Current Real Estate Trends: Lon Welsh's Expert Perspective

We recently sat down with Lon Welsh, Chairman and Founder of Ironton Capital & Your Castle Real Estate, to discuss the importance of market selection when investing in residential real estate, current housing inventories and lending standards, opportunities for individuals to get real estate exposure despite affordability challenges, and some of the structural challenges that have put a limit on residential home supply growth in the United States. Listen to the full interview on Spotify.

“Market by market analysis is going to be key … some markets like Austin are going to have a lot of new deliveries and it’s going to be very difficult to see rent increases or strong occupancy growth … On the other hand there’s a lot of tertiary markets that didn't get the level of attraction of developer interest where there's maybe not any pipeline at all and deals in those markets might still see good rent growth and good occupancy trends so you’re going to need to really pay attention to the details and not be confused by the national statistics. I often say that I could tell you the average temperature in America today but that wouldn’t tell you much about whether you need a coat or not” 

Mortgage Rates and Lending Standards: Lon emphasized that lending standards are currently as tight as they have been in the last 20 years. He also pointed out that with mortgage delinquencies at a record low, he doesn't see any plausible path to home prices going down.

“Lending standards right now are as difficult and tight as they've been at any point in the last 20 years”

“With mortgage delinquencies being at a record low right now I don't see any plausible path to [home] prices going down” 

Home Equity Wealth in the United States: Lon shared some interesting statistics about home equity in America, noting that one-third of homes are completely paid off, a little more than one-third have more than 50% equity, and less than one-third have 50% equity or less.

“One third of homes in America are completely paid off, a little bit more than one third have more than 50% equity, and less than one third of homes have 50% equity or less.” 

Changing Attitudes Around Home Ownership and Real Estate Exposure: Lon discussed the shifting mindset around home ownership and real estate exposure, noting that many people are embracing the idea of renting for the foreseeable future. He also highlighted the exciting opportunity for individuals to invest in real estate without the headaches of direct ownership.

“I think there’s also a group of people that financially think ‘this is going to be too much of  a stretch for me I don’t see an easy path to ownership’ and whether they want to or not they've embraced the idea that renting is going to be in their future for at least the next 5-10 years.”

‍“What’s really exciting is that I think that we’ve got this uncoupling of the historic view that to have real estate exposure I had to buy a house and live in a house and that was my real estate exposure and now I think people can have a more well rounded mindset that for all the reasons we just mentioned renting might be the answer for me but that doesn’t preclude me from investing in [Plotify] or one of our funds to get access to the [real estate] market and still get the wealth generation without the headaches and do it in a passive capacity. I think for a lot of people that’s much more attractive not only do you get the diversification it’s passive and it’s just easy to do so we have a large educational task ahead of you and I to make people aware of this incredible opportunity” 

Chronic Undersupply and the Challenges of Narrowing the Gap: Lon discussed the chronic undersupply of housing in the United States compared to population growth, noting that the U.S. ranks last among industrialized countries in adding new housing inventory relative to population growth. He also highlighted the challenges of narrowing this gap, including the retiring of skilled tradespeople and the rising costs of raw materials.

“There was a great article in the Financial Times … where they took a look at the rate of adding new housing inventory vs. the population growth rate of all of the industrialized countries and the United states ranked last and we ranked last by a lot. We are nowhere close to building enough for rent or for sale product, relative to our population growth and it’s been like that on average over the last 25 years.” 

“We’ve got a lot of baby boomers who are welders, master carpenters, and electricians who are retiring and the number of young people at the beginning of the pipe as journeymen is not nearly as great as the number of people retiring. These craftspeople become more scarce every year so the ones that remain have more and more pricing power. It’s hard to get around that. A lot of the raw materials required for building are up more than 20% over the last four years.”