Do I buy now even though rates are going up? Or, do I wait it out, hoping for a drop in rates next year? How much waiting and how many "next years" could there be?
I — like many of my buyers — often ask these questions. While no one has a crystal ball, I feel like there is evidence that this is a good window of opportunity to buy. I'm not saying there won't ever be a dip in prices. Of course there will. That's how real estate markets work. But I don't think we are on the precipice of a crash like we were in 2008. And if we are, then it wouldn't be for the same reasons as back then.
Photo Credit: Kostiantyn Li
Here are my thoughts — and these are just that: thoughts, not professional, financial, or legal advice. Please, as always, do your research and consult the appropriate professionals. And on with the thoughts:
There has been a limited supply of new home construction for a while.
This is not new because of the pandemic. If anything, I think the pandemic has unknowing created a surge of new construction builds outside of cities, despite the fact that prices for materials are still soaring. We began to notice this shortage in the construction of newer homes back in 2011 and 2012. That's when building newer homes became more cost prohibitive. We saw many new builders deterred and pivoting to other paths because they weren't making the margins they used to. That's not to say there hasn't been new construction at all, but it definitely slowed down from what we saw prior to that. Also, most new construction was really focused in cities and on the luxury end of the scale. Affordable housing essentially became unaffordable to build. Even with tax advantages, we saw that sector slowing down thus creating a shortage in affordable housing, so this has been a long time coming.
And here we are again. Builders are shook by the current rates and bad memories from 2008. Many are pushing pause on new builds right now to see where the market will settle, which contributes to the inventory shortage. We all know that when there is a shortage in supply, and demand continues to rise, prices follow.
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What people are looking for has shifted.
Cities were all the rage before, which is why significant development was focused there. However, we are increasingly seeing people's preferences shift to more remote homes with privacy and seclusion. Because that hasn't been a major focus before, those types of properties are very limited. Rural towns tend to have zoning requirements that mandate more land per home lot, thus reducing the ability to develop those towns further. Plus, with the surge of short-term rentals, many of those properties aren't available for long-term living, thus making the inventory even more scarce.
The buyer is likely in a better financial position.
Most buyers who are shopping for places now have been burned in the past or watched the horrors of what happened before. They have heeded the advice and have been scrupulously saving. Also, they have been cautious with taking on individual debt. Whether it's because they came of age in an economy that was tough to find a job in in the first place, or they spent the last couple years staying indoors and stashing cash, most buyers are coming with more cash and less debt, period.
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Homeowners have more equity in their home.
What does this have to do with anything? Well, a lot. Homeowners aren't as spread thin as they were last time during the subprime lending crisis. Many of the homeowners who went under then were given loans they couldn't really pay back to begin with. And then, on top of that, many had taken second mortgages out to either help keep their households afloat or to support living a lifestyle above their means. This meant that they were already maxed out in terms of a safety net. Now, many homeowners have learned those lessons and been much more cautious about the debt they take on. Also, banks and lending institutions ensured they were underwriting safer loans. The combination of those two things means there are a lot less homeowners who are in a pickle right now. Homeowners are less likely to do fire sales out of distress. Even if the market were to drop, they are in a much better position to wait it out now.
Our government in the US has printed a lot of money over the past two years. And honestly, pretty much every year before that. When the economy gets tough, that's what they do. It comes at a cost though: the cost of inflation. I'm sure if you haven't already noticed it, by this time next year you will be hyper aware of it. Part of the increase in the price of homes is directly correlated to inflation.
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The impact of population growth.
I love humans, I really do, but there are so many of us. And we keep increasing the amount of us each year. Even if we could build houses at the same rate as population growth — which I'm dubious about — we are running out of space on the planet to do so. Some places that once were considered so remote, so isolated, are no longer. The population will continue to grow, and we will continue to need more and more housing.
All to say...
I — like everyone — definitely don't like that rates are rising. But I'm also not going to sit out and wait for them to fall. It's hard to get over the fact that my interest rate on a purchase last year was half what it is now. However, if you are investing for the long term, even if the market dips a little bit (which it will), it will always go up over time. My plan is to continue buying (while making sure the numbers work now, of course), and when rates drop, I will refinance.
That's why this is a prime time to buy, in my humble, personal, non-legal opinion. Less competition. Slightly lower prices. Anticipated price increase in the future. And a way to refinance down the road and increase cash flow. Real estate is a long-term play, and this is my personal game plan.
As a buyer, try not to get shook. It will trick you into just sitting on the sidelines. These downturns are where people who are brave enough to get in make their fortunes. You have to be brave though and take action. So, for those who said they were going to wait for prices to drop and competition to decline... recognize that moment is now. It's go time!