Have you seen the movie The Perfect Storm?
It was a disaster drama movie released in 2000. The film tells the true story of a commercial fishing boat named the Andrea Gail that was lost at sea in the hellacious Halloween Nor’easter storm that lashed the east coast in 1991. The captain and crew all perished.
Journalist Sebastian Junger wrote the book the movie is based on. During his research, he interviewed Bob Case, the head meteorologist at the Boston National Weather Service at the time of the storm.
Case described the confluence of three forces that combined to create such a storm: Warm air from a low-pressure system coming from one direction, cool air from a high-pressure system coming from another direction, both colliding with the tropical moisture of a hurricane. Case called it a “perfect storm,” hence the title.
The success of Junger’s book and its movie adaptation brought the phrase into popular culture, and it now refers to an unusual combination of circumstances that combine at the same time to produce a rare event.
A PERFECT STORM IN REAL ESTATE
You don’t need to be in real estate to know that housing prices have skyrocketed the last two years. This was fueled by historically low interest rates driving buyers into the market, combined with a shortage of homes for them to buy. It’s supply-demand economics 101:
Limited Supply + Huge Demand = Soaring Prices.
According to the National Association of Realtors, home appreciation nationally was 16% in 2020 and 13% in 2021. In Arizona the average home appreciated 17% in 2020 and 28% in 2021. Most experts predict double digit gains for 2022 as well.
I believe we will continue to have a robust housing market throughout next year. Buyer demand should remain high as long as the economy stays strong and interest rates remain low (below 5%).
What could bring it down? Is there a confluence of events that would create a “perfect storm” in real estate, bursting what would then be perceived as a bubble? (It’s never a bubble until it bursts.)
Here is what a perfect storm in real estate could look like…
To get control of inflation the Federal Reserve raises interest rates so significantly that monthly payments price many primary home buyers out of the market. (In 1981 the Fed increased interest rates to 17% to temper inflation and the housing market crashed.) Rising interest rates would also keep investors from buying when the carrying cost of a home exceeds the projected rent payment.
When investors (who own rental homes) see interest rates rising and the market reversing, they are likely to sell and capitalize on the gains they have already made. Also, there is a movement to repeal a state law that keeps towns like PV and Sedona from minimizing the negative impact of Airbnbs on quiet neighborhoods. If this law is repealed and many Arizona communities prohibit Airbnbs we will see even more investor owned homes come onto the market.
Back in January of this year Arizona averaged 10,000+ COVID cases a day. By the end of March the number dropped to around 400 cases and remained at that level into July. But cases now exceed 3,000 a day and if cases surge to the point that businesses shut down and workers are laid off, the effect on housing is obvious (fewer buyers + more sellers = downward pressure on prices).
All this is unlikely to happen, but if it does, it would be the perfect storm in real estate we don’t want to see.