The costs that we incur throughout daily life are soaring lately and they’ve infiltrated just about every aspect of our everyday existence. Combine this with forbearance programs ending and rent moratoriums getting ready to run out, other factors like baby boomers owning 42% of the inventory, and it looks like the housing inventory dam is about to bust.
You may know this already or you may not be paying attention, but building materials like copper, steel, wood, and others are becoming astronomically expensive at the moment. Even worse, the cost of inflation jumped to 4.2% on May 12. Inflation was only 0.8% back in March.
Add all this together with the eviction bans coming to an end and Covid mortgage forbearance moratoriums about to run out, and you can anticipate that there will be a lot more property on the market in the near future because many of these homeowners will be in trouble financially and have to sell their property.
As an investor, this is a good thing because there’s a real opportunity to pick up great properties at a low price. For many years straight, the sales of existing homes have held steadily at roughly 5 million to 5 ½ million properties per year. Things changed in 2020 because of the pandemic. Believe it or not, existing home sales skyrocketed to 6.7 million that year because many people wanted to relocate due to the pandemic related concerns.
In March 2021, the National Association of Realtors said the existing home sales current pace is at 6.01 million for the full year. Different experts believe that existing home sales may reach as high as 7.1 million in 2021.
There are three major forces driving such high demand. These forces include:
- Moving because of the Covid 19 pandemic
- Millennial’s buying their first time
- Investors and iBuyers looking to flip houses
To get a better understanding of what might happen in the near future, it’s important to see how these differing trends will impact residential home sales in the near term.
Are Foreclosures on the Horizon for 2022?
Recently, the Consumer Financial Protection Bureau said that they’d like to modify their lending rules. They want to make these changes because in the later stages of 2021, a large number of homeowners will be exiting forbearance in the near future.
The reason they set this proposal up to change the CFPB rules is to slow foreclosures down that could potentially have built up because of the forbearances. Believe it or not, 2.1 million homeowners were enrolled in forbearance programs and were very delinquent by 90 days or more on paying their mortgages. With no clear reinstatement path, these homeowners have no choice but to go into foreclosure once they’re out of forbearance.
Many experts believe that in 2022, it’s going to be the year of the foreclosure. Nobody knows what the new lending rules will be, but the notices of default moratorium are going to end on December 31, 2021.
2.1 Million Homes in Forbearance and Their Impact on the Foreclosure Market
The foreclosure process doesn’t happen overnight and it could take months or years before it’s finally completed. This depends on where you live and other factors as well. Moreover, investors shouldn’t expect a huge surge in real estate owned or recently foreclosed properties just yet.
Lenders are not permitted to file notices of default until 2022, so at-risk homeowners still have half the year to figure out a way to solve their financial uncertainty. They also have the opportunity to sell their home now while the market is boiling hot. In many cases, many of these homeowners may retain most or all of their equity. This will also help to keep their credit protected instead of going into foreclosure.
Real estate agents with the know-how to properly counsel homeowners in default have a big opportunity to list these properties right now while the market is scorching hot. No matter what way things go, within the next 12 to 24 months, these properties are about to hit the market in a big way.
National Eviction Moratorium Struck down by Judge
A federal judge struck down the national eviction moratorium on May 5, 2021. And again, on May 14, 2021, the same judge stayed her decision, although it is currently under review by a higher court. We do not know if this will ultimately lead to reinstating the eviction moratorium, or it may keep the current May 5 ruling in place.
This eviction moratorium had a major impact on single-family residences and mom-and-pop business owners, because they were hit particularly hard during the pandemic. And if you would like to sell your rental property, with an eviction moratorium in place it makes it impossible to sell under the previous rules even if your tenant isn’t paying rent at the moment.
Property Inventory Impact
When the eviction moratorium eventually comes to a real and permanent end, property owners struggling with really severe cash flow problems and financial difficulties will have the opportunity to sell their house or property once and for all. This should add more property to the inventory shortage currently plaguing the country.
Skyrocketing Prices for Commodities Combined with Inventory Shortages
Unless you’ve been paying attention to the commodities market, you likely have no idea that the cost of certain commodities has increased by a wide margin over the past year because of Covid19 production cuts and shutdowns.
The increased prices include:
- The cost of purchasing plywood has gone up by more than 250%. The cost of wood sheathing has risen by 287%. Why did this happen? It happened because wood mills shutdown or slowed down production because of the coronavirus pandemic.
- The price of copper reached $10,000 per metric ton for the first time in a decade. This happened in May 2021. Bank of America predicts that the price of copper will reach 13,000 per metric ton in a few years, and price swings could go as high as $20,000 per metric ton in the future.
- Bank of America warned the public about steel prices and says that they are in a bubble that is about to pop. The price of steel dropped to $460 a ton in 2020. But the current approximate price is $1500 per ton, which is an increase of 326%.
- A shortage of truck drivers is making things even worse, which combined with rising gasoline prices is also causing the price of commodities – among other things – to skyrocket in value.
How Shortages and Exorbitant Material Costs Impact Real Estate Inventory
The increased cost of housing is certainly one of the major and obvious impacts on the rising price of material costs. Additionally, there’s a major shortfall within the construction industry as far as available construction workers is concerned.
But there’s also another factor that no one wants to address at the moment, and it’s how the astronomical cost of materials will have an impact on flipping, iBuying, and remodeling in the near future.
All of these groups are experiencing a negative impact in the proceeding ways:
- If a project was originally budgeted at a specific amount, that budget is no longer adequate because the rising material costs no longer fit the framework. What does this mean for ongoing projects? It means that cost-cutting measures will need to take place on a project, or the project manager/owner will need to come up with additional financing to finish the project.
- Projects will take a lot longer to finish now that material costs are so high. This means that they will incur greater holding costs, which creates a big issue for home flippers and iBuyers. To make this point clear, if you originally projected to flip a house in four months, and it now takes eight months to resell the place, you’re holding costs have effectively doubled. This can eat up major profit potential in the near term, and even make certain projects suffer a loss.
The easing inventory crisis will also experience a major impact because fewer flippers and iBuyers are going to be capable of making a profit in this environment.
Will Baby Boomers Ultimately Burst the Inventory Dam?
The baby boomer generation makes up 22% of the population in the United States, consisting of people between 55 to 75 years old. They also own 42% of the homes throughout the United States of America.
Even though 76% of the baby boomers want to remain in the current home that they own instead of moving in with family members or nursing home or assisted living center, we also have to consider life expectancy rates into this equation. The average male lives to 76.1 years old, whereas the average female lives to 81.1 years old.
The implication of these statistics for baby boomers will definitely have an impact on housing inventory. These three implications are:
- As far as the initial wave of male baby boomers goes, roughly half of all males born in 1946 will pass on from this world by the end of 2022. Remember, this number is cumulative including fatalities from war, illnesses, accidents, and more. This 50% range will continue for men born in 1947, and those with a life expectancy of 76.1 years.
- Moving beyond the rate of death, most baby boomers are currently experiencing the age where health issues are becoming a major concern. As an example, one of the main reasons why baby boomers end up selling their houses is because of mobility issues. For baby boomers that own multistory homes, need hip replacements, have damaged knees, or have other reasons that make mobility a problem; they have to sell their homes to find a single level property or move into properties that have an elevator on the premises. Lung and heart problems because of smoking, COPD, and cancer will also negatively affect mobility and make it difficult for many baby boners to continue living on their own.
- The five-year gap in age between females and males in the life expectancy department is very big. From a historical standpoint, when women lose their spouses, they often find it financially and physically difficult to continue owning their current home.
The really challenging thing is the skyrocketing prices that we’ve been saying. This is really a problem because housing price increases are outpacing inflation and adjustments to cost-of-living. They are also outpacing employee retirement benefits and Social Security. Where property taxes have increased in particular states because of the valuations in the current market, this could mean senior citizens are forced to sell their property even if they would love to remain in their current home.
Baby Boomer Age and Its Impact on Inventory
Since baby boomers own 42% of single-family homes in the US, a wide margin of these homes should hit the market over the next few years. As a matter of fact, home selling has significantly increased over the past two years. Since many baby boomers are over 70 years old, this trend will keep climbing year after year for the foreseeable future.
With rising expenses dominating the majority of our lives, rent moratoriums and forbearance programs coming to an end, and baby boomers owning 42% of single-family properties, the existing home sales inventory is about to explode.
Will it overwhelm the market? Only time will tell if these three instances will finally put an end to our major shortage of inventory.
How to Make the Most of This Information
As an investor, you have to consider every angle when buying property. Right now, inventory is tight and buying property is extremely expensive. You may want to remain on the sidelines for the foreseeable future until the inventory dam finally bursts and millions of new homes – many being foreclosures – hit the market.
Personally, I think this is the best way to truly take advantage of the exciting market that’s about to unfold. On the other hand, if you own property you may want to sell now before this glut of properties dominates the market and it becomes difficult to sell at a higher markup.
Again, please use this information and make the most of it because it could mean the difference between making successful real estate investments or potential failures.