Home buyers and investors are facing a dilemma: Should they enter the market now or wait to see how things unfold?
Recent data revealing a decline in median home prices have added to the caution. According to Redfin, home sales dropped by 16% year over year in May of 2023. However, it is crucial to look beyond the headlines and consider the nuances within these statistics.
Understanding the Data
It's important to recognize that median home prices encompass a wide range of housing prices. Expensive homes have experienced less activity due to increasing interest rates, with home buyers opting for more affordable housing instead. Although the median price appears to be declining due to sluggishness in the luxury home market, many other segments of housing continue to appreciate. Home appreciation is expected to average around 5% to 6% in 2023, slightly lower than the 6% average in 2022.
The Risk of Waiting
Those waiting on the sidelines hoping for lower prices might end up paying more for the same property in the end. Interest rates are projected to rise, driving up price points due to increased demand. Moreover, active listings in the United States are currently almost half of what they were in 2019. Simply examining lower sales as an indicator of potential price drops can be misleading, as it fails to consider the decrease in available inventory.
The Impact of Low Interest Rates
Many homeowners and real estate investors who purchased properties since 2019 have secured historically low interest rates. These individuals are unlikely to part with their homes when they have such favorable mortgage terms.
Fixed-rate leverage on real estate is seen as an asset by those who understand leverage, while it may be perceived as debt by the inexperienced. The prevalence of low, fixed interest rates further contributes to the limited availability of properties for sale.
The Importance of Timing
Hoping for a significant drop in prices this year is not a sound home buying or investing strategy. As Neda Navab, president of the U.S. region at Compass, a real estate tech company, suggests, "Buyers sitting on the sidelines today in anticipation of lower prices tomorrow may end up disappointed."
"The housing market — like so many other markets — is impossible to time," Orphe Divounguy, senior macroeconomist at Zillow Home Loans, says. Divounguy also advises that "getting on the housing ladder" is worthwhile to start building equity and net worth, echoing the sentiment of my friend Joel Moyes, who often says, "It's the start that stops most people."
Making Informed Decisions
Instead of relying on hope for significantly lower prices, it is advisable to purchase a home or invest in properties based on your budget, needs, and area metrics. If you come across a home you love in an area that suits your requirements and fits within your budget, it may be the right choice for you.
However, stretching your finances excessively or succumbing to the pressure of keeping up with others can lead to buyer's remorse or budget overwhelm, potentially resulting in the need to sell the property. Remember, hope alone is not a viable business strategy.
In the current real estate market, careful consideration of the available data and individual circumstances is crucial. Understanding the nuances within statistics, the influence of interest rates, and the importance of timing can help home buyers and investors make informed decisions.
By focusing on your budget, needs, and area metrics, you can find a home or investment property that aligns with your goals while avoiding the pitfalls of speculative waiting or imprudent purchases driven by external pressures.
About the Author:
Aaron Chapman is a veteran in the finance industry with expertise in complex transactions since 1997. He is ranked in the top 1% of over 300,000 licensed loan originators and closes over 100 transactions per month. Learn more at aaronbchapman.com.
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.
SecurityNational Mortgage Company, and its loan officers, unless individually licensed and specifically denoted in their credentials, are not qualified to, and are prohibited from representing themselves as accountants, attorneys, certified financial planners, estate planners, investment specialists, or tax experts, and will not advise you in those matters. Always seek the advice of a licensed professional. This article is for informational purposes only, contains the opinion of the author, not necessarily the opinion of SecurityNational Mortgage Company, and should not be construed as lending advice. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet LTV requirements and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines, and are subject to change without notice based on applicant’s eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over life of loan. Reduction in payments may reflect longer loan term. Terms of the loan may be subject to payment of points and fees by the applicant. Aaron Chapman, NMLS#267844, SecurityNational Mortgage Company Inc., Co. NMLS# 3116, AZ Banker# 0904315, Equal Housing Lender. Any amounts, figures, payments, or loan terms stated are based on continually changing markets, rates, loan programs, and borrower-specific qualifications, and subject to change without notice. See loan officers featured for a personal consultation and accurate pricing.