Many people are asking where is the market headed in terms of both Real Estate and Interest Rates?
I had clients tell me over a year ago that they were going to wait to buy until the Real Estate market crashed. That being said…. a funny thing happened on the way to the Real Estate crash….it didn’t happen, and I don’t see it coming.
The Real Estate Crash of 2008 was caused mainly by subprime loans made to many borrowers that did not qualify for standard Fannie or Freddie loans, but instead bought houses using “stated income” loans. If you had a pulse and a high credit score you could just state your earnings, regardless of whether it was even possible, and buy a property. Buyers purchased primary residences, second homes and even investment properties with little or no money down. Because these loans were made with little to no money down, buyers had no true stake in the property. If it was investment property and their renters couldn’t pay, they simply walked away and turned over the keys. Houses began to flood the market and prices plummeted with virtually no one looking to buy and Lenders not wanting to lend.
Fast forward to 2023…for the last 15 years borrowers have had to show the ability to repay their loan before being able to obtain financing. Almost all loan products (other than USDA and VA) require down payments, so buyers have equity from the start. Housing prices have continued to escalate and then in 2020…. COVID.
Rates fell to all-time lows and most homeowners refinanced to unbelievably low rates placing them in a better financial position. Many people also put more money into their homes doing projects and making updates with their free time during lockdowns. Homeowners now find themselves in the enviable position of having a historically low rate and ever-increasing equity. COVID also brought many more buyers into the market as people wanted to get out of the apartment or Condo or move up to a larger home. The low rates made more properties affordable to all and with a limited supply what happened, you guessed it bidding wars. That carried on in most of the Country as rates started to rise. As rates went up, fewer and fewer people wanted to sell. If you just finished fixing up your home and you are sitting at a 3% interest rate, would you want to sell? Purchase a new home with less house than you already have with rates climbing above 6%? Even with rates rising, the bidding wars and houses selling for well over Ask continued until the middle of 2022 when rates climbed above 7% for the first time in what seemed like forever. The market slowed and everyone started looking for the crash to begin…. but it didn’t. In early 2023 rates began to drop back closer to 6% and after a few months of declining home prices, in some markets, the buyers came back out. Since January we have had 4 straight months of year over year increasing home prices and Case Schiller, Home Price Index, now believes that we are back to a rising home price environment.
Where do we go from here? Is now still a good time to buy?
It seems like many buyers have started to come to grips with the new normal interest rates somewhere between 6 and 7 percent. The days of hearing “I am going to wait until rates drop back into the 3’s” have long passed. Many buyers are willing to bite the bullet and buy now and hope rates drop soon. If so, they will refinance and put themselves in a better financial position down the road.
When will the tight supply start to loosen?
No way to know for sure but it feels like the Economy is slowing and there is a good chance with the FED continuing to raise rates that we will see some type of recession. At some point the FED will most likely have to pivot and lower rates to stimulate the economy that they have worked so hard to slow down.
If rates theoretically drop back in to the 5’s will that be enough to get sellers to come back into the market. Will they want to look for a new house and can they get something better than what they already have? If that does happen guess who else will want to buy a house. All the people that have been unable to get a home due to the tight supply and we can add in all the people who got priced out at 7% and all the people that waited for “the crash”.
At the end of the day, Real Estate is one of the best investments you can ever make. Everyone must live somewhere, and you are always paying a mortgage whether you are paying your own or paying your rent and paying someone else’s mortgage. Every month you pay your mortgage you gain equity through amortization which increases your long-term wealth. If you decided to sit on the sidelines last summer, do you think you would have been better off buying before rates climbed over 6% and housing prices continued to climb? Will housing costs continue to climb in the future. Historically speaking the answer is YES. So why not invest in yourself and your future and grow your own wealth instead of someone else’s? The future is yours!