I just had a client who is going to sell and buy with me ask me to forecast the market in the short term. Here is what I said:
I think that the market and prices will at least remain stable for the next 6-12 months. All of the unemployment is probably the biggest concern, but a lot of those that have been laid off are renters and not home owners so I am not expecting to see a lot of foreclosures.
Like any market, real estate is about supply and demand. As long as the ratio of buyers to sellers remains fairly equal, the market will always be strong even if the total number of sales is down. What we had already been seeing in the pre-coronavirus market is that people are staying longer in their houses. That is one reason the market has been so strong the past few years….there have just been fewer houses for sale. In Lexington, we have another issue that plays a big role, which is that we are running out of land to develop. Lexington cannot simply build new houses to meet the demand like other towns across the country. Even though the surrounding towns are seeing a construction boom, Lexington will always be the most desirable place to live in the Bluegrass.
There is a lot of refinancing going on. Usually people stay longer in their houses when they have recently refinanced. I saw this several years ago when rates had hit a record low at that time. If rates stay similar to where they are now, it won’t be too bad. If rates go up past 4%, people would have to pay a lot more for their mortgage than they do now. If a seller’s house has appreciated a lot and so has the house they want to buy, having more equity from the sale of their old house to carry into the new one doesn’t matter as much if their payment is still going to be a lot higher. Most people base their decision on the monthly mortgage payment.
I think there will be plenty of buyers in the market for quite a while. A lot of the older millennials have outgrown their starter homes and will be looking for a house like you have in Chilesburg. The Gen Z buyers are entering the market now and from what I have read, will be 27% of the population. These are people that will be buying based on a need, not just because they want to nicer house. One thing I learned from living through the worst real estate market in history is that first time buyers drive the market. It’s like a baseball game where the bases are loaded. Every player standing on a base has a house to sell before they can buy their next one. The first time buyer comes to bat, hits the ball and because they don’t have a house to sell, everybody on a base gets to move to the next one.
So, in Lexington, I think the limited supply due to people staying in their homes longer, the lack of new construction and the number of young buyer will keep our market strong.
Probably the single greatest threat to all of this would be if we saw crazy inflation and rates skyrocketed like they did in the 80s. If that happens, the houses over $400k would be much harder to sell. The cheaper houses should be safe because what will happen is that you will see first time buyers competing with all the buyers for smaller, affordable houses.
What is the type of house that is the riskiest to buy?
(I’ll pause to give you a minute to think.)
I bet you didn’t come up with a brand new house as an answer, did you?
Now, new homes are built every day all around the country. Most of the time everything goes well. Probably like 98% of the time, but there are some risks involved that I always like to check out before a client decides to build a house. So, why is new construction risky?
- You don’t know what the neighborhood is going to look like until it is done. Ever drive down Wilson-Downing and see that one street with about 12 houses that are much bigger than the rest of Belleau Woods? Those were the first houses in what was going to be a neighborhood similar to Hartland. Until interest rates shot through the roof in the early 80s and the only thing that was selling were small homes. The people who bought their new houses on that street didn’t get what they expected.
- You don’t know what the value is going to be after you build. A brand new sale is a unique sale. It is never going to be brand new again. It will be a “Used” house for each subsequent sale. That is why when I have a client who builds, I like to look at the sales of other “Used” homes in the neighborhood so I can tell them what to expect.
- You don’t know what the builder is like. Building is like most industries where 99% of them are good honest hard working people. The rest are the ones that bring their whole industry down. Many many years ago, there was a custom builder who was flying first class to see every UK basketball game, using his customer’s money to live large instead of you know, building their house. He got arrested because he was telling banks that houses were nearly done so he could get more drawls from the construction loan. There were a few houses that were still vacant lots. This is why I like to check out my client’s builder to see if I think he is going to take their money and run. Usually a long track record of building homes and a good reputation goes a long way with me. I get nervous when the builder has only been around for a short time.
These are just a few things that pop in my mind when a client says they want to build. Like I said, most of the time you never have these issues, but I think it is always a good idea for you to have your own realtor involved.