Do you fear a 2008 housing crash is looming in the wake of high home values and wild appreciation trends nationwide? Are you asking “should I wait to buy”? A reasonable question since I don’t know anyone who wants to buy at the worst possible time! Let me give some context to what actually happened in 2008 and the factors that make 2022 different. Its important to remove unfounded fears and misguided comparisons that can cost you poor real estate decisions. Likewise, it's important to understand your personal risk tolerance, financial situation and personal circumstances. So what exactly happened in 2008? A postmortem of the 2008 crash identified lending practices as the straw that broke the camel’s back. Loan practices and loan amounts were far too generous resulting in buyers waltzing across the home ownership threshold who simply couldn’t afford it. How did it financially impact homeowners?
Essentially, buyers who found themselves purchasing at the price peak netted out flat. No appreciation upside – a key lure for people building wealth through home ownership - but no worse off than renting. How is 2022 different to 2008? So what is different now? In addition to better lending practices, our current real estate environment has three key distinctions setting it apart from 2008: 1. Inventory Is Low. Inventory – the number of homes listed/available for sale – peaked around 2006/2007 and of course stayed strong in 2008 when folks were seeking to offload their properties. Since then, we have seen a steady, year-over-year decline in inventory and this year is proving more of the same. Recall that economics class we all hated? We learned that price is a result of supply (inventory) and demand. The more people that want a certain something and the fewer “somethings” that are available the higher the price goes. Following this tried and true economic principle, if inventory continues to remain low and demand remains high, prices should continue to stay strong. 2. Inflation Is High. We have all seen the impact inflation has on our everyday purchases including the cost of buying a home. If it costs an extra 8% to buy the same home next year due to rising inflation, your $300,000 home will cost you an extra $24,000 when you’re ready to buy. Inflation comes into play bigtime with new construction, too. While the saviors of the home buying world could be builders/developers if they could just build more homes and pump inventory into the market, the reality is new construction has been fighting back against supply chain issues and rising labor costs for a while now. Add to that the upper cut that historic 40-year high inflation is throwing, and builder costs are soaring as other challenges persists. 3. Interest Rates Are Trending Up. We have hit a 10-year high on interest rates after trending down for a decade. The Federal Reserve’s focus on curbing 40-year high inflation promises no quick end in sight. The general consensus is that rates will continue to rise – no crystal ball needed. Rising rates diminish your buying power so let’s use the same $300,000 home example with the alternative being a $1,500 a month rental to see how so. Should you wait another year and rates increase by another 2%, your mortgage payment once you buy in 2023 would be an extra $400 a month. Across the next five years of your loan, you’ll spend another $24,000 in interest charges alone. Combine this with the fact you’ll “lose” your $1,500 a month in rent - or $18,000 for a whole year – plus having to cough up another 8% in purchase price due to inflation, and your wallet could be hit with an equity loss to the tune of $66,000 simply for waiting a year. Ouch. So what should you do if you’re thinking of NOT buying? Not buying simply out of fear of a repeat of 2008 is not the best strategy. While risk tolerance should absolutely be a factor in your home buying decision, it’s unwise to let it be the only factor. Make decisions based on your risk tolerance coupled with a review of the financial scenario (potential gains and losses) and your personal situation. Afterwards, should you decide renting is the right call for right now, watch out for inventory trends in the rental market. Many investors sold their portfolios to capitalize on the historic gains the booming housing market provided. Their cash in may be a sign that fewer rentals will be available. Should that happen, rental prices may sharply increase – again economics 101. Considering a longer lease with guaranteed terms may save you money and hedge against rising rental rates. And what should you do if you’re STILL thinking of buying? Throwing caution to the wind and ignoring the fact that there are uncertainties in any market is not prudent. If after careful analysis you think it may be time to shop, consider hedging any unforeseen risk with the goal being securing your need and foregoing your wants. Spending below your means and securing homes in the “easy to sell” price point are always wise in my book. Also, purchasing a home that could provide solid rental income (should you ever need) is also a smart approach in any housing environment. But if you are going all in on a dream home that checks all the boxes, consider strategies like shopping adjustable rate mortgages (in addition to the traditional fixed rate ones), buying down your interest rate or putting more money down to reduce your interest liability across the life of the loan. If you are unsure whether now is the right time to buy, let’s talk through your concerns and present options. Making the best decision comes from lots of information and the guidance of a trusted advisor. Contact me today so I can answer your questions.
Kat Medaries, REALTOR® Long & Foster Real Estate, Village of Midlothian Sales Licensed to sell in the Commonwealth of VA Equal Housing Opportunity For informational purposes only: Not intended as legal, financial or credit counseling advice.
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