Timing The Real Estate Market
Buy low, sell high…that’s the goal, right? But in reality, it’s impossible to time the real estate market. In fact, we know many buyers that have sat on the sidelines the last few years feeling like prices were not sustainable and just had to come down. In that time period, home prices went up over 60%. Pair that with the rise in interest rates and some buyers have gotten completely priced out.
Our friends at Guaranteed Rate put together this comparison of monthly payments for an example purchase. You’ll see in the numbers that choosing to wait “until prices come down more” also means gambling with interest rates. A drop in home prices can be immediately erased with a rise in interest rates.
This example shows a home with a sales price of $1,000,000 with 20% down and a conforming loan of $800,000. The monthly mortgage payment went up by almost $1000.
I asked Guaranteed Rate to calculate what purchase price a buyer would need today in order to maintain the monthly payment at $3684 with current interest rates. The result was $710,000 with 20% down. So the big question is, do you think prices will come down 30% from January 2022 prices without interest rates continuing to go up?
For those that want to, let’s dive into the data…
While I don’t have a crystal ball to know for sure, we can look at trends from past market dips to guide our thinking. This graph shows the decrease in house prices for the Bay Area during the major market corrections of the last 30 years. With the exception of the subprime mortgage bubble bursting, the reduction in prices was about 5%. In addition, the recovery to appreciation in house prices only seemed to take a year or two.
(Note: the 2008 housing crisis did have a significantly larger drop and time for recovery. However, it was fueled by subprime lending - people were buying homes they could not afford, often with little to no down payments. This is not the case for the market we are in now. In fact today, we hardly have any delinquency rates.)
On top of that, interest rates are still quite average in comparison to historical rates. The graph below shows rates all the way back to 1981. While in most recent years, we’ve had extremely low-interest rates, that was not the norm.
High-interest rates in the early 1980s were a result of many economic factors including high inflation, high oil prices, and high unemployment. While history may not repeat itself, we are currently in a high inflationary period again and experts expect to see rates continue to rise in the near term.
And even with those very high rates in the 1980s, we see that the median house price continued to increase in the graph below. I find this to be the most surprising!
As a Realtor® at a dinner party, I often hear “home prices have to come down because interest rates are going up, people just can’t afford it.” While that may be the reality for some, the overall trend in the 1980s was still a steady increase in house prices.
So let’s ask the question again - do you think prices will come down 30% from January 2022 prices without interest rates continuing to go up? That could be the cost of waiting and trying to time the market.
Based on this data, there are a few main takeaways:
If you can afford the payment today, buy the house and take advantage of the softening in the market. It is a much-welcomed reprieve for buyers who now have more time to consider a property and often aren’t competing against multiple other offers. You can always refinance bringing your payment down later if rates drop but you are protected from increases.
Buying a home is a long-term investment. According to NAR, in San Luis Obispo County, homeowners typically stay in their homes for 12 years, on average. In all of the past cases where prices dropped, they’ve recovered well before 12 years. If you are buying a home to live in it (and not flip it), then whenever you buy, history suggests that your home will appreciate over the lifetime of your ownership.
With every home buyer I’ve talked to, their motivation to buy a home is not because of the interest rate. Your family is growing, you got a new job, you’re downsizing, etc - those are reasons to buy a house, and even with interest rates rising, those motivations still exist.
We’d love to hear your thoughts on this too. Let’s have a conversation!
