2007 is remembered as the year of the great real estate boom in the United States, so much so that the expression “the bubble of 2007” is used to name it.. Although these values seemed unbeatable, the conjunction of certain variables made possible another extraordinary situation that began to become evident in 2021 and seems to be consolidated in 2022, but The situation gives signs of risks.
The value reached by properties between 2020 and 2021, well above the maximum value reached in the 2007 bubble, is a clear expression of how inflated the American market is today.
Hoy, commercial assets (offices, industries, retails, multifamily and hotels), are on average 52.8% above 2007 and have risen even more in the last year -on average- 16.1% per year.
Housing, for its part, exceeded the maximum reached in the 2007 bubble by 55% and also reached an annual variation of 16.8% in 2021.
This phenomenon occurred due to the drop in rates in 2019, which resulted in a wave of investments, added to the effects of the pandemic (in some way “forced” savings) and the enormous currency issuance (25% of the total circulating), generated an extraordinary flow of capital.
The purchasing power together with the low rates caused a real estate boom with assets growing annually at an unusual rate: well above the previous bubble.
Additionally, recent data reveals that residential properties recorded a year-on-year increase in sales prices as of March 2022 of 20.9% in the USA and 31.4% annually in Florida. Given the current rate hike, it is highly likely that there will be a brake on the rise in market values and even a possible price correction.
Just as when rates fall, real estate rises, as there is more purchase intention due to accessibility for users and greater attractiveness due to the increase in profitability for investors.
When rates rise, real estate usually goes down because a higher return is required to compete with other options, such as treasury bonds, whose yield rose between 2 and 3 percent per year and the expectation is that the increase will be maintained in the next months.
The rise in rates is clearly a variable that corrects prices. Those of us who dedicate ourselves to analyzing market cycles are aware of the indicators that warn that the bubble could burst at any time, although it is important to note that on this occasion there are other forces that act as a counterweight and that they are stopping, at least for now, price correction. Some of them are: high inflation, increases in construction costs, strong existing demand from buyers, low inventory levels, excess liquidity and fear that rates will continue to rise, among other variables.
If we review recent data we see that Some indicators are beginning to show signs of a cooling off in the market. Inventory was reduced by only 3% in April while, that same month, 17% of sellers lowered their prices in order to be able to sell: in any case, the volume of sales registered a year-on-year decrease of 4.5% in April and 15% in the comparison with the previous month, that is, March.
In conclusion, the cycle is in the final stage of expansion.
We are closer to correction that the rises continue and if they do it will be for a short term, we understand that the correction will be heterogeneous and as always it will affect some asset segments more than others.
The time has come to leave, since when everyone wants to leave, there will be no place at the door for everyone to pass.
* The author of the note is CEO of Inmsa Real Estate Investments