Friday, February 25, 2022 / by Kathryn Jones
A Note From Russ On His 20th Real Estate Anniversary: Inflation, Supply vs. Demand, Beating of War Drums & More
I'll bet you didn't know this, but I am officially an Endangered Species. I am a native Austinite that is over 40 years old. I was here before hipsters, Starbucks, and skinny jeans. According to statistics I made up last Wednesday, I am one of only FOUR native Austinites at this age or older that you are destined to meet in your lifetime.
Why should you care? (My kids ask this too....just silently with an eye roll....)
Well, I grew up in a Real Estate family here watching and learning as we navigated the last significant inflation the news keeps referring to. I remember the Carter Administration. I remember the Miracle on Ice at the Lake Placid Olympics (which I watched in shorts because hey...I was in Austin). I remember when mortgage rates were flirting with reaching 20%. I remember that we had not one, but TWO boom and bust cycles in Texas Real Estate in the 1980s. The second one was particularly challenging to my family's sphere of influence, and I remember my Step Dad telling me before I finished high school "Half of the people we know are living on credit right now...."
So, with all that background, I hope you know that if for no other reason than self-preservation, I've been an observer and thinker about these for many decades now...It was like I went straight from "Girls Have Cooties" to "I'd better pay attention to this real estate thing and always have a strategy....lest I get burned."
I revisited a lot of that kind of thinking between 2008 and 2012. So I pay attention. I try to think about the long game. I have told the buyer agents on my team "Hey don't get our clients into something we can't get them out of." With few exceptions, this has worked out well in the last 20 years. Maybe all that worry did help a little (in the form of trying to make smart decisions.)
So people are asking "What's to become of things?" "Are we in a bubble?" ....and many other questions. I'll start by saying I look in the mirror and see a Realtor, so I look for answers from people who know more than me. I try to be smart. And I try to find out what people smarter than me, are saying.
Here is what I have gleaned in recent months:
Supply and Demand
"Inventory is low" is being heard all over the market. I didn't track it in the 1980s, but I'd say it's as low as I have ever seen in my lifetime. A neutral/balanced market between buyers and sellers is thought to be enough homes on the market that it would take SIX months to sell all available inventory (if the pace of sales remained constant and no new listings were added).
But we don't have 6 months' worth of homes to buy. The current supply across many price points and regions is below 1/2 a month. There are niches (like 1-3 acre lots with custom homes in West Georgetown for example) where literally the cheapest available home fitting this criteria is $1.1 million, and the SECOND CHEAPEST is $3.3 million. Everything else is under contract or sold. That, my friends, is a shortage of inventory.
How did we get here? Is this a 'Bubble?'
From late 2007 to late 2011, all building essentially stopped. When demand came back, building was too slow to ramp back up. In other words, we weren't building enough in anticipation of the coming demand. In essence, we've never caught up.
Covid saw household savings increase dramatically. People got hungry to do something with their cash, and many decided "if the future includes lockdowns, I want a different place to live..." How they defined "better" could have meant getting a pool, more acreage, further out in the country....the point is, people had money and started getting itchy to put it into their new dream property.
Then you consider all the companies that have made Billion Dollar announcements in recent years related to Austin. Tesla, Oracle, Apple, Samsung, and the list goes on. Between Texas' business-friendly regulatory environment, a highly skilled labor force, and affordability that even now is still better than many urban areas (Boston, San Francisco, Chicago, NYC)...Austin remains a magnet for both businesses AND people.
I believe we are going to be a Tex-ified version of Silicon Valley as it pertains to real estate and population growth. I heard a pastor from Liberty Hill tell us a few weeks ago that LHISD has 7000 students currently, but by 2030 they expect to quadruple that.
Regardless of what you think of politics, Russia and Ukraine, or a 15-year-old Olympic figure skater using performance-enhancing drugs....world events are not stopping the flow of people and money into Central Texas.
In other words, the fundamentals are too good for this to be a bubble. One of the smart people I listen to says as much. While the "Great Recession" that began in 2008 was painful, Austin didn't lose a ton of real estate value like other parts of the country. I continue to believe that should some catastrophic event take place in our economy, we are likely in one of the best areas of the country to weather any kind of storm.
I remember complaining at age 18 that gas had topped $1/gallon. Understanding that oil prices were contributing to local economic woes, my Step-Dad said "I'd pay $2/gallon right now if it helped the real estate market. I was a bit shocked, so I shut up. Yesterday I saw diesel in Jarrell was $4/gallon.
Well, since then it has occurred to me that if I borrow $100,000 from you and pay you back over 30 years, then at some point the money I'm paying you back is worth SUBSTANTIALLY less than the money I borrowed. Then I learned that exactly ZERO politicians/experts/people who know things want DEFLATION to occur. If your money would be worth more TOMORROW, then you'd never spend any TODAY.
By this time I *might* have been seeing some grey hairs on my chin. So I'd had enough time to recognize that in general, prices seldom go backward. Some inflation is good. Out-of-control inflation not so much.
Is inflation "out of control?"
It's certainly on everyone's mind. January numbers were reported to be the highest in 40 years. In my mind, this should HELP BUYERS. I've said for a long time that "If you wait long enough, inflation should keep you from ever losing money on real estate..." So I am still bullish on local property, due to the economic factors I mentioned above AND the fact that I want people to think of real estate as a "long game."
I nearly swallowed my tongue when I saw what diesel trucks cost 16 months ago. But I'd kept my last one for 20 years and it was time to replace it. So I bit the bullet. 2-3 months later, the chip shortage was in full swing and I heard I could sell that same truck for $10k more than I'd just paid. Inflation is not always this dramatic, as the timing for price increases can vary from months to years (even decades)....but if you can buy real estate with a "long game" perspective you can still do well. Appreciation seems to happen in spurts is what I've noticed in my 5+ decades as an endangered species. 2021 was a big spurt. It appears shortage of inventory will make 2022 another one.
What about Russia vs Ukraine? China and Taiwan?
It's no secret that the Cold War is heating up. Or getting cold again. Whatever. It's kind of scary, right? It's like there is a distant beat of a drum that stirs up some fear down in my gizzard.
Not wanting to trust talk radio or what passes for "news" these days, I asked my financial planner about this subject as it pertains to markets. He said the general consensus in his industry is "When bombs fly, it's time to buy." I've also heard that Warren Buffett has said things like "The time to buy is when there's blood in the streets...." (blood meaning people are panic selling).
So, while I will make no assumptions that you want to know what a Realtor in a cowboy hat has to say about Russian imperialism or Chinese expansion plans, I am trying to think about this in light of what you and I should see here as it relates to local real estate.
It may have no impact. When I started doing this, we were starting the War on Terrorism. Things were sluggish in the early 2000s, but remember that by 2006 we were peaking in Real Estate. People were describing their kitchens in Starbucks-like paragraphs. "I put in knotty alder soft close cabinetry with mocha travertine floors and butterfly-verde granite countertops...." In the 1980s and 1990s, we went to the counter and asked for "Coffee." In the 2000's we went to Starbucks, paid 5 times as much, and our orders became exotic paragraphs. In the '80s and 90's we said "cabinets" and didn't put adjectives in front of them. Starting in 2003, our kitchen descriptions became a social status discussion. And we were simultaneously fighting a war on terror.
I don't mean to trivialize international instability. But I have seen it where the shock of 9/11 gave way to people wanting what they wanted and being a distant memory just a few short years later.
Remember...Real Estate is a LONG GAME. If you want to be a flipper, you should create a make-believe/fairy tale show for HGTV (you wouldn't be the first one on that network) or you need to find the proverbial "crystal ball" which is likely sunken somewhere in the "fountain of youth" that flows right behind the Easter Bunny's house.
Is this a time to BUY?Realtors have a knack for saying "This is the time to buy!" or "This is the time to sell!" and I've seen us play "chicken little" about everything from interest rates to running out of land. I'll tell you that my goal for my team is to be your TRUSTED ADVISOR and NOT the "Fox guarding the henhouse." We occasionally hit a home run, but again....let's play the LONG GAME.
- Our fundamentals are good. REALLY good for long-term price support.
- Interest rates remain low...ridiculously low to folks like me who danced a jig when they had an 800 credit score and locked in at 7.75% (in 1999).
- If you buy with plans to hold it long enough, you'll pretty much always come out ahead with Real Estate. The people who lose are those who speculate or have some external factor forcing them to sell in a down cycle. But consider my friends in San Jose, who bought in the early 1970s. Today their house is worth 20x what they paid. The appreciation wasn't a steady rise...there've been ups and downs, but they were able to sell when they CHOSE to and market conditions were positive. I believe Central Texas has that kind of future.
- I'm glad I bought that truck when I did. At the time, I balked at the cost then. A year later, I feel like I got it cheap. This is only a dramatic story because the time between my thoughts then and now was short. In 1990 I bought a pickup for $14k and 20 years later I paid $38k and never blinked. The time between those price increases was just longer than the situation with the truck I just bought. (PS I also buy trucks to keep for years and years...."Long Game."). Vehicles depreciate! Real Estate appreciates.
- There is an old saying that you should buy at the edge of what you can afford. The inflation narrative I give above is why. You'll be amazed at how quickly the price you paid seems like chump change. I know it pushes buttons (remember I am a child of the 1980s) but I do see that now.
Is it Time to SELL?
I want to go more in-depth than the obvious "Duh!" response here. Certainly, the market is producing record results for sellers. (We have an entire strategy on how to maximize this by the way....)
LIFE is often what dictates whether it's time to sell or not. What is going on in your life that a real estate sale would make better?
- Grandkids you wanna be close to?
- Time to downsize? (You're tired of maintaining that huge lawn and you wanna travel more?)
- Do you want to pay to reduce your debt and the equity in your home is perfect for that?
- You can now work from anywhere and Small Town, USA looks pretty attractive?
There are infinite reasons to sell, BESIDES the market. Tell us your dreams. What is changing for you? What do you WANT in the next 5 years? 10 years? What phase of life are you in?
Certainly, this is a Seller's market. You might be shocked at what you can get. My advice right now is that if you sell, do your best to buy and stay IN homeownership. As inflation continues, the cash you pulled out will have less purchase power and housing seems one of the best hedges out there. The point is this: Let's make sure you have a PLAN.
Well, this has been a long email I know. My apologies for being long-winded. I'll just add one more thought:
Monday is my 20th birthday in Real Estate.
What started as a “re-invent myself so I can make a living” has turned into more than I could have ever dreamed.
God has blessed me with eyes to see lives changed…not just “sales made.” My industry has honored me on multiple occasions up to and including a lifetime achievement award. The number of closings I have been privileged to participate in is in the FOUR DIGITS.
I’ve said for years now, I get to make friends for a living. That’s not just clients…it’s team members. It’s good relationships with other local agents that make for collaborative attitudes when bumps in the roadshow up.
It’s so many blessings that in 2002 I could not have seen. My life at that moment was in a decidedly negative place. And yet here we are. Romans 8:28 is my story.
I am full of gratitude as I contemplate where I was and where I am. Thank you, Lord, thank you Russ Phillips Team and thank you to all the friends and clients, and colleagues along the way.