Impact and Understanding – The real estate market during conflict
The word impact can be defined as:
1: a striking of one body against another: collision – The meteor’s impact left a crater.
2: a strong effect – He warned of the economic impact.
Our real estate coaching clients have a lot of questions surrounding the potential impact of the current conflict between Russia and Ukraine; the potential impact on energy prices, the potential impact on the economy as a whole, and the potential impact on the real estate market.
Here are our thoughts on how the conflict between Russia and Ukraine can, and possibly will, impact the real estate market.
You may have heard us say so a time or twelve – supply and demand drive the real estate market. It is important to understand the relationship between the two.
A question to ask yourself about Supply –
Has anything changed with real estate supply in your market?
The most likely answer is no. Builders can’t build any faster. And, if we do see an impact on trade routes, particularly through Asia, then we can lean on this thought:
We are currently seeing a bit of concern and uncertainty surrounding the stock market, due in large part to the stock market bouncing around a lot the first part of this year. We predict that we could see more money rolling out of the stock market and into real estate.
Questions to ask yourself about Demand –
Has anything changed with buyer demand in your area; more specifically, has buyer demand weakened?
The most likely answer to this question is also no.
Personally, we think buyer demand may actually strengthen as a result of the conflict. Supply and demand are driven by three things: (How Long Will This Last?)
- net migration into an area
- demographic trends
- and affordability (interest rates)
Nothing has changed with those three things in the current real estate market. Now that we have clarity surrounding supply and demand, we can focus on the things that we CAN control.
Real estate will always be an asset
- Real Estate is the #1 asset class that people move into during uncertain and high-inflationary times. We currently have both.
There are many high net worth people from the Baby Boomer generation who are either currently in retirement, very near retirement, or living off of their 401K and such. This generation has some lingering pain when it comes to their portfolio losses during the markets of 2008 – 2010. There will likely be a knee-jerk reaction from many of them to say:
“I don’t know what’s happening, I can’t see through the fog, I can’t afford to feel that again. I’m taking my money out of the stock market because that’s less certain to me.”.
Because it isn’t ideal to have a bunch of cash just sitting on the sidelines in a high-inflationary environment, they will be looking for a place with a solid inflationary hedge and a place they understand better than the stock market. Real estate is something many can wrap their hands around, especially in times of uncertainty.
- What do you do with high investment returns during a volatile time in the stock market?
Many people saw high cash returns from stocks sold earlier this year. There is concern over putting this cash back into the stock market right now, so they want to buy real estate. We are seeing stock investments rolling over into real estate.
If you remain worried…
Remember basic economics, and that the setup of the real estate market currently remains unchanged. Barring a major catastrophe within the banking industry, there is a very low probability that we’ll see anything change in our local real estate markets. We anticipate more cash buyers coming to the market; more high-net-worth individuals rolling out of the stock market and into real estate.
What you CAN do now…
1: Focus your concerned energy on prospecting and working with buyers more in general.
2: Nurture your relationships with those educated in predicting economic impact; money managers, accountants, financial advisors, estate planners/attorneys, people who hang out at the private country club…etc. They will be a great source of understanding the current impact that surrounds your market, AND they will likely be the people (or will be able to connect you with the people) who want to roll their money into real estate.
3: Work with buyers who see real estate as the safest asset class during a time of uncertainty.
Concern surrounding whether or not to buy –
Buyers that are unaware of current market conditions and supply and demand are among those concerned about potential market crashes.
As a real estate agent, it is important to alter your mindset and offer some objection handlers for concerned buyers:
Are you going to live in this house for the foreseeable future?
In this scenario, you’ll only lose money in a down market if you decide to sell. If this will be your primary residence, it makes sense to buy now. You need a place to live.
Going back to focus on the things we CAN control…
Assess the REAL risks:
Do you feel good about being able to afford the payment?
Do you feel good about your job security?
If your buyer can answer “yes” to both, then there’s less risk involved than they might think for a “down market”.
An ability to explain to your buyers –
Having an understanding of the mechanisms that drive the market, as well as leading market indicators, is the best way to educate your buyers.
We believe, with a very high degree of certainty, that we will see a sustained high single-digit or low double-digit home sale price growth for at least the next few years.
The leading indicators of that are:
- Days on market for a listing remaining low
- Months supply of inventory remaining below 3 months
Don’t buy into the theory that “The faster prices go up, the faster they come down”.
They only go down if supply dramatically exceeds demand. Until that happens, the market is going to run away from buyers at one percent a month in equity growth, plus rising interest rates. Buyers actually now have two forces acting against them because of their uncertainty.
A buyer’s uncertainty is caused largely because their real estate agent could be doing a more effective job of explaining the dynamics of the market.
A FINAL THOUGHT –
If you feel like you can’t get buyers off the fence or listen to you, it’s likely because you are not crystal clear about the mechanics that drive pricing and the real estate market.
If you can explain the real estate market with a level of conviction, then your buyers will listen to you and do something right now!