Four Factors Crushing Real Estate

by David Reavill

The Four Things That Are Depressing Real Estate

Wall Street likes to reduce everything down to its price. Your stock went up today; you’re doing well. It went down; you’re not doing so well. And while it’s true, like the economists say, that price contains the sum total of all available information. It’s just a summary, not a complete overview. The Wall Street analyst who walks into an art gallery, and declares that a particular Monet Painting is worth a million dollars, has described its relative value but has yet to see the consummate beauty one gets from simply viewing the painting.

Tomorrow, the Street will do it again, giving us the latest reading for the Case-Shiller Home Price Index. And if the analyst’s predictions are accurate, the Index will show that Home Prices have declined for the second month in a row by roughly 2%, if they’re correct.

But what has that told us? It does indicate that Real Estate is having a difficult time, but the why’s and wherefores are missing.

Here are four factors depressing Real Estate Prices.

The first factor is the Drug Culture and the associated Urban Decay.

There is a vicious cycle occurring in many of our major cities. First, the “druggies” take over the sidewalks, then follow filth, deification, and crime. It causes customers to avoid shopping in these neighborhoods, resulting in shops and businesses closing their doors. The most vivid example of this cycle currently is San Francisco, where dozens of shops have shut down and left the “City by the Bay.”

The drug of choice for many users is Fentanyl, an incredibly addicting substance that has recently gained popularity. In 2011, there were only 2,600 overdose deaths from Fentanyl; ten years later, the OD’s increased to 71,000, a startling increase of 273%. It has had a predictable impact on Real Estate in cities nationwide, especially in San Francisco, where OD’s are rising while Real Estate Prices are falling. In the last report, real estate prices in San Francisco are down 12% for the previous 12 months.

The subsequent adverse event for Real Estate was the Covid-19 Pandemic just two years ago.

The mandatory “lockdown” of non-essential businesses inflicted the most harm on real estate. It was the small mom-and-pop shops that were hurt the most. You know, the kind you see in Shopping Malls and quaint village centers. The places that now have open storefronts and closing malls. Few realized how dependent those malls and shopping neighborhoods were on these little shops, but we need them now. And so are the leasing agents who can fill all that empty commercial space.

The numbers show that the Lockdowns were the most devastating economic event in our history. The economy was plunging at a disastrous 30% for the second quarter of 2020. The empty spaces you see when you walk through most Shopping Malls tell you that commercial real estate is still recovering from that blow.

Right in the middle of those Covid Lockdowns came the one-two punch of the George Floyd Riots.

Mr. Floyd died under suspicious circumstances while under arrest by the Minneapolis Police. Floyd’s death occurred on May 25, 2020, right in the middle of that disastrous second quarter. Just four days later, rioters in Seattle joined the nationwide protest. For the next year, the City of Seattle was plunged into civil disobedience. The protesters took over entire sections of that City. Areas were cordoned off, and Police were not allowed to enter. The City had lost control of its streets; it was mob rule, plain and simple.

It was also the beginning of the decline in Real Estate Prices. Seattle, along with San Francisco, has been the two worst-performing real estate markets in the nation over the past year, with each suffering double-digit declines in property prices.

As if things weren’t bad enough for Real Estate, the Federal Reserve Board stepped in and started raising interest rates.

The Fed showed the most severe financial myopia since the Great Depression. They could only see inflation, which they fought principally by raising interest rates. It didn’t take long for real estate buyers to feel the effect. Monthly mortgage payments skyrocketed.

We began 2022 with 30-year mortgages priced at just over 3% interest. Ten months later, by November, 30-year mortgages had a 7% interest rate before settling back to 6% plus currently. Still more than double the cost of just a year and a half ago. Because most single-family homes are purchased with a mortgage, I suspect these higher mortgage rates will depress real estate. With these higher mortgage interest rates, we’ve already seen a 30% plus decline in new home sales.

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So tomorrow at 9 am Eastern time, Standard and Poors will announce the latest result for the Case-Shiller Home Price Index. If Wall Street estimates are close, it will be a simple number, likely down: 1 ½% or 2%. But behind that number will be a bit of American history. A difficult time of riots, plague, urban decay, and higher interest rates. Events that none of us will forget and which contributed to the price of real estate today.