A lot of buyers are wondering what the heck is going on in the market these days?!? The industry is seemingly all over the place. I keep seeing buyers get into escrow, only to change their mind based on the fear of the market. This is understandable human behavior in a shifting market, and buyers want to know what to do.
LET'S START AT THE VERY BEGINNING…A VERY GOOD PLACE TO BE
In 2020, Covid happened, and everything screeched to a halt. Once the industry figured out how to show homes safely with social distancing, masks, booties, staggered showings, and sanitizing, things started to move. Between fall 2020 and March 2022, we experienced historically LOW interest rates in the 2%s and 3%s, which contributed to huge buyer DEMAND. At the same time, according to the SDAR, inventory dropped from 5,794 in May of 2020 to a low of 1812 in December of 2021 and is currently sitting at 3,523 in May of 2022. To give this context, all of these numbers are LOW compared to the “normal” days of the past. For example, in May of 2019, inventory was at 12,670!
So, the inventory during the “Covid Years” was at any given point between 50% and 28% of what it “normally” is. This was due to general fear of Covid and the market, sellers not wanting to lose their low priced tax basis at a very low interest rate, sellers deciding to use their equity to fix up their homes, and baby boomers aging in place. This created the perfect storm for unprecedented, intense bidding wars. Prices increased between 30-80% from May 2020 to present! The median home price in San Diego(non-distressed sales, not including manufactured homes) was $599K in May 2020; in May 2022 it rose to $860K. In certain areas, such as 92127, homes increased during the same time-frame by 57%!!
Fast forward to the present: interest rates rose tolevels not seen since 2008. (Today they are over 6% on a 30 year fixed). Rates rose the fastest they have risen since 1994. The government did this to curb inflation, which currently sits at 8%. While there are a myriad of factors that led to high inflation, including the war between Russia & Ukraine, supply chain issues, and an ongoing pandemic, the stock market decreased rapidly as well after months and months of gains. Buyers lost a chunk of their savings/down payment as a result, AND got hit with higher interest rates at the same time. This, in turn, caused demand to drop to a snail’s pace; as a country we are teetering on the edge of a recession.
As a result, homes went from flying off the shelves to sitting on the market for an average of 30 days just weeks before. Many buyers just couldn’t swing the cost of buying what they wanted anymore. Prices have since dropped in different markets, depending on the desirability of the home.
GREAT HISTORY LESSON, BUT WHAT ABOUT ME?
What do I do right now? Great question, depends on who YOU are!
Choose to be a “Wishful Thinker”: AKA, Wait it out. This is a great plan for all of those people who have been shy about buying, or sitting on the fence throughout all of 2020 and 2021, and now 2022. You know who you are….those who are turned off by the crazy bidding wars of 2020 through March of 2022, and now the slowdown that is actively happening in the market.
Perhaps you're the over-analyzer type and fear is really gripping you. If you fit this type, then your playbook tells you to continue to wait and bide your time. Watch and see where this all nets out. Continue to pay rent and just wait. This is a commendable option for people who want to play it safe. However, these people also missed out on 50% equity increases between 2020 and 2022, and they missed out on quite an opportunity to lock the lowest rates we have ever seen. If you are renting, just remember you are paying rent, not locking in a payment (rents will continue to increase while your mortgage payment won’t), and you don’t have an appreciable asset. So, even though some homes are dropping their prices, prices will normalize and then appreciate at a more typical rate of 3-5% per year. So, you are really truly gambling here. Timing, as we have seen, historically is tough, even for old pros.
Walk among the “Adaptables”. There are many options for this category of buyer. For example, the Adaptables are rolling with the punches and pivoting to make the market work for them, instead of “waiting” for impossibly perfect conditions. Some are getting creative by renting out their current property and using the equity locked up to purchase and move up.
Others are really grasping the different loan programs available to them with 5 year, 7 year, and 10 year ARMs to lower their interest rates. Others have learned that local Credit Unions don’t have to abide by the same lending criteria as banks, and are still getting rates in the 3’s and 4s. These folks are the ones that have been playing the game even during these changes in the market, and are “making it work”. They understand that right now, prices have come down slightly, and it’s a fabulous time to make a deal happen! They also want to lock in the rates now, even though they know they will be going up more as the Fed tries to curb inflation.
Be a “Boss Buyer”. Truth be told, this is really my category. I don’t walk into my real estate purchases, I enthusiastically sprint into them with gusto and energy! Fear is not my thing when it comes to Real Estate!
The people in this category understand that real estate is a LONG game and owning real estate is truly one of the easiest ways to build incredible wealth in this country while at the same time having a place to call your own. If you analyze any 10 year period of time, including during the Great Recession, prices ALWAYS increase. These “Bosses” are flippers, long term investors, and cash buyers. This group understands that Real Estate is cyclical and they understand the power of “leverage” as well. If they are financing to buy property, they understand that putting 10, 20, or 30% down and having the bank loan the rest allows you to gain equity on the whole asset cost.
This is much different than the stock market, which doesn’t allow you to “leverage” the bank’s money. They also understand that right now is a terrific time to park their cash into an asset, since the stock market is more volatile. Financed buyers understand they can lock in their mortgage home payment to hedge against inflation.
So, what should you do? Just know, only you can answer that. But whenever there is a down market, there are people like me that spot deals and find opportunities out there, while others hit the panic button. Fear is not your friend. The greatest advice when it comes to buying real estate: If you need a home to live in, it doesn’t matter what the market is doing at the time you need to buy because you need a place to live. If prices are up, so are rents! If the economy is down, so are stocks! Real estate is much more secure and it provides you with a place to live. Most people aren’t investors or “Boss Buyers”, but buying at the top or bottom of a market will all balance out if you hold on to the property long enough AND you get a place to call your own!
Contact Heather Wendlandt at firstname.lastname@example.org or 619.309.9274 to discuss how we can help YOU with your real estate needs.