By In case you hadn’t noticed, real estate is all the rage right now. All the realtors you know who were broke from 2009-2012 are now living the lives of rock stars as the real estate market across the country has jumped almost 10 percent over last year, which is amazing considering we were in the midst of a pandemic.
Not to poke fun, but what do realtors actually do anymore? People are closing without setting foot in the house or ordering an inspection, and in certain markets, making offers of 5 to 15 percent over asking just to get what they want or need. And, houses are moving fast. Usually, when people put their homes on the market, they have a few weeks to prepare and get ready to move. Now, houses are selling in a matter of days, hours or even minutes, and if they’re not, it probably means there’s something seriously wrong with the home or how it was priced.
Speaking of, how much house can you afford? Federal Reserve Chairman Powell has been manipulating the markets, and one beneficiary of that has been the mortgage market. The result of that manipulation has been that the average person can afford, in some cases, twice the price of their previous home, simply because mortgage interest is half of what they’re currently paying, and home prices have gone up a whopping 48 percent in the last decade, giving sellers big profits to put toward a new home.
Now, I know some of you are thinking, wow, the real estate market is headed for a crash, right? My answer is, no. I don’t mean that real estate won’t fluctuate, but we have a unique situation. As long as mortgage rates stay low, I believe we’ll continue to see current and new homeowners buy homes in numbers we haven’t seen in years.
Will this eventually end? Yes. As mortgage rates rise, fewer people will be able to move into new homes. But we’re currently in a Goldilocks situation with a year of recession combined with a personal savings rate that’s at a 15-year high. That’s right – people have saved $1.8 trillion more than they would have without the pandemic as they’ve paid down debt, loans and other bills. That money has put people into an economically stronger position than they were in before, and that money is going to be invested or spent and put back into the economy one way or another.
Currently, people are using cheap interest rates to buy a first home, move to a new home, buy rental property, or open a home equity line of credit and renovate their existing home. Many people are deciding to keep their current home (and neighbors!) and gut their house for a full redo. In turn, as more home valuations are completed, neighborhood comps will go up, so the next house to hit the market will be listed at a greater price.
Don’t forget that people were saving money because they had nowhere to go last year, and employers sent them home for a year, if not longer. This resulted in a huge number of folks leaving city life because they couldn’t actually live city life, and no longer wanted to pay city prices. So, they’re moving to the suburbs and increasing demand.
So, when will this stop? At some point, people will return to the cities, or a new generation will head in to enjoy city life and all it has to offer. Moving up the socio-economic ladder happens more quickly in cities than small towns. Home prices could slow, most likely as the Fed raises rates, or the lending market tightens credit portfolios to avoid the crises of 2009, when gypsies making $30k were given million-dollar, interest-only loans.
Or, the third thing that could slow or derail the real estate market is that ugly word inflation, when suddenly, the same money you’re spending on your home and its associated bills are prohibitively more expensive. Remember, it wasn’t that many years ago when gas prices were so high that people were buying motorcycles to get from point A to point B, and of course we’ve recently seen energy and oil prices increase. Eventually, these increases from the supply chain will be passed on to the consumer.
But does this need be a true real estate crash? It’s still about location, location, location, and buying something someone else will want when it’s time to sell, regardless of what the economy is like. Even if you do overpay, you might just have to stay in that house a little longer to make it work.
Times like these are also when we hear many questions from clients about whether to take out a 15- or 30-year mortgage. Typically, our advice has been to borrow for as long as you can (especially at these low rates), and use the rest to pay down other debts and invest. You don’t make money by paying off your house. You make money through appreciation.
Now, I know many of you who simply can’t live with a mortgage, even though you know my math is right. For you, despite the recession, you will take out a 30-year mortgage and then make extra payments to try and pay it down faster. Feel free to ask us to do the math for you, but for these folks, you might be better off taking a 15-year mortgage, as the difference could be what you’re paying extra each month anyway, This isn’t an optimal situation, but I know who you folks are, and I understand that it’s your money.
However, if you’re not following the advice to borrow for longer and put the savings to work for you elsewhere, please let us know. This way we can be intentional in the plan we put in place for you and perhaps recommend the shorter mortgage. We understand that some decisions that should be made based upon the math end up being based on emotions, and we know money and debt are often emotional subjects. Just be up front with us, as you expect us to be up front with you.
If you’re considering buying a new home or have any questions for us, please, don’t hesitate to call. We’re here to help.
