Should you wait it out??
So you plan on waiting for the market to “crash”….
I hear it all the time, “Will the market crash?” OR “I think I will just wait it out…”
I get it! We have seen home values trending on a substantial rise for the past 24 + months!?
To put that in perspective, a stable market rise is between 3-5%?
So I get it, that rate of increase is not sustainable!
But here is the TWIST! In that same time Affordability has increased or stabilized, despite such an increase in home values. Meaning the monthly cost to the buyer has dropped or stayed the same.?
HOW IS THAT?
Rates! Rates have been RIDICULOUSLY LOW during this time period. Low rates have helped drive the market since 2012, but the rates in the last couple of years have BEEN STUPID LOW… opening the market to more and more buyers. Thus the low rates have outpaced the increase in home values.
The comment I am sure you have heard by many buyers in the market or real estate agents is that THERE IS NO INVENTORY… Which is true, Demand is crushing the Supply.
That is not for a lack of home sellers in the market. In fact 2020 and 2021 are the two greatest home sales in terms of units since prior to the 08 crash. They are 2 of the top 5 years for sales in units on record.
It is very difficult to predict what the market is going to do. But we can look at this type of information to help understand how the market is moving to get a better idea of what could happen.
A stable market would have 6 mo of inventory. - meaning based on the average sales per month, if no more listings came on the market it would take 6 months to sell off the inventory.
Throughout the pandemic, in MA we have seen a month or less of inventory. Currently we are looking at 2 weeks!
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WHY IS THAT? Well, one, is the low rates driving the market. But the larger reason is THE GREAT VOID of new construction since 2008. To keep the market stable, the US would need 1.1m home builds per year. Since 2008 the US is SHORT 5m home builds.?
The factors that have ultimately driven values have surpassed even the most knowledgable individuals on the topic of real estate. After the 2008 crash and the market stabilizing itself between 2010-2013 it was thought that the US had lost a significant value that would never be made up. Trend lines simply began and grew at a new and lower values. From 2013-2018 that loss did get smaller, but through 2021 we have surpassed that loss and values are effectively at the 40 year trend line we would have expected (4% increase per year in US home values).
So now you have a better idea of where the market is and how we got there.
What would then effect a change in the market to…. CRASH…??
Well we would need to see a rise in inventory and a decrease in demand.?
What would drive a decrease in demand? Well a rise in rates could certainly have a negative effect. We are expected to see such a change over the next 12 months, as indicated by Powell of the Fed Reserve. The rise in rates is expected to fight inflation. We have seen inflation throughout 2021. Many believe inflation and as a result the rise of rates would push the over all economy into a recession. The rise in rates though would help balance the inflation. This would indeed reduce buyers demand.
But we still have a supply issue and even a substantial reduction of demand could still leave us below the 6mo inventory of a stable market.
As rates rise and demand drops, sellers will stop seeing the multiple offers, and we may even see homes on the market for 2+ weeks. Of course the lack of home builds will not be solved if there is an overall economic slow down. So we are more likely to see a stabilization of values in the market.
Of course at the end of the day, affordability or the home owners monthly payment is more important than the homes price tag. So other factors we would need to look at is the lack of growth in household income. In regards to affordability through 2020-21, rates dropping not only surpassed the rise in values it did it without an increase in income.
The economic “unrest” that many expect over the next 12-24 months will effect the market and the combination of inflation and lack of income growth will be substantial impactors. It should be noted that in the last 40 years there was only one recession that had a negative impact on home values. That was 2008, a recession driven by a real estate/mortgage crisis. Typically values slow down and or are stabilized.
Based on the factors mentioned, this is why I would expect a slow down/or a stabilization in values. Of course home values slowing down from a 15-18% increase does not mean values will not continue to climb. Even a stabilized market can see a 3-5% increase in values.
Such a slowdown may scare people and may create a media frenzy that could snowball the slow down which can cause values to flatten and we may see some pockets throughout the US that will see a slight decrease.?But remember, there is a balance between rates and values. So even if values drop rather than slow down or stabilize, we would want to pay attention to what that would do too affordability??
So should you WAIT IT OUT?? I see no indication to do so. I get there is a fear of buying “at the top of the market.” This is prominent in our minds because, even though 2008 was 14 YEARS AGO, the effects of it is fresh in our minds.
The differences between now and then are stark! For one, the mortgage industry has been far more regulated. Preventing predatory lending. Second, the low rates over the past 10 years have kept most home owners in Fixed Rate Mortgages. Third, home owners equity is at its highest than ever before.
This does not mean that you may want to remain conservative on your home purchase. I for one always side on being conservative in your real estate investment. But that does not mean holding back, simply remain educated. There are some factors on an individual basis that may suggest you be more or less conservative.?But overall, buying in the current market with the balance of affordability, I don’t see a reason why one wouldn’t buy or invest in real estate. Whether this is your first home or looking to “buy up.”