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When it comes to the real estate market, shades of 1987 could resurface around 2030. If the long end of the interest rate yield curve remains elevated or moves higher this is the big danger we face. High rates combined with a market where offices and retail space appear to be overbuilt may halt this type of new construction for the next few years. This has the potential to turn a glut into a shortage, especially if a lot of the current stock is demolished.

When new construction slows faster than demand falls the relationship between supply and demand hammers its way home. Those of us who had to lease space in the mid-80s ran smack dab into a wall of high prices and a lack of availability. For many small businesses finding space to lease in 1987 was very difficult. As you might expect, this sent the price of buildings soaring.

In some areas, the shortage of space for lease got to the point where it generated a bidding war. This was a direct result of high interest rates and other actions taken in 1979 and 1980 to coral inflation. Making it more difficult to build means that after a few years, all excess supply vanishes from the market.  

It is also possible that America may be in the process of even moving residential rates off of long-term rates and pushing to more flexible rates. Such a change would also pose long-term ramifications. Central banks have far more ability to affect near-term rates than those several years away. The rates charged on longer loans are more at the mercy of investors and their perception of future inflation.

This is particularly true if the Fed moves away from purchasing mortgage-backed securities. In short, new construction suffers during times of high interest rates. This tends to create supply shortages over time which at some point fuels an additional boom in new supply. A key question is where we arein this cycle. Remember the cycle is not the same in all countries, in this case, I'm focusing on here in America. 

Another factor is the cost of future construction and the idea prices will not fall and will most likely rise. DIY with Dave, takes the stand that, lumber prices have been relatively low and stable for the past few years but things are changing. In a video, he makes the case that the stage is now set for huge lumber price increases if use rapidly picks up. He explains how mill closures are impacting the capacity of the lumber market and how that could lead to huge price spikes in the future. 

Of course, lumber is not the only cost factoring into new construction cost. Government regulations, utility hookups, labor, insurance, and more all feed into this. It is difficult to make a case that any of these are about to fall. While buildings are notoriously expensive to maintain, building them from scratch continues to look more so.

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