For the last 6 years, the real estate market has seen a steady increase (about 5% per year according to Mark Hamrick, senior economic analyst at Bankrate) in home prices. This is due in part to two factors — increased buying power of potential homeowners and scarcity of inventory.
Interest rates have been at record low’s, hitting their lowest in 3 years just after the infamous #BREXIT incident. Because of this, in addition to the many first-time homeowner, FHA, and down payment assistance programs that are currently available, more and more buyers have flooded the market in past months.
On the other side of the spectrum, the actual available inventory on the market (or homes listed for sale), has not been able to satisfy the number of buyers currently looking, leading to a more competitive marketplace.
Now the Law of Supply and Demand says that price is driven by how much supply is available of a product or service, in this case properties, and how much demand there is for said product or service. Low supply and high demand means an increase in price, and when it comes to the California real estate market, the number of buyers has far outweighed the number of available properties leading to the aforementioned increase.
That however seems highly likely to be coming to an end very soon.
The Ele-Trump in the Room
Whatever you may think of the outcome of this last Presidential election, if one thing is certain, it’s that we can expect a change in the US housing market.
As the election approached, many potential buyers put the breaks on their housing search and opted to adopt the “wait and see” strategy — waiting on the outcome of the election and its short-term ramifications to the housing market.
As was expected, interest rates increased post-election, however surprisingly, the jump was not as large as anticipated, up to 3.94% from 3.57% in the week following the election. To put that into perspective, the rate at the same time in 2015 was 3.97%. Entering 2017 rates were just above 4%, still fairly low, and rather than continue to increase quickly as many predicted, the rates seem to have stabilized for the time being, meaning many buyers are back on the home search, eager to take advantage of the low rates while they still can.
For homeowners looking to sell, that means the time to sell is NOW, before rising interest rates force prices down.
“If you think of Real Estate like the stock market, NOW is the time to sell. We’re at the peak of the market.” — Jason Bosch, Real Estate Business Strategist
There are a number of factors indicating that we are in a shifting market, including an increase in days on market before selling, an influx of higher-end homes to the market, and unit sales slowing. We are no doubt on the verge of a shift and as prices have steadily increased in the past years, a price correction is heavily anticipated.
For homeowners looking to cash in their equity, time is running out to maximize their return. To take advantage of the current market and get the highest return, Sellers need to list quickly and price ahead of the market.
What This Means For Buyers + Why It Still Makes Sense To Buy
Now some potential buyers are probably wondering if despite this impending shift, now is still a good time to buy. The most common questions I get on the subject are: “Shouldn’t I wait? If interest rates are going up, won’t prices go down? Can’t I just buy later at a higher interest rate, and then refinance in a couple of years?”
The answer is, it depends.
Just like now is a good time for SOME homeowners to take advantage of the higher prices to sell their homes, for those looking to stay in their properties long-term, now may simply be a good time to refinance. The same is true for Buyers.
For those who are in a position to buy, want to maximize their purchasing power by taking advantage of low rates, and contribute more toward the actual home rather than insurance and other fees, now may be a great time to buy.
Let’s dissect this a little bit more.
Q: “Should I just wait? As interest rates go up, won’t prices go down?”
As rates increase, will home prices decrease? Yes, absolutely. This is an inevitable occurrence in the real estate market.
However, how does this really affect you as a homebuyer? As rates rise, your buying power and maximum purchase price decreases. Most homebuyers don’t realize how much impact this makes, but take a look at the chart below.
For every 1% increase in interest, you LOSE approximately 11% buying power. In this example, if you can afford to make $1,800 in monthly payments at a 4.5% interest rate with 20% down, you can afford a home priced at ~$445,000. A 1% increase in interest rate drops that purchase price dramatically to ~$395,000, which might mean you can no longer afford the type of home you originally wanted or may have to settle for something smaller.
Now some will argue that it evens out — as your buying power decreases, so does the cost of a home and thus you will get a comparable property. This assumes that the market will decrease at the same rate that mortgage rates will increase, which is not often the case. In fact even during a down-shift, when prices drop, home prices still trend upwards overall.
Q: “Can’t I just buy later at a higher interest rate, and then refinance in a couple of years?”
This is called speculation and it’s risky business. When you speculate, you are making a decision now based on something that may or may not happen in the future.
Let’s look at what happened in 2007. Many people had opted for low payment, adjustable-rate mortgages on the assumption that they would be able to refinance at a later date and lock in a lower payment. When the time came to refinance, it was no longer an option and many had their homes foreclosed on.
“Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so.” — Warren Buffett, Billionaire Investor
All in all, the market is going to change and we can all feel it coming, the question is are you going to take advantage now before #ShiftHappens?
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Curious about selling your home? Grab the insider secrets your real estate agent doesn’t want you to know on how to get your home sold fast for more money HERE.
Interested in buying but don’t know where to start? Grab my first time homebuyers quick guide HERE!
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Originally posted on Medium publication #RealEstateLoveNotes. Monica is a Realtor® + Wealth Revolutionary who is passionate about making Real Estate investing more accessible for communities of color. She writes & speaks on the intersections of la cultura, wealth-building and real estate and has been featured on a variety of media platforms including Real Estate Game Changers Radio, Realtor.com and She’s Trending. As a strong believer that “sometimes saving money and planting roots is an act of revolution”, Monica created the Wealth Revolution Mastermind — a membership program designed to empower women to create multi-generational wealth by investing in themselves and in real estate. She is also author of The Chingona Manifesto.