How the Real Estate Economy is Changing For the Better

Joseph Maharaj

September 23, 2022

Joseph Maharaj

The baby boomers are retiring, affecting the real estate market. The baby boomers were born from 1945 to 1964, and their retirement began in 2010. As a result, they will have a significant impact on the real estate market. As a result, new construction is becoming more affordable, and the supply of new housing is increasing. The Real Estate Economy is Changing For the Better

Economic stress index

The Economic Stress Index of the real estate industry is a way to measure how stressed the real estate market is. The index is calculated by taking the percentage change in home prices from the previous month and subtracting it from the percentage change in the unemployment rate. This index is based on data from the Case-Shiller home-price index. The index tracks the movement of home prices since homes are the most significant asset for most households. Therefore, an increase in home prices is considered a positive sign for the economy and can also indicate a rising wealth level.

In April, LegalShield released its latest Economic Stress Index, which measures the financial health of U.S. households and small businesses. This month, the index shows that the housing construction index hit its highest level in history. Currently, there is a housing shortage of nearly 4 million homes in the U.S., one of the causes of the housing crisis. Meanwhile, the Consumer Stress Index dropped to its lowest level in over a decade due to the American Rescue Plan, warm weather, and recovering economic activity.

Despite the rising number of foreclosures, the economy is still showing signs of improvement. A rise in home prices is one of the best signs that the economy is stabilizing and improving. However, there are still some concerns about the economy.

Increased supply of new housing

While the current housing market is recovering from the housing pandemic, the demand for new homes is still too high, and the supply is not yet high enough to keep pace. According to Freddie Mac, the housing supply deficit is projected to reach 3.8 million units by 2020, but new home construction is increasing.

This problem is exacerbated by low mortgage rates and the coronavirus, driving people away from urban centers and toward more remote living. The lack of mortgage credit is also reducing homeownership rates, which will worsen housing inequalities in the future. Moreover, labor availability, construction costs, and local regulations continue to limit the new housing supply.

Rising land values drive up new housing costs, thereby driving prices higher. This situation has also caused an increase in the price of existing housing. This trend is particularly noticeable in coastal cities. For example, a median lot size in a suburban area of greater Boston is well over an acre.

A high price-to-cost ratio characterizes the current housing market. As a result, new housing prices remain above the minimum profitable production cost (MPPC), while the new housing supply is below the maximum profit margin. Thus, an increase in supply would result in super-normal profits for developers.