A sudden surge in American Real-Estate market has taken the form of a bubble. Will India real estate follow the same pattern?
“Real estate is the safest investment”
Well, this statement has taken an upwards trajectory for the United States of America.
The property valuation for homes has risen at a fastest pace in the last 15 YEARS which is just a reflection of polarity in the demand supply fulfillment of real estate in the country.
According to NAR(National Association of Realtors), In February of 2020 there were only 1.03 Million homes available for sale in the market which was on a record low since 1982 which just became a catalyst for people to compete for properties even fiercely.
Cities like Idaho, Montana and South Dakota showed as high growth as 22.6%, 19.5% and 17.1% respectively. The reason being people are shifting towards these, less densely populated areas to take advantage of comparatively lower rates.
How did it all begin?
On March 15 2020, when the Federal Reserve cuts the mortgage rate to ZERO inorder to aid the help during COVID pandemic.
The reason for doing that was to stimulate the economy during COVID. A stimulant in the economy is to make sure that it doesn’t fall during a national emergency/crisis.
Right after that on March 27th CARES act floated $2 Trillion as a stimulant bill to blunt that blow of the COVID pandemic even further.
Under CARES act people were allowed to temporarily pause their Mortgage forbearance to provide assistance to people who are experiencing financial difficulty, for upto an entire year.
Due to such ease in getting the loans and relaxation in the forbearance people were able to float money in investments for quick buck be it stock market which is at record high or the Real-estate market which is skyrocketing at an exponential pace.
But, you must be wondering this can go on only for so long, right?
What will happen to markets when things go back to normal and people are able to pay their mortgages? Will that result in a sudden drop in the prices of real estate proving this to be only an economic bubble?
According to the new act issued by Consumer Financial Protection Bureau (CFPB) which will be effective from 31st August 2021, and is only applicable to primary residence i.e. investment properties do not qualify for this.
The act says that any individual which has experienced any sort of financial hiccups due to the pandemic. The lenders will have to provide the borrower with Loss Mitigation, meaning the lender has to take the borrower through all the options available which will allow homeowners to stay and keep their homes.
Anything like mortgage modifications and payment extensions i.e. working a middle way out where the home doesn’t fall under foreclosure.
One interesting thing this act will bring is, homeowners will be allowed to extend theri loan term by 480 months with no increase in the periodic principal amount or interest rate.
To break it down in simpler terms, let’s say an individual has a 20 year mortgage and you’re paying $1000 a month, they’ll be able to cut it down to $500 a month for 40 years with no additional cost, which means you’ll be reducing your monthly payments by half or more depending on the time period on you mortgage rate.
And as a cherry on top, if any amount of your loan is deferred you will not own any excess interest or any other (late, stop payment) kind of fee.
Even after this if a homeowner opts for foreclosure they’re given an additional 120 days period to decide whether they want to go ahead with foreclosure or want to figure another way out i.e. modification or repayment.
With a full proof plan we can consider it as an economical and political stimulus to boost the health of the US economy.
NOTE: CARES act is a proposal open to public comment, but if it goes through it will act as another major catalyst for the real estate market in the United States.
Other catalysts affecting real estate prices
Timber cost
Time costs are 112% higher compared to previous year.
But why is it a concern for real estate? Because, over 90% of American houses are made out of wood/timber.
To put it in simpler words, the cost of raw materials is higher hence the cost of finished product is also significantly higher.
But demand alone is not what is hitting the housing markets so heavily, it’s also the supply. The timber industry didn’t predict a sudden surge in home demands during a pandemic and hence surge in timber requirements, they took a decision to pull back timber production creating even steeper difference in demand and supply.
Builders, on the other hand, can only pass on a certain percentage of their expenditures since homebuyers can only pay so much. Higher costs will undoubtedly reduce builder profitability and margins.
As the rates of new homes increase because it’s difficult to construct them with limited supply of raw materials, the rates of second homes, homes which are resold after in use, is also increasing.
Individuals are not able to find new homes due to less inventory, as mentioned above, hence they’re settling for pre-owned homes due to such low interest rates and attractive mortgage deals.
Polarized Demand & Supply
According to HouseCanary’s report monthly new listings have shown a steep decline of 11.5% during March 2021 compared to March 2020. To put it in perspective, there was only a 0.6% decline in the same period during 2019.
On the other hand, in total for the month of March 2021, 348,422 listings went under contract nationwide which is a 22.7% increase versus March 2020.
Which clearly indicates a wide gap between supply and demand of the Real-Estate Market.
The inventory is so low that buyers are forced to buy whatever is left which is creating a cut throat competition.
The reason for such a rush is there’s been speculation that interest rates will increase hence buyers are trying to lock into lower interest rates while they can.
Will the American bubble splash to India?
Till now we’ve been talking about the United States and it’s clearly established that the housing market is in a bubble, the future outcome of the current bubble is hard to determine for both real estate and stock market in the USA.
Now the appropriate question which raises is, why United States? And will the bubble affect Indian real estate in any way?
The answer is yes, it is a possibility.
In the last five years, the real estate market has been in a decline which has resulted in a lot of developers to stop venturing into it. Because of that, a lot of big brands are forced to take small projects because they can afford to bleed out the competition and survive.
If this pattern keeps carrying on, only the big names or big brands will survive which will create a possibility of limited inventory according to each area.
And of course the other catalysts like lower interest rates and handsome home loan deals can create a surge of real estate prices in India.
But, it’s difficult to be completely certain about the question “Will Indian real estate market follow the same pattern of The United States?”
Sometimes caution or awareness can be a crucial factor determining your future and we at RealtyNXT are there to be with you.
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