When Chicken Little screamed the sky was falling, everyone panicked, but we all know how the story ends. The sky stayed intact, and upon hearing the story, children learned to not listen to everyone screaming and running for the hills. It seems that real estate is a perpetual teaching machine, and for the last three months, I’ve heard people screaming that the market is crashing. My only response is, “how exactly do you mean?”
Yes, there are areas where prices are falling. That’s plain as day. There are some lucky areas that appear to be less affected than others, but these are not the norm. For most of America, prices are in fact coming down. How much depends on your area, but let’s make the argument that on average, prices have dropped between 10 and 20 percent. Cue the Chicken Little screaming, “the market is falling!!!” Again, I ask, “how do you mean?”
The reality is that the prices are not the only things that are changing. Interest rates have doubled. Naturally, prices have been affected but by how much? Well the doubling of interest rates has led to a 30-40% increase in mortgage payment. That’s quite a lot, but it has not led to a 30-40% drop in prices. Consider a million dollar home selling at 3% interest. The mortgage payment would be right around $4,200 per month. That million dollar home is now worth around $900,000, a 10% drop, but the interest rate has gone up to at least 6% and the mortgage payment on $900,000 at 6% is roughly $5,600 per month. That’s a $1,400 increase in payment. When the market crashes, people generally aren’t willing to pay MORE for the same product. How is it that the market is crashing but people are willingly paying more for the same thing? The answer, of course, is that the market isn’t crashing.
There are many metrics by which you can gauge the strength of the housing market. Sale price is one of them. If interest rates held steady at 3% and we saw prices plummet, yes, we would be in a crashing market. However, what if we take into account how much people are willing to pay on a monthly basis for a home? If we consider that as a gauge for market strength, the market is actually getting stronger or at the very least holding steady. If we searched for homes by monthly payment instead of sale price, we would see a market that was selling homes at a higher value. The problem is there are many moving pieces, and people are just seeing sale prices.
There is enormous opportunity here, because what will happen is someone will buy the $900,000 home at 6% or 7% interest. They’ll weather the higher payment, but when interest rates adjust back down, the market’s willingness to pay a higher price on a monthly basis will not adjust with interest rates. It’ll stay at $5,600. When interest rates come back to 3%, the home won’t go back to a million dollars. It’s going to climb to around $1,350,000, because that will be the price that aligns with the $5,600 market payment. Those who bought homes recently as I did need not worry, and those who have yet to buy homes need to deeply consider the ramifications of waiting for interest rates to bottom out again. Lower rates will bring massive price increases, bidding wars, and everything that kept people on the fence in the first place. Right now you have your pick of the litter and a clear upside in sight when rates drop. Pick your path wisely.
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