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Is Real Estate Overvalued?

Is Real Estate Overvalued?

When investing in a real estate project, every investor thinks about how much money one should pay to acquire a certain real estate property. Real estate valuation is known as real estate appraisal or property valuation.

Property valuation is the action for determining the economic value of a real estate property. The main goal of property valuation is to determine the fair market value or the recommended price if the buyer has the necessary information.

Between 2006 and 2008, banks and other financial institutions were willing to give mortgages to anyone regardless of their income and other qualifications. Between 2004 and 2006, there was a tremendous increase in mortgage loans from 8% to 20%.

Due to the pandemic, the housing inventory collapsed by almost 30% in 2020. It was the biggest decline ever recorded in the industry. Most sellers who preferred putting their property on sale became hesitant and worried about getting a new replacement option after selling.

There was a drop in mortgage rates due to changes in the historical laws. The federal government made these changes to sustain the disrupted economy. There was a decrease in construction materials which caused the inability to build new homes. Due to the loss of jobs and reduction in income, most people moved from high-cost to low-cost housing.

In business terms, ‘squeeze’ refers to the stock market. This situation occurs when there is an increase in the number of traders trying to limit the amount of stock, and several shareholders opt to withhold their property during the short period. Creating a shortage in supply when the demand is rising creates a rapid increase in the price.

This scenario is similar to what is happening in the housing industry. There are many potential home buyers, but the available housing units are not enough to satisfy the huge demand. Combining this scenario with the ability of investors and individuals to access loans at low-interest rates creates a gold rush. In this case, we ask ourselves; who are the beneficiaries of this development? Let’s explain this phenomenon using the local Market in Arizona.

Factors Affecting the Value of Housing in Arizona

Access to Loans

Source: ukrgate.com

The U.S government plans to maintain low-interest rates on all loans until 2023. In 2019 the average interest rate was 3.94%, which dropped to 3.11% in 2020 and further dropped to 2.93% in 2021. The fall in interest rate will allow investors to access financial support and purchase new homes.

With a stable economy, the reduced interest rates would be effective. Still, with a housing market similar to the properties in Scottsdale, Arizona, the average single-family home has risen by 41% since 2019. People now have to spend more for a 1500 square foot home, which normally costs $373500 but will now cost an average of $636,437.

By the end of 2021, the same property will cost $794227, above the loan’s repayment period. The advantage to the reduced interest rates is that borrowers who could secure loans before the spike of property value can now refinance at a lower rate.

Shortage in Building Materials

Source: beroeinc.com

Covid 19 pandemic created an upset in the supply chain, and most companies were forced to reduce production. This condition created an increase in the prices of building materials. Commodities such as steel and lumber tripled in price while the price of concrete and other resources doubled.

However, by 2021 lumber and steel prices have dropped by 44% and 23%, respectively. Hoarded materials during the pandemic are now flooding the market. The restoration of the normal supply chain also pushes to return to the normal marketplace. This factor will help ease the housing supply but may take a few years to restore fully.

Mass Movement

Source: piscorealestate.com

Using the Uhaul index, the migration rate to Arizona was ranked position five where people moved to in 2020. The trend is still observable in 2021 where more than 300 people move every day. 15% of the moving population came from Los Angeles, while 5% moved from Seattle to Arizona. This migration led to an increase in buying power.

Several regions in the U.S are experiencing mass migration. When people move from a high-cost neighborhood, they create high demand in other low-cost housing states. In Los Angeles, the average price of a home by the end of 2020 was $850,000, and Seattle was $911,000, while that in Phoenix was $388,000.

Although if you happen to be looking for a home in the Phoenix-Metro area a great real estate agency that can help you out is The Kay-Grant Group.

Is There a Chance That the Big Squeeze Bubble Will Pop?

Numerous factors could cause a decrease in housing prices. These factors include:

  • An increase in the number of houses built
  • An abrupt listing of houses for sale
  • Loosening of lending restrictions by offering a low-interest rate
  • An increase in the number of distressed properties in the Market

The most common factors among the four are sellers’ abrupt listing of houses at once and an increase in the number of distressed housing units in the market within a short period. However, these two can only happen when people migrate to one region.

What Makes You Aware That You Are Purchasing At The Market’s Bottom?

Source: constrofacilitator.com

There are four stages in the real estate market cycle. These stages include the recession, recovery, expansion, and hyper-supply stages. During the change from recession to the recovery phase, home prices are usually lower, making it the best time to purchase a property. After the Covid pandemic, the housing prices have been at the lowest, meaning that currently, we are hitting the bottom of the industry.

However, prices in some areas are still increasing. The increase resulted from the recession stage being an anomaly that came in due to a pandemic when the economy was strong. It may cause the squeeze bubble to burst since the high prices are a reflection of the whims of buyers, sellers, and middlemen, whereas the GDP, wages, and growth hould support them.

How to Identify That You are Purchasing at the Top of the Market?

Source: economictimes.indiatimes.com

If prices go up because of increased GDP, jobs, and wages, you are likely not purchasing the property at the top of the market. However, when the prices are high because of low inventory, it is a clear sign that you are buying at the top of the Market. The cycle is likely to change since new constructions will come up, leading to an increase in inventories and could lead to a significant price drop.

It is important to be careful when purchasing a housing unit at the top of the Market with an ambition that the value might increase in the future. Purchasing at the top of the Market only creates a win scenario for sellers and a loss for buyers. It is best to wait and acquire a property that meets your financial objectives.

Conclusion

Since 2021, there has been a tremendous change in the economic position compared to the year 2020. Several states in the country have opened up, which affects the housing field throughout the 50 states of the United States. The big squeeze seems to loosen up.

A good example is an increase in demand for housing; the number of units in the Phoenix area has increased from 3500 to 7500 currently. The prices of the houses are set to level off as the Market stabilizes within the next few years. As a buyer, it is best to identify the best time to purchase a property to ensure a return in value of the asset.

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