Home prices have stopped going up and started coming down a little.
Why? Because there are many more homes for sale. Though the number of buyers has not dropped much, the number of sellers has more than doubled. Supply and demand.
There’s no longer a shortage of homes for sale. With the high price of housing and interest rates doubling since last year, fewer people are qualified to buy a home meaning there’s less competition to buy your home. Prices are dropping a little and homes are taking longer to sell.
Stated income loans, interest only loans and 40 year mortgages are all returning. This should help the real estate market by making credit easier to get and maybe offset the fact that interest rates make that credit harder to pay back.
The most desirable homes will be least effected, still selling reasonably quickly and at a high price. Less desirable homes will take a larger hit in price and take longer to sell. I call it the last glass of water in the desert syndrome. If you own the oasis and only have one glass of water to sell you could demand any price. If there are many oasis and many glasses of water for sale and consumers are less desperate, they will be more picky as to the quality of the water and the price they have to pay.
The number of homes listed on the Multiple Listing Service for sale in any given area is increasing. The supply and demand ratio is changing quickly. That’s the number of homes actively listed on MLS for sale today (the supply, called inventory) compared to the number of homes that have sold and closed escrow over the past 30 days (considered the demand). As an example: If in any given area or city there are currently 100 homes actively for sale on MLS and 50 homes sold or closed escrow in the past 30 days that would indicate two months of inventory. Today, there is around 5 to 8 weeks of supply (inventory). Since homes that sold in the last 30 days accepted an offer 30 to 60 days ago you need to look carefully at any small changes in this supply / demand ratio to see the direction the housing market is moving. For the past several years there has been around 3 weeks of supply / inventory. Today there is 8-12 weeks of supply / inventory. That is a huge increase in the # of homes for sale compared to how many are selling. That is is a significant change! The sellers market is still strong but it’s rapidly changing .
I have found the following scenario has always happened and will likely continue.
If # of homes in any given city, currently listed for sale on MLS ≤ the number of homes that sold over the past 2 months, then home prices rise beyond current inflation.
If # of homes in any given city, currently listed for sale on MLS = the number of homes that sold over the past 3 months, then home prices stay roughly with inflation.
If # of homes in any given city, currently listed for sale on MLS ≥ the number of homes that sold over the last 4 months, then home prices will decline compared to current inflation
It’s like musical chairs. With 10 people and 9 chairs, the demand for a chair is high and people fight for a chair but with 9 people and 10 chairs there is no urgency to get a chair.
Population growth or decline affects housing supply and demand and therefore prices. For 100 years California has had an ever-increasing population that has kept demand for housing high.
*Inflation causes most everything to cost more, including homes. Inflation parallels government borrowing. Lately, the government has borrowed money by the trillions. Some people refer to this as printing money because it adds to the amount of dollars in the world but does not add to the amount of tangible goods. To watch our debt grow in real time, go to this website. https://www.usdebtclock.org It will shock you!
High inflation is bad because it makes your money near worthless but moderate inflation is good. If you own real estate and are leveraged with a mortgage, a percentage of your house will be paid off by inflation. Example: If you buy a $500,000 house with $100,000 down and owe $400,000 you essentially own 20% of your home and the bank owns 80%. If your house doubles in value to $1,000,000 you would still only owe $400,000 which would then only be 40% of the value of your home. You then effectively own 60% of your home and your bank owns only 40%. Inflation paid off 40% of your home for you. That’s real profit. AND… If in years to come, because the dollar is worth less, each dollar you owe should be easier to earn, making your balance easier to pay off! That’s a double win. Example: people who bought their homes 15 or 20 years ago make very small monthly payments by today’s standards.
Questions & Answers
Q Is now a good time to sell?
A Yes, but only if you plan on selling anyway. Prices are currently at or near the highest they’ve ever been and homes are still selling relatively quickly. Selling now eliminates the risk of the market turning down before you sell… and it’s already starting to turn. A bird in the hand is worth two in the bush.
Q Is this a good time to buy?
A It could be if you’re buying a home you really want and plan to stay in it long-term, but the rush is over so take your time and find the perfect home. Many economists believe there is a recession coming which would cause house prices to decline over the next few years. Some say inflation will cause home prices to rise even more. I believe both will happen. Initially a decline over the next year or so and inevitably an increase do at least to inflation if not demand. Most lenders say interest rates will continue to rise although they have come down slightly over the past few weeks. If you are thinking of flipping it’s a very risky time to buy but if you plan on staying in your home long term, 10+ years, it’s always a good time to buy.
Q Should I fix my home up before I sell it?
A Yes, but… Today the typical buyer is a young, well-educated, well-paid professional with little interest in working on a home. They prefer it “Move-in Ready”, but improvements can cost more than they will benefit a sale. Cosmetic work is still considered the best investment when selling a home. Beauty always sells. Time is crucial as the market can change quickly. A remodel project that takes too long could cause you to miss this great seller’s market.
Because multi-unit income producing properties are valued on their profitability or CAP rate (click here to see how it’s calculated). Higher rents have made multi-unit rentals more profitable causing their prices to go up. Most economists believe we are headed for a slowdown. If this causes homeowners to disproportionally sell their homes they will likely end up as tenants. That will add to the demand of rental property just as it happened in the 2007 recession. Then home prices dropped but rents went up. Add to that inflation, and multi-unit properties can be the investment of the century.
Disclaimer with regards to future predictions: Although this is compiled from my 25+ years’ industry experience, it is only my honest opinion. Its accuracy can’t be guaranteed and should not be relied upon when making financial decisions.
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