The pandemic has been a watershed moment in our lives. It has had a negative effect on health, industry, growth and the economy. It has changed the way many of us experience work, school, and home. However, while the pandemic has negatively affected many aspects of our personal and business life, the one surprising area that it has helped is residential real estate.
The residential real estate market is red-hot across the country. The demand for housing is up across the board for every type of residential asset: single family homes, new construction, existing homes, condominiums, rentals – you name it. If you are a consumer looking to buy or rent a home, these are challenging times. However, if you are an owner of residential real estate, you are in a good position.
However, investors are understandably wondering if this red-hot market will eventually overheat, like in 2008/2009. Alternatively, they question if this market has strong fundamentals that will continue to push it forward over the long run. No one knows for sure. However, many experts believe that there are strong signs that residential real estate could be a valuable asset class for the coming decade.
A recent article published in MarketWatch posed this exact question to Ben Carlson of Ritholtz Wealth Management. As Mr. Carlson discusses in the article: “As the adage goes – don’t wait to buy real estate, buy real estate and wait. If you follow this advice in the current climate, you could be in store for a nice windfall over the next 10 years. There is a real possibility real estate could be one of the dominant assets of the 2020s.”
As most investors understand, owning real estate is not like owning other investments such as stocks and bonds. Owning real estate comes with numerous additional costs such as maintenance, taxes, insurance, etc. In some instances, these costs can be significant and can negatively impact long-term returns.
Once these additional costs are included in the equation, real estate investing does not always compare well versus other investments such as stocks and bonds – which come with lower expenses. From the article: “Shiller real home price data shows that the annualized gain of U.S. housing over the rate of inflation comes to a paltry 0.1% from 1900 to 1996. Over the past century, it clearly lags behind many other asset classes.”
Even with these additional costs, the current fundamentals of owning residential real estate look very favorable for the coming decade. Demographics alone point to a higher demand for real estate for years to come. We are currently experiencing an historical imbalance in the supply of and demand for real estate. There are several reasons for this that we have written extensively about in the past (Soaring Home Prices Helping Homeowners).
In addition, the very definition of home and work is changing. Restrictions imposed by the pandemic forced companies to close their office and distribute their workforce. Most experts agree that companies will move significant portions of their workforce back into the office once the pandemic fully subsides. However, these same experts also agree that the work/home relationship has most likely changed forever. New distributive workforce technology coupled with the cost savings of a smaller office footprint will equate to continued remote work arrangements. Therefore, consumers will continue to place more emphasis on larger, single-family homes that allow for the flexibility of greater work and school space.
Finally, interest rates continue to hover at near-historical lows, which helps with home affordability. However, many investors expect interest rates to rise at some point in the future. The US government is in the process of adding significant liquidity and stimulus into the market. While most experts are not forecasting a significant increase in rates, if this stimulus were to trigger higher inflation and mortgage rates, home affordability could be negatively affected.
The current market is red-hot. Supply of housing is at an historical low. Here at Aloha, we believe that the current level of demand is not sustainable over the long run. We believe that the market will respond, as it has done so in the past. More housing will come online. However, because of the strong trends mentioned above, residential real estate looks like a strong investment for the coming decade. If you are interested in learning how we are capitalizing on these trends, contact us so that we can discuss our strategy further.
Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.