Barbers, Haircuts, and Nice Homes

We’re excited to host our son, Humberto Jr., for part two on this real estate and financing series. This blog post is especially helpful for clients thinking about construction, real estate, and renovations.

Humberto Jr.

Humberto Jr.'s career began on the ground floor, so to speak, as an installer and sub-contractor at Humberto’s Flooring. He now serves as a Mortgage Loan Officer and REALTOR® at Home Pride Real Estate. Additionally, is the Co-Founder of UCLA’s Value Investing Program and an Adjunct Professor of Economics at Cerritos College. He is passionate about helping families achieve their goals, especially through real estate investing and construction

Barbers, Haircuts, and Nice Homes 🏠💰

Navigating the real estate market in these times reminds me of the saying, "Never ask a barber if you need a haircut." This holds true for most realtors in the current market too. With housing stock as scarce as hen's teeth, it's hardly a shocker that they're nudging prospective buyers towards homes with price tags that are beautiful but eye-watering expensive. Within the real estate professional community, I have embraced a contrarian perspective, harboring a pessimistic outlook that, to be candid, is not widely appreciated in such an exuberant and bubbly realm. Some of my clients might be shocked to hear me suggest giving their current homes a makeover instead of pursuing the elusive dream of a brand-new home. It's not that I'm “half-assing” my job, I'm thinking as long-term as possible and maximizing the options in front of me in light of the seemingly obvious constraints.

The State of the U.S. Housing Market

Once upon a time, the American dream — and the path to social upward mobility — was paved with the bricks and mortar of homeownership. The strategy was simple: buy a starter home, wait for your equity to appreciate, and then jump into a better home. Rinse and repeat until you've climbed to the top of the real estate ladder. Alas, those days seem to be fading into the annals of history. Today, homeowners with good interest rates are more inclined to hold onto their homes for many years, maybe even decades. The concept of homeownership has indeed shifted from being a stepping stone to wealth building to a game of musical chairs where no one wants to give up their seat. Consequently, the ability to upgrade to a better home has become an elusive dream for many. Why is that?

The answer is not so simple. In the past three decades alone, the U.S. has experienced significant shifts in housing construction patterns. Since 1990, we've seen periods of rapid development, stagnation, and even decay, all largely influenced by economic, demographic, and policy changes. The 1990s began with a construction boom, thanks to favorable economic conditions and a robust demand for housing. However, as we moved into the new millennium, the housing bubble burst, leading to the 2008 financial crisis and a significant plummet in construction activity.

After a painful period of slow recovery, construction rates began to pick up again around 2012. Yet, the progress has been sluggish. In 2020, we built fewer homes than in any year of the 1990s, despite having a larger population and lower interest rates. The result? A severe shortfall in housing supply with demand outstripping availability at an alarming rate (Chart 1). This supply-demand imbalance is a key driver behind the skyrocketing prices and fierce competition for homes we see today. Understanding these trends is vital, as it not only shapes our understanding of the housing market history but also provides crucial context for the decisions we make today.

CHART 1

Similarly, interest rates have also seen highs and lows, spikes and dips. But when we look at the grand scheme of things, we're currently experiencing some of the lowest rates in human history! In fact, the current interest rates are much lower compared to what our older readers might remember from 1980-2000. Those were the days when double-digit mortgage rates were the norm - a far cry from the 5-7% rates we are accustomed to today. I'm glad to report that we're also pretty far away from the 20% rates charged in Mesopotamia 3,000B.C. (Chart 2). Given the current "low-interest-rate" environment, it's unsurprising that home prices continue to surge year after year. People can afford to borrow more money. This increased borrowing capacity drives up demand for homes and consequently pushes up home prices.

CHART 2

All told, the U.S. housing market is currently caught in the throes of a perfect storm. This storm, born out of a severe shortage of housing inventory, historically low interest rates, and a pandemic-induced surge in demand, is creating an environment of prolonged housing stagnation. For middle-income families aspiring to climb the property ladder, this storm brings strong headwinds. It’s not just about owning a home anymore; it’s about strategic growth - building equity in a home and leveraging that growth to propel forward.

Antidotes for Aspiring Wealth-Creators

So where do go from here in light of these challenges? For starters, we need to think outside the box. The traditional path of purchasing a beautifully remodeled home may not be feasible for many middle-income families anymore. Instead, we need to explore alternative options like expanding the equity in a home they already own.

Indeed, the fundamental principles of economics often boil down to the reality of scarcity and market responses. In times of scarcity, the market tends to reward those who bring what's missing. Following that logic, if beautifully remodeled homes are in short supply, then investing in the renovation of your existing property should significantly appreciate your equity. This is not mere conjecture; we see evidence of this in the data. The recent surge in home values is largely attributed to home improvement activities, signaling the market's response to an increased demand for quality homes (Charts 3 & 4). This underscores the opportunity for homeowners to harness the potential of their existing properties and build wealth in the process.

CHART 4

My advice to current homeowners, therefore, is to start with small, manageable projects that offer a high return on investment. This could be a simple renovation such as repainting, upgrading the kitchen or bathroom, or improving the home's energy efficiency. Don't feel compelled to undertake massive, costly projects right away. Instead, prioritize improvements that will increase your home's value and provide a solid return on each dollar spent. If your financial situation permits, or if you are comfortable with smart leverage as explained in our “Smith's” Blog Post, you might consider expanding the square footage of your current property as the ultimate step in capitalizing on the equity gained from recent renovations.

One practical approach is to investigate recently sold properties in your neighborhood. Examine the listing images and note the renovations that have been implemented. These properties are likely to have features and upgrades that were rewarded in your specific area. Once you've gathered ideas, attempt to imitate these renovations in your own home. However, you don't need to do everything all at once. Break down the renovations into manageable chunks and tackle them one at a time. This method allows you to gradually improve your home's value while staying within your financial capabilities.

The benefits of focusing on renovation are two-fold. Firstly, you're not just adding to the monetary value of your property, but also enhancing your day-to-day living experience. Each renovation, no matter how small, contributes towards making your home more comfortable, convenient, and aesthetically pleasing. Secondly, by building equity through improvements, you're setting yourself up for future prosperity. This accumulated equity can be a powerful tool in wealth creation, potentially offering you the opportunity to trade up to a new home in the future when things start to balance out.

Concluding Remarks

As an individual deeply passionate about construction and real estate, I love providing clients with a multitude of options that extend beyond one-time transactions. This long-term perspective, instilled in me by our family-oriented business, highlights problem-solving in light of massive challenges. We hope that this piece has given you a glimpse into the current real estate market and how it relates to building multi-generational wealth. And remember, just like a bad haircut, today's housing market conditions are temporary. Eventually, it will grow out and you'll be ready for a new style that fits you better. Until then, keep that home improvement hat on and keep building those equity bangs.