Waves of change

“My comrades, hardly strangers to pain before now, we all have weathered worse. Some god will grant us an end to this as well. You've threaded the rocks resounding with Scylla's howling rabid dogs, and taken the brunt of the Cyclops' boulders too. Call up your courage again. Dismiss your grief and fear. Maybe someday you will rejoice to recall even this. Through so many hard straits, so many twists and turns our course holds firm for Latium. There Fate holds out a homeland, calm, at peace. There the gods decree the kingdom of Troy will rise again. Bear up. Save your strength for better times to come.” Virgil, the first book of the Aeneid.

Yes, maybe someday we will rejoice to recall even this: the inflation crisis, the health care crisis, the housing affordability crisis, the climate change crisis, the fill-in-the-blank crisis. There’s a website that tracks words that are getting a lot of search engine attention right now, and I suspect the term “crisis” is right up there at the top of the list. But as Virgil knew back in 29 BC all things must pass, and every crisis has within it the seeds of change and a solution. Which brings me to the current mess we call the real estate market.

A friend of mine accused me once of being relentlessly optimistic, which some of the readers of this column might not agree with, but there’s actually a lot to be positive about in 2025 with real estate. Interest rates have stabilized, which in financial circles is winning. Precipitous up/downs in interest rates create uncertainty and financial markets hate uncertainty. Real estate most often succeeds when it is slow-cooked over time: asset appreciation and paydown of mortgage debt require a longer term horizon, and while interest rates of 7% are a nuisance, their effect is minimized as equity is created with rising home values.

Dramatic gains may be elusive though, because in addition to higher debt service, the carrying costs that support the asset have become more expensive: property taxes and insurance coverage particularly. For an investor, these challenges may be too much to overcome, but for a homeowner, the return on investment isn’t as important as having shelter. And for most of the past 40 years or so “having shelter” was also the best way to build household net worth. I think that equation still holds true, but one aspect of the housing crisis is that the high price to get into the home is compounded by the carry costs adding up to more than the guideline limits of 30% of household income. And even that guideline is a joke, given the cost escalation in child care, health care and basic groceries. The demand side for housing is certainly there with a growing population and Gen X-Y and Z looking to move out of their parents’ basement. Demand will stay strong through 2025.

The supply side is slower to respond with more homes coming to the market, but public awareness of bureaucratic regulations that strangle the process will mean easing of many archaic zoning restrictions in 2025. Increasing supply is the only way forward in resolving the affordability challenges, and there are all kinds of initiatives that the supply-side crisis has generated, from more efficient construction techniques and practices, to utilizing new building materials, to re-thinking the architecture and form that housing/shelter could evolve into. The waves of change we have experienced since the 2008 financial meltdown, where many of the negative forces that affect housing today were first unleashed, and were exacerbated by the COVID pandemic, seem negative.

But what happened was the pace of change greatly accelerated and overwhelmed the status quo. Existing systems couldn’t cope: the financial establishment, the house-building industry, civic planning departments, buyers and sellers, were all caught unprepared. Charles Darwin is often mis-quoted, he never said “survival of the fittest,” he said those who survive are those most adaptable to change. My take on 2025 is that the new solutions emerging to resolve the various crises will take us onto the next plateau.

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Raphael Barta is an Associate Broker with a practice in residential, vacant land, and commercial/industrial properties (Raphaelb@sandpoint.com).