The Resilience of Real Estate Investing

In the ever-evolving landscape of investments, we hold the conviction that real estate stands as a robust investment opportunity in the present day, even in the face of challenges presented by the highest interest rates in a decade¹. As we wind down 2023, the real estate market is navigating a unique intersection of factors that is reshaping investment dynamics in unconventional ways. In this article, we will dissect the nuances of the real estate market, emphasizing the synergy between high mortgage rates, low inventory, and the strategic initiatives undertaken by homebuilders to seize opportunities amidst adversity.

One of the unique challenges of our real estate market today is the phenomenon of "golden handcuffs." Existing homeowners, benefiting from historically low mortgage rates, find themselves reluctant to sell. We believe that the prospect of purchasing a new home at current high rates creates a financial bind, contributing to a significant shortage of existing homes for sale.

According to the newest Existing-Home Sales housing snapshot covering the month of October published by the National Association of Realtors (NAR), existing-home sales dropped 4.1% month-over-month and 14.6% year-over-year. This scarcity, in turn, fuels an upward trajectory in home prices.

"Prospective home buyers experienced another difficult month due to the persistent lack of housing inventory and the highest mortgage rates in a generation," said NAR Chief Economist Lawrence Yun. "Multiple offers, however, are still occurring, especially on starter and mid-priced homes, even as price concessions are happening in the upper end of the market."

The scarcity of existing inventory has prompted a surge in new construction. We think builders recognize the opportunity presented by this shortage and the increase in home starts supports this theory. According to recent data from the US Department of Housing, privately-owned housing starts in October 2023 rose by 1.9% from the previous month, showcasing a proactive approach by builders to meet the growing demand.

To counteract the impact of high interest rates on potential buyers, homebuilders have devised creative solutions. Mortgage rate buydowns, financial assistance towards closing costs, and discounted home prices are the top strategies employed by homebuilders according to the National Association of Home Builders ². These measures aim to entice buyers back into the market, providing a compelling case for investment even in the face of challenging economic conditions.

The True Life Companies and homebuilders alike have recognized the extraordinary opportunity presented by the current market dynamics. The National Association of Homebuilders reports that, despite mortgage rates surpassing 7%, Americans remain committed to homeownership. The Housing Trends Report indicates a consistent increase in the percentage of adults planning to purchase a home within the next year, with 27% expressing a preference for new construction. This trend is attributed to the diminishing availability of existing homes, leaving new builds as the primary option in many regions.

Despite the challenges of today’s market, we believe there is an unwavering commitment among Americans to secure their piece of the American dream through property ownership and this is the cornerstone of our thesis. This sentiment to own a home reflects not only a financial investment but also a deep-seated cultural value, emphasizing the resilience and determination of individuals to carve out a stable and lasting foundation for themselves and their families. In the face of economic fluctuations, we see that the desire for homeownership remains a testament to the timeless significance placed on the pursuit of stability, independence, and a place to call one's own.