Post- C*vid American Real Estate is the biggest Bull Trap of Modern History.

Starting in 2020 the housing market has gone on a triple digit tear to the upside, leaving many sidelined as they watch prices on homes more than double in hot markets. The combination of mass relocations out of cities and dense urban areas along with historically low interest rates (as low as 1% with 2.5% being an average across all time lows) led to a market frenzy. Properties that had not been on market before or hadn't been listed in generations were listed and sold as sellers took advantage of the price surge. Inventory nationally reached all time lows soon after as sellers became exhausted and buyers continued to enter the market due to rates staying below 7% for years. 

Rate hikes slowly began to normalize the lending side of the market but the trend of moving out of cities continued as crime and other economic factors continued to solidify the trend of city exodus. This combined with the new hybrid work/ work from home culture led the commercial real estate sector, particularly for office buildings, to begin to correct heavily. By the end of 2023 huge chunks of many city office buildings were vacant and large office buildings were at risk of defaulting on their loans for the first time since borrowing. 

As prices and the market as a whole began to level in the residential sector rough fire seasons particularly in California led to other issues. Dry winters across the United States as a whole had led to record low levels in reservoirs and incredibly dry climates. in 2018 and again in 2020 and 2022 intense fires across the nation in various locations, especially California, led to record breaking losses for both owners and insurers. With the climate change trend only seeming to continue many insurers announced they would no longer be writing policies and or adjusting their coverage in high risk areas. 

The problem with this? Nearly all of California is a high risk area. The state with a 4.0T, yes Trillion, GDP now had a serious problem. Homes rebuilt or built after the fires would no longer be insurable. Homes that were worth $500,000 in 2018 that were now trading at $1.3M would not be insurable as their new owners took ownership. For most Americans their biggest asset is their personal home, and this meant that for nearly all new  real estate transactions in California that this asset would not be insured. 

The other factor here is how real estate values are calculated. The two key metrics for residential real estate are replacement value and comparable value. 

replacement value is the cost of the land plus the cost of materials and labor needed to make the same house on the existing or similar plot of land. In recent years building materials have skyrocketed in value fueled by the building frenzy as builders tried to satiate the endless demand for new housing as millions of Americans moved out of cities and dense urban areas, as well as supply chain issues due to imports and global trade slowing down in a p*nd*mic and post p*nd*mic economy. As these factors combine one key issue emerges, most of the price increase of purchasing or building a home in recent years comes from the cost of materials and labor, the land value has increased but not by the triple digit values that have been seen by the market as a whole. 

The other value calculation is comparable value, this is calculated by finding an average value of similar properties within a given area. This value estimation formula has been historically accurate but has now been met with the new variable of having portions of properties in an area being insured and/or insurable, with another portion being ineligible for this incredibly important form of asset protection. 

These two methods of calculating value of residential real estate lead to the trap, the land value is only a portion of the value of the property and the ability to accurately calculate asset value across a dataset has been reduced. 

What does this mean for buyers, sellers, and the general public? 

It means that the house that was worth $500,000 in 2018 that sold for $1.3M in 2020 could burn to the ground, uninsured, and the owner could be offered $250,000 for the land. This may seem like highway robbery but given the methods of calculating real estate property values it would be a fair valuation. If the house is uninsured or uninsurable, it is no longer comparable to like kind properties that are insured and/or insurable. Since most of the recent price appreciation in the real estate market has been fueled by  high material and labor costs coupled with a low interest rate induced buyer frenzy, buyers have been left with the inflated valuations with increased downside risk. 

This isn't about the risk to reward of a trade, this is about the largest chunk of American wealth being at risk of being literally burnt to the ground. Could this lead to a price adjustment in the market? Sure, but it is a risk adjusted price that reflects an over bought and under protected asset category that people have been fighting tooth and nail to take part in.

On a personal note these aren't just assets, people's home's are where they base their whole family life out of. The home being at risk puts much more at risk than just net worth, this is a bull trap for the sanity of an entire generation.