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.