Supply Chain Issues & Inflation Impacting The Housing Industry

So now, it is housing.  Think about every material needed to build a new home; lumber, dry wall, cement, nails, appliances, hardware etc. etc.  A lot of those items are sitting on ships off shore outside a US harbor.  In this case, time is money.  If these goods are not delivered soon, there will be major delays in building homes.  This also applies to home improvements and renovations.  

Builders usually borrow money to fund construction projects.  Though interest rates are low at the moment, whatever the additional cost because of delays to complete construction will be passed on to the buyer driving up home prices even more adding to the inflation that is happening in the US.  Many now believe it will take a year or longer to deal with the Supply Chain issues facing our country.

This is a nightmare that will impact every aspect of the economy.  Joe Biden needs to stop issuing Executive Orders that are driving up energy prices, which is impacting the supply chain.  Next, we are going to see the gas lines that occurred during the Carter Presidency.  Gas prices are up $2 a gallon since Joe Biden took office.  The cost of energy impacts the cost everything, which is why we see the price of housing, food and everything else going through the roof.  It is time to put politics aside and do what is right for our country.  Inflation hurts the poor and middle class most.  It is a tax on everybody.   

Inflation Is A Tax On Everyone

Home prices have been going through the roof; but so have the prices for everything else.  For the first time in decades, we have raging inflation fueled by higher energy prices and government spending.  The federal government has pumped trillions of dollars into the economy to deal with Covid, in many cases far more than was necessary.  That money is now chasing goods, many of which are stuck off shore awaiting delivery and services.  Inflation is all about supply and demand.

Once inflation begins, the spiral is hard to stop.  Usually, what comes next is the federal reserve raising interest rates to slow down the economy and actually pull money out of circulation.  As bank interest rates go up, which is the rate the FED's charge banks to borrow money, mortgage, car loan and credit card interest rates will go up making borrowing more expensive.  This will bring down the cost of homes since buyers will need to qualify for mortgages at higher mortgage interest rates.  

But in many ways,  the cost of energy is the key to inflation because energy costs are built into everything we buy, eat, do etc.  Current federal and some state government policies are purposefully designed to drive up the cost of carbon energy, namely coal, natural gas and oil.  Gas is getting close to $5 a gallon in many areas of the country.  This is a terrible tax on the poor and middle class in particular, since spending more for energy will come at the cost of other items necessary to daily life.   Inflation is clearly a tax on everyone.  

Understanding Residential Real Estate Commissions

In most parts of the United States, standard real estate commissions to sell a home are usually between 5 - 7%.  So, when listing a home for sale if working with a licensed real estate agent who is affiliated with a broker in the area, the commission rate will be indicated in the listing agreement.  In many cases, the listing agent will end up splitting the commission with an agent representing the buyer in the transaction.   In some cases if the listing agent also sources the buyer, he or she can earn both sides of the commission.  

But that is not the end of the story.  The commission is ultimately paid to the broker, who may also get a cut of the commission based on the splits agreed to between the real estate agent and the managing broker.  High producing agents tend to keep more of what they earn.  Less experienced agents usually end up paying the managing broker a bigger split.   

So if the commission is 6%, the first split occurs between the listing agent and the buyer's agent so 3% on each side.  Then based on the arrangement they have with their managing brokers, the commission is further split.  It is important to recognize that if a sale is not closed nothing is earned by any agent.  The real value the real estate agents bring to the table is in making sure that a sale does not fall out because without a closing, they earn nothing.  As a result, once a contract of sale has been executed by the seller and the buyer, the agents stay very close to the transaction to make sure that the sale closes.  Commission is a very powerful motivator specific to attention to detail and dealing with any impediments to closing the sale. 

Real Estate agents earn their money.  Their job is to negotiate a price a willing seller will accept from a willing buyer.  That sounds simple; but a lot can happen during a transaction to kill the deal.  The real estate agent is there to make sure the deal closes to everybody's satisfaction.  Discount brokers are not quite as motivated, since they are not earning much if a sale does happen.  They work on very high volume in the hopes that a good percentage of the sales they manage will close.  

Rising Home Prices Have Resulted In Homeowners With Lots Of Equity

With rising home prices, the 63% of people in the United States that own homes are sitting on about $3 Trillion in home equity.  This may be unprecedented and it is very good, but also little scary.  Homeowners could be tempted to take out home equity loans and or to refinance to pull cash out of homes.  This would be ok if for a home renovation that adds value to the home; but not ok if being used to buy a car or anything that will depreciate in value over time.   

This could be a way to pay for a college education for children; but again it will come at the expense of retirement income later on so be careful.   It would not be a good idea to borrow more than 70% of the value of the home because if a correction comes, which is likely sometime in the future, it would be possible to owe more on the home than the amount of the mortgage.  This is called being upside down.  

And, then there is the federal government looking at what is called unrealized capital gains.  There are some in Congress that want to tax unrealized capital gains even though the home has not be sold.  The reasoning is that your home value has gone up and so Big Brother wants a share of the gain.  Let us hope this never happens, but with all the new entitlement programs under discussion, this $3 Trillion pot of gold sitting in home equities could be a target.  Keep your ears open and your dialing finger ready to call your members of Congress if there is any mention of taxing unrealized capital gains.  It would be a disaster for many homeowners.   

Living Near Great Medical Services Is For Everybody

Generally, people think that older people need to live near great medical services and that is true; however, all families need to live near great medical services.  Children get sick and have accidents.  We have certainly seen the need for the emergency room services for our grandchildren more than once.  Now that people can work from home, there is some thinking about moving to second and even third tier cities where medical services will be less than adequate.  It is not the best idea to be further than a hour away from a major hospital.

At a minimum, the town should have a decent smaller hospital to deal with emergency services.  Even then, it is likely that for anything serious, the patient will have to be sent to a major hospital in a big city.  And, then there is regular care by a family doctor.  Second and third tier cities often lack enough doctors to care for people in the area.  Many doctors just don't want to live in these small towns because they lack various amenities.  The same is really true for specialists.  This leads to doctor shortages.

We don't often think about getting sick especially related to younger people.  However, is is important to realize that not everybody lives to be 90.  Sometimes something relatively easy to treat in a big city can turn into a life threatening event in a small town.   In some instances, time matters to get the right treatment to prevent a serious problem.  So before choosing a location to call home, make sure your insurance will work in that area and make sure there are doctors and hospitals nearby that can treat serious illnesses.  

Single Family Home Zoning Is Under Attack

Owning a single family home on a little bit of ground has always been part of the American dream; however it does come at a cost.  The land used for single family homes is not then available for multi use residential apartments, duplexes and condos.  And, since our country is now short about 5 million dwellings, there is pressure from some politicians to eliminate single family zoning.  That would be a mistake.  A better solution is to change zoning on obsolete commercial properties to include more multi use residential, higher density living.  

California recently passed a law that would allow a single family homeowner to subdivide the property to build a duplex or even more units on the lot.  This might be acceptable in areas where the homes are 50 years older; but should not be happening in areas with newer homes because it will lead to all sorts of non conforming land use that in the end will devalue remaining home values.  Many areas with much older homes should be redeveloped to include apartments and condos; but that is already happening in many places because ultimately it represents highest and best use for the land.  

Clearly, there are office buildings, malls and other commercial developments that can and should be reinvented to include more housing.   It is already happening; but we should accelerate the trend to make it happen sooner.   Older buildings that are not energy efficient would best be torn down and replaced with new buildings that are energy efficient.  This would kill a few birds with one stone; more housing and lower energy consumption.  

We do need to add to our housing availability in the United States including more affordable housing in many cities.  Higher density is the way to do it; but we need to use common sense not knee jerk political reactions to get there.  

Dealing With Mold

Many parts of the country have experienced flooding from hurricanes and or lots of rain.  When homes are flooded and particularly in hot, humid climates, there is a pretty good chance that the end result will be mold.  There are various types of mold; but none of them are good.  Generally, mold must be dealt with by professionals preferably before moving back into a home with serious flooding.  Obviously, any standing water must be drained from the home; but that is the easy part.  

Once the water is gone, the dry wall will have to be removed to get to the mold behind the walls.  Mold is a living thing that must be killed using chemicals to prevent it from multiplying and becoming even worse.  Before repairs occur, usually big fans are used to dry out the home removing the moisture that caused the mold in the first place.  

Mold can occur from any plumbing leak not just flooding by a natural disaster.  Once there is sitting water anywhere in the home, it must be checked for mold.  Mold is a major health hazard that can't be ignored.  If it results from flooding, depending on circumstances, it may be covered by home insurance; but check your policy for the fine print.  Either way, mold must be remediated to continue living in a home.  There is no other choice.