Many industries saw serious recession qualities in 2020. People were not calling it the second coming of the Great Recession from 2008, however. The main reason is pretty straightforward: They knew why it was all happening. The Pandemic provided that sort of clarity at the time.
But every little thing that the Pandemic made clear, it made 10 more things make absolutely no sense. The contender for the least sensical product of the Pandemic is the economic boom that came following, specifically that within the realm of real estate and the prices of homes for families.
Don’t get it twisted: The price of homes and other forms of real estate was definitely going to go up. The prices of everything were going to go up and suddenly money started flowing once more.
But if you look at how the economy behaved in 2021, none of it was normal. And the price of homes and the size of the real estate industry went far faster than was healthy for the economy.
Let’s take a bit to talk regarding how and why.
Why are Homes so Expensive?
This is a question many people find themselves asking. How can homes be so expensive? What is driving up their price? The big motivator behind this question is the fact that the price of homes is so far outside the median income. And it is highly unlikely anyone with a family will be buying a home anytime soon. This is not just a downward trend—it is apocalyptic.
Does that sound like hyperbole? Well, to get an idea of how alarming this is, consider this: Home sales actually went up in 2021 for the first time in years. That’s a good thing, isn’t it?
Well, there is a problem: The homes were not being sold to people or families. Over the course of 2021, thousands of homes around the country were being sold to real estate firms. You can find more info on our website.
This means that while there was demand for homes, it was driven by groups that had far more money to pay in a far shorter amount of time than your average home buyer.
At the Same Time There Were Supply Chain Issues
And shockingly we are not talking regarding the supply chain issues that every industry has had to deal with since the sanctions on Russia. These supply chain issues have been a problem in the United States for quite a while.
Pop quiz: How many homeless people are there in the US relative to homes?
The answer is hard to give exactly, but it is less than one. What does that mean? It means that for every homeless person, there is more than one empty home they might live in. And if you factor in people who do have living spaces, there is still more than one home per person.
What this means is that there is an oversupply of homes. There are more homes than there are people to live in them. Shouldn’t this cause the price of these homes to crash from oversupply?
This is where the supply chain issue comes in. While there are more homes than people in the United States, real estate is unique among commodities. The biggest defining feature is that it does not go anywhere. You are not just buying the home, but the land it sits upon.
That means even if there are a million homes per person, it does not mean a thing if they are all in the Arctic Circle while the people are in Nebraska. And indeed, most of the homes are too far away for most of the people to make use of them, meaning there is less supply than demand.
Adding This Up
So, on one side of the economy you have corporations with billions of dollars buying land up as fast as they can. They then trade this to other corporations for development, or they turn the properties into some form of rental. These properties never go back on the market normally.
And at the same time that is happening, more homes keep coming into existence nowhere near where they should. If they are being built, it is to sell them to those development companies mentioned before, not to try and provide housing to a community at a certain cost.
What do you get when you add these together? You get a real estate industry that is inflating past almost every consumer’s ability to actually pay for it. All of the value of that housing bubble is a result of artificial value created by highly specialized interest that has far too much money.
The prices are not the result of a bidding war. They are a result of those billionaire corporations being willing to pay whatever silly price they need to in order to get a property instead of you.
When Will it Bust?
It is hard to say. A recession in that part of the economy is inevitable, but the question is whether or not it has started yet or not. In April the United States Federal Reserve raised the interest rate, meaning that a lot of the banks that would finance loans and hold accounts for big corporations had to undergo major strategy reevaluations. This has tightened the economy.
It has been an intentional tightening though, and the more the economy tightens now, the less disastrous a recession will be.
If home sellers and the corporations buying the land slow down their business at the same time, then it is possible that this current economic downturn will be the recession. But what is much more likely is that it will take the market drying up to get prices to drop.
And because of that, when they drop, they will plummet.
Conclusion
The best thing you can do to deal with this sort of inflation is make your money while you can, then cash out before it hits. There will be a surge in value of everything before the drop-off, but do not try to time it too carefully. You do not want to get hit by the drop.
