to three dynamics on a list of the top six MAJOR things I believe will influence the real estate market today and beyond.
#1 – New York Yankees Hall of Fame catcher Yogi Berra said, “it’s déjà vu all over again.” I feel like Yogi is spot on when talking about people moving away from the city, and now people moving back to the city. The great, “we can work from anywhere experiment” appears to be over as most major employers all over this nation are calling their employees back to office buildings. Don’t get me wrong, I think it worked in some instances, but for the vast majority of employers, it was a disaster. As we speak, Amazon, one of the country’s, largest employers, is beginning to call its workers back to its downtown Seattle offices. In addition, Amazon has just opened its HQ2 mega office building in Arlington, Virginia. Some 8,000 new Amazon employees will be reporting to a downtown office. Maybe this is just in time, because the commercial office space industry has been bleeding money left and right. In fact, if there was going to be a deep and prolonged recession in this country it would no doubt be triggered by the huge vacancies in commercial office space. Landlords of commercial buildings all over this country are struggling to make their payments to the bank and, in turn, the bank is struggling to keep the doors open because the debt on their balance sheet is rising every day. However, workers moving back into office buildings may be the rescue landlords are hoping for. People going back to work in downtown buildings means people will start buying again in downtown buildings. Yes, people just two years ago were moving out of the city, and now they’re moving back to the city. So, if you’re an investor and you’ve got some money on the sidelines, buy property in the inner cities as quickly as possible because people are coming back to live where they work.
#2 – Inflation and interest rates go hand-in-hand. Inflation has been steadily coming down month after month, but interest rates seem to be moving at a snail’s pace. Why is that? Mainly because there are too many other economic factors that are suppressing interest rates from falling into the fives. The first thing holding interest rates in place is all of the discussion in Washington about the debt ceiling. As I’m writing this article, there is no resolution of the debt ceiling and there is about a week left before the country defaults on its debts. This has never happened before and I think it will probably be resolved in time. However, it’s one of the main reasons why interest rates are not coming down. The second biggest reason interest rates are staying where they are is because people are still unsure about whether there will be a banking crisis. We know the banks are having a difficult time meeting their debt obligations, but the Federal Reserve has indicated there may not be any more interest rate hikes. If that in fact is the case, it will come in just the nick of time to help stabilize banks. There’s also an outside chance the Fed may begin to reverse course and start to reduce interest rates. That’s if they feel inflation is moving in the right direction. I’m not optimistic about that last point because the Fed was incredibly slow to raise interest rates, and they will be incredibly slow to lower them. Keep a close eye on the interest rates, because if rates get into the fives, then we will go back into a full-blown seller’s market. It will be a buying frenzy all over again.
# 3 – which brings us to our last point, which is inventory or the lack thereof. Probably the number one question I get is, “Dan, why is there not more inventory?” The easy answer is because there are so many people who are in a property at a 3% mortgage, and they don’t want to trade up or trade down into another property at 6%. Nobody wants to double up their mortgage payment. However, if rates got into the fives or the low fives, then it would make it more palatable for people to put their house on the market and make a move. People are only making three moves in real estate. They are either upgrading to a bigger home, downgrading to a smaller home, or purchasing something for a real estate investment/second home. All three of those scenarios become a lot more appetizing if the interest-rate isn’t killing the monthly mortgage payment. As I said in the previous paragraph, as soon as rates get into the fives, not only will there be more buyers in the market, but there will be more homes for sale as well. Migration also has a serious effect on inventory. If, as I stated, people are moving back into the cities that will trigger a demand for property in the inner cities. Those people will first gobble up the available inventory, and then prices will begin to shoot up from there. When those people purchase in the city that means they’re most likely going to be putting up a property to sell someplace else. This is how the inventory game works, but it all hinges on two of the main factors that we’ve mentioned above.
In part two next month, I’m going to be taking a look at the top three factors that will affect the real estate market in the next 10 to 15 years and beyond! I bet you won’t guess two of the three.
Dan Polimino is the owner of the Hawai`i Team in Kailua-Kona, Hawai`i. He and his team are the luxury residential experts for the Big Island. If you are thinking about buying or selling in Hawai`i, then please reach out to us at team@thehawaiiteam.com or call 808-913-0899.
