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Housing: Supply and Demand

Housing: Supply and Demand

One of the basic principles of economics is “Keynesian Economics” that talks about the supply and demand chain. There are population shifts in the United States, as we've seen over the last several years, and a shortage on supply of houses on the market, therefore the demand for them goes up and so does the price.

There are several case studies. For example, in Wyoming there is a nuclear power plant being built in a small town, along with some other industries that have decided to move in, and some of the property values have doubled in a short period of time including raw land. Zoning can make the value of a property go up as well, but the big one is obviously supply and demand. We have seen companies like Oracle and Tesla move from California to Texas resulting in property values going through the roof because of supply and demand. In areas that are more compressed, like college towns, students need to live closer to the university, so the supply goes down and the demand goes up.

Using that same example, Austin Texas has a huge university downtown near the state capital. There are special events that take place downtown like South by Southwest, or the Formula One race which puts a strain on housing, so students pay more for the residential rooms than you typically would find in a Texas city. Cambridge Massachusetts houses a major university downtown surrounded by office buildings. A 50-room apartment building in Cambridge would have no problem staying 100% occupied with maximum rents because of supply and demand. In Florida, a sleepy little town called Lady Lake was rebranded by a developer and now referred to as the villages. It is a massive retirement community where the average annual household income is approaching just under $100,000, making it an affluent area. They're putting houses side-by-side and building miles of roads. People that are retiring from cold-weather states want to move to a better climate and play golf.

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We are seeing purchase prices never seen before. With gas prices going up, their downtown living has seen an influx of individuals that want urban living, so they won't have to drive far to go to work. The covid situation has seen its last days and the country will open up. That will have a great impact on supply and demand.

The reverse can be true as well if the city has a high crime problem. People will seek to leave that city and go to the suburbs to get away from the crime and they will open businesses in the suburbs and work there. People that own property in downtown areas, that experience high crime, will also see their values drop because of supply and demand. In general terms, we want to avoid cities that don't have a game plan.

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Rent controls are also something that's important to consider. If you own an apartment building in a city that has rent controls, it will hurt your capitalization rate and your value base, when you're ready to sell the building. If you have a house or an apartment you want to rent out, you need to create a feeling of demand. Have everyone that wants to look at the property show up at the same time. Tell them you have one appointment left to show the property, it's at 2:00pm on Saturday, and that's the last appointment. If you have five to ten people that show up, it creates a little anxiety and that emotional feeling of fulfilling the demand. People may even say, “what do I need to do to make sure that you rent this property to me” or “what do I need to do to make sure that you will sell me the property?” The obvious answer is, make an offer higher than the others. Supply and demand is one of the most beautiful things if you have knowledge and know how to use it to your advantage.

Areas of Review

Takeaway

Big picture takeaway points

  1. Forbearance was intended to help Americans, but unfortunately many will lose their homes.
  2. As an investor forbearance creates opportunity.
  3. Many Americans will be dealing with the effects that Covid caused for years to come.

Reflection

Self-reflection questions to think more about the content

  1. How can I create a solution for somebody that may have lost or is losing their home?
  2. Will helping other people allow me to get what I also need?

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