Yesterday, Today, and Tomorrow’s Real Estate Market

Understanding the market’s past:

Investors ask me all the time what my opinion of the current market is. Where is it going? When will it change? Is it going to crash?

The market has been appreciating artificially for quite some time now — it’s not a question of will it fall, but how far it will fall and what type of impact that will have on investing. Undoubtedly, what goes up must come down. This is exactly what happened to the market over a decade ago.

At the time the recession hit, banks were providing ‘no doc loans’ — meaning they were literally providing funding to homebuyers without proof of income or ability to pay the mortgage on the home they just purchased. Simultaneously, appraisals ironically always met value or were not done at all. The result — Buyers overpaid for properties, and without banks properly verifying their finances, they soon were strapped to mortgages that would eventually bankrupt them. In addition to this there was a ton of corruption in the banking and financing industries which dramatically impacted a large part of our nation.

The economy and the real estate market always feed off of each other. When the economy is good — people have better jobs and there are more homebuyers looking to purchase which enhances the real estate market. If the economy crashes, jobs are lost, people can no longer afford their homes and soon foreclosures appear. If a specific area has a high number of foreclosures to traditional sales, housing prices start to plummet and then refinancing or getting better mortgage terms is out of the question for most homeowners.

As a response to the market crash, the U.S. government began enforcing restrictions on mortgage lending -- people had to prove they could afford the homes they were purchasing to qualify for a mortgage. This made it much harder for anyone to just buy a home, and even today, purchasing a home to live in is a strenuous, long process. The subprime lending and no doc loans of the past are no longer a reality. Today there is much more scrutiny on home affordability and valuations of homes being purchased which has allowed a steady growth of the real estate market and one less likely to be so volatile in the future.

Investment real estate is affected by the market cycles as well. After the crash, banks were less willing to lend on investment properties. Think about it: when the market crashed, what properties do you think people let go of first — their investments. Banks continue to view investments as more of a risk, and they are specifically wary of lending to out-of-staters, who are assumed to be more of a flight risk. What does that mean for investing today — not much actually. Investors that are strapped for cash will have a hard time investing in general but if a property makes money and has a steady rent roll, there are plenty of banks willing to lend money for those purchases.

Where the market is currently?

Today, the market has increased and prices are through the roof; the difference between the recession of 2008-2009 and now, is home values are actually being backed by appraisals and held to the loan restrictions put in place. You truly have to be able to afford the home you are buying. So, even when the market softens, and it eventually will, we won’t have the dramatic high and low we had in the recession. The other caveat of the current market state is lack of inventory. This is actually what created the dramatic increase in value. When demand is high and inventory is low, prices climb.

Where the market is going?

Prices will begin to decrease. Although I think we have about 6 months or more until we see it shifting, it will eventually soften. This will be due to more homeowners selling. During the COVID pandemic and so much economic uncertainty, homeowners that perhaps wanted to sell- thought twice about selling and held onto their properties. As people return to work and funding from the government decreases, we will begin to see who can and cannot afford the homes they owned prior to the pandemic. Similar to the recession, there will be another foreclosure wave due to those impacted by the pandemic. This certainly will drive property prices down and cause another market shift.

Buying or Selling in this market-

Investor always ask me, “Should I wait to buy? Should I sell now?

This completely depends on what your investing goals are. You might think it’s advantageous to wait, but there could be thousands of other people with that same game plan. I always try to advise my clients to not do what everyone else is anticipated to do. Everyone is waiting for the market to soften — you do not want to be competing against everybody. If your goal is to create passive income, and you can find properties now that will cash flow for you, you should buy. If the numbers are right, you should always act. Never stop investing waiting for market to change — we have a projection of where the market is going, but it is impossible to predict with absolute accuracy. If you sell now- what else will you invest in? If you are just selling to take advantage of the hot market but have no real plan of where to park that money to keep it growing, then you are making a mistake. I never recommend anyone to sell if they are not confident their next investment will make more money. You must have a plan for every market as well as every buy or sell decision.

If you act now, you could be years ahead of others who decide to wait and buy foreclosures when they appear. I am not saying you should not partake in the foreclosure market, but what you buy now builds equity and in the long run gives you more options for additional purchases in the future.

It’s important to take advantage of the highs and lows of market. If you have the right broker, they should be able to secure you deals that utilize any market to your advantage. The main point is you are not buying the market, you are buying investments! If you want to build long term wealth and financial stability, you need to keep building your portfolio. Think of it as buying stocks. Real Estate Investments are really no different. You need to know when to buy and sell but you can easily take advantage of any market and be successful. If you think you can wait it out and pick the perfect time - you can’t. Every market can be a good market for making money so don’t hesitate to pull the trigger so to speak, if you find a good deal!

This information may not be used as a substitute for legal advice and you should consult your attorney for legal advice if you have any questions relating to this advisor guide.