For my entire legal career and until 2020, home ownership was the bedrock of every family’s financial world. Other than some brief blips on the home value screen and a somewhat serious price decline in Florida just after the 2008 Great Recession, real estate was always viewed as an American’s most reliable investment. Slow and steady won the race and, as my father liked to say: “They’re not making anymore.”
The period after the Great Recession was somewhat slow. Florida prices came back but from 2010-2020 the stock market was the place to be. The 10 years returns on the SP500 Index averaged 12%. Yet houses did not track anything like that even though the Federal Reserve kept rates very low. We can now see what 2020 brought us besides a pandemic. Fearing a catastrophe, the government flooded the market with stimulus while it turns out lots of Americans had plenty of dry powder of their own to invest in new houses and home improvements. We also saw speculators flooding in, so our mailboxes were now festooned with cards: “We want to buy your house.” Today it is abundantly clear we have an immense housing shortage and not a lot of builders interested in building for the middle class.
The good news is that middling homes in most of Pennsylvania rose by huge amounts. Meanwhile the million dollar + market never caught the same fire. Anecdotal reports I have indicate the New Jersey shoreline has been blazing hot with mostly all cash deals where a million dollar buy is a starter home.
Now the market has gotten weird. People with grown kids and a $600-800,000 home they are ready to downsize are finding that a $450-500,000 house is half the space and being sold “as is.” So, they aren’t selling. Interest rates have doubled. We started to head towards rate cuts in the last quarter of 2024 but today the bond market is signaling it doesn’t know where the economy is headed and interest rates will remain static or rise.
But, to this writer the other uncertainty looms ahead. Today a house is pretty much a two income proposition. Yet millennials (the 28-44 crowd) are struggling with lasting relationships and have debt and job stability issues that are affecting qualification for a mortgage. Those problems have little to do with what the Fed’s Open Market Committee decides.
Millennial problems with relationships and finances have been around for a while. But what has also emerged is enormous uncertainty in the home insurance market. Pennsylvania is a pretty safe state in terms of weather related losses. But, then so were central and western North Carolina and George until this year. As I write this Pacific Palisades is ablaze. Underwriters are going to spend the bulk of 2025 assessing risk in the wake of 5 major hurricanes in 2024 with an estimated quarter trillion in losses. Those with homes in New Jersey and the Del-Mar-Va peninsula are going to be caught in the undertow of anticipated problems when their policies are renewed and we are fast approaching an inflection point where carriers are poised to withdraw from markets. When carriers withdraw from a market – PIA Northeast News. Meanwhile, we are reading about the insurance crisis in Florida where many homesteaders are seeing basic coverages increase by staggering amounts. Today the Wall Street Journal reported that California fire losses since 2017 are estimated at close to $50 billion. Those who can’t find coverage or don’t pay on time are in default of their mortgages and subject to foreclosure. While many recent cash buyers don’t have to worry about a mortgage company’s ire, those folks may have real money but not many of them are prepared to eat a $2-4 million loss if the Cat 3 comes to their barrier island.
Nostalgic for the memories of childhood vacations at the shore, many affluent folks along the coastline have opted to place their second homes into a Qualified Personal Residence Trust (QPRT). This is an estate planning technique that moves an appreciating shore house out of the hands of Mom and Pop Warbucks and into the hands of the next generation. Ordinarily the receiving generation is expected to share expenses like realty taxes, homeowners fees and insurance. That combination can put a real hurting on the cash flow of the donee families who now divide the expenses of this gift on an annual basis with two or more sibling families.
Is there still money to be made in real estate? Of course, but what was once a tried and true, slow but steady investment is likely to be bobbing on the whitecaps for some time to come as interest rates and the hottest year on record converge to make for market turbulence.