real estate predictions

What makes a good time to buy? It’s not what you think

by John Rice

In my nearly 20 years of being in this business, I have rarely seen anybody think it was a great time to buy a home.

Most of our perception of when was a great time to buy is retrospective.

2008-2010 was a fantastic time to be a buyer. Rates were really low, inventory was up, prices were down. But know what? Every buyer was scared to death to buy back then. Why, because like any time though history, there were reasons that made it scary. There will ALWAYS be reasons that make any moment in the future seem like a scary time to buy: Wars, recessions, politics, interest rates, employment stats, the price of gas. There will never ever be a time when all of those variables align to make you fell like it is the perfect time to buy a home.

Now I’m not just saying this because I’m a realtor. To most realtors, it is always a good time to buy. Interest rates going down? BUY and save money. Interest rates going up? BUY before they go higher. Inventory is up? BUY while you have options. Low inventory? BUY just to get in the market.

Know what I say? Buy when the time is right for you. It doesn’t matter what the market is like. It doesn’t matter what the interest rates are. Buying will always get you ahead because you will be buiding equity with every payment. You are investing in your furture though real estate, all while having a place to live that you can control. How will you know when you’re ready:

  1. When you can afford the payment and to maintain a home.
  2. When you know you will likely be able to stay in the home for at least the next 4-5 years.
  3. When your life is settled enough that the house you can afford will meet your needs for the next 5 years.

If you are at the point when all 3 of those conditions are met, it’s time to start shopping. Like I have been saying for nearly two decades: Buy a house on a decent lot, with a good floor plan, in one of the best neighborhoods in your price range. These three things will make your house desirable in any market when it is your turn to be the seller.

Buying a home will always be risky. Just be smart about it and minimize those risks though planning and good decisions.

Short term pain-Long term gain

by John Rice

I was showing one of my rental houses to a prospective tenant yesterday. This young lady said she was torn between buying and renting.

Know what I told her…..while she was standing in my house which was for rent?

I told her to buy a house if she could. I said that I think right now it seems scary and might not be any fun to have such a high interest rate, but in 5 years, she will surely look back and be glad she had bought something.

Why? Because history shows us that rates won’t stay high forever. It also shows us that prices won’t stay where they are right now forever. The odds are very strong that you will one day be able to refinance and the odds are even stronger that prices will at minimum rise slowly over time.

Also because when you are paying rent, you are paying down somebody else’s mortgage and are getting absolutely nothing in return other that getting to live somewhere for the next month. When you buy a house, at least part of your payment goes to building equity in an appreciating asset. Then, too, there is the fact that the principal and interest portion of your mortgage payment will NEVER go up, unlike your rent.

About the only time I advise people to rent is when they know they will not be in a house for more than 3-4 years. If you know you will need to move again in that short of a time, you may come out ahead by buying but the difference is so slim that it may not be worth the risk.

So pretty much, I told here that buying right now is a short term pain, but a long term gain. For her own sake, I hope she can buy a house.

What to expect for the rest of 2023

by John Rice

In 2-3 months, you will be reading that sales have dropped significantly. The news media will have you believing the sky has fallen. They will compare the stats to the booming pandemic years and/or the best of times……as if that was normal. Headlines will read:

“Sales down 20% (compared to last month.)”

“Mortgage applications fell to lowest level (since 2022.)”

The reality will be that the market has just returned to normal, seasonal cycles.

I think sometimes we forget to look back far enough to see the bigger patterns. It probably doesn’t help that the media people are only following real estate long enough to write their article. It also doesn’t help that so many real estate agents haven’t been in the business long enough to see a balanced or even a bad market.

This is what a balanced market looks like: Some houses sell the first day on the market in multiple offers. Some houses don’t sell quickly and need one or more price reductions. March through August are peak sales months. After August the sales gradually slow down and start picking back up after the New Year.

So, for the rest of 2023, I think we will see fewer and fewer sales. Yes, the interest rates are high and that is what is returning us to a more balanced market. However, that is not the only reason we will see fewer sales. Part of it will be that we have returned to a more normal cycle of sales slowing down due to the time of year. I think prices will remain stable. We will see a whole lot of price reductions on listings that didn’t sell the first day on the market. This doesn’t mean that values are dropping. It just means the seller and/or their realtor were just too ambitious on the list price. We are returning to a market where buyers have some choices. When there are not 10 buyers fighting for ever single house, it means the loser houses that nobody wants will have to reduce the price to even attract one buyer.

The wrong way to make housing more affordable

by John Rice

I keep seeing a bit of enthusiasm in the media regarding the market softening to the point that real estate prices will drop.

With the logic of a 5 year old, sure, it makes sense that lower prices make things more affordable. There are however more variables that go into a mortgage payment. There is the price you pay, your interest rate and the length of your loan. There is another variable independent of real estate and that is wages. I read this morning that wages are going up as workers are demanding more income to combat inflation. I predicted this. Inflation came first and hurt all of us. I knew that in time, wages would have to go up as well. I used to have a lawn care business when I was younger. I remember a customer who built their house brand new in the 1960s. They told me their payment was something like $160 a month and some months it was hard to make ends meet. We laugh at that payment today, but keep in mind that it was probably still about 30% or more of their income.

Let’s say that we all wake up tomorrow and real estate prices have dropped 20%. Yay affordability!! It won’t make a bit of difference. Why? Having lived through the Great Recession, I can tell you that Buyers will not view this as an opportunity. They will be afraid to buy. The self claimed shrewd Buyers will try to time the market and wait for prices to go down more. Those Buyers usually end up waiting so long that prices have started to rebound before they feel comfortable to pull the trigger.

Let’s also take into consideration what softening real estate prices will do to those who already own a home, which ultimately affects everybody. For most middle class folk, their home is their greatest asset. If they feel good about the value of their home and their job security, they will go out and spend their money. They take vacations. They go to Lowe’s and Home Depot. They buy furniture. They spend on landscaping. It’s good for the whole economy. They stop all that when the value of their home goes down. How do I know? I saw it from 2007-2011.

What is the solution? Build more houses. We have been in a housing shortage since the Great Recession ended. Yes, people right now are not moving since they got super low rates that don’t exist anymore. That is keeping prices high in these times of higher rates. But think back. When rates were super low and everybody was eager to buy houses, we still didn’t have enough houses available.

And if you think affordability and low inventory are bad now, just wait until rates drop down to around 6% or hopefully less. That will create a bit of a frenzy. There will be even more bidding wars and prices will continue to go up, making housing less affordable.

Airbnbust?

by John Rice

One of the most valuable lessons I learned from my dad is how cycles work.

I remember one of the first times I ever thought about such things was when we lived in a starter home neighborhood in Frankfort. I remember him telling me that the houses in our neighborhood would eventually get run down because everybody who buys such an entry level home only plans to stay there for a few years. You don’t do a room addition, kitchen renovation or anything when you’re thinking so short term. Forty years later, the neighborhood is pretty run down. Houses only got fixed up when the values got so low that an investor could buy them cheap enough to make a profit.

Another thing I learned about cycles is to expect them. There will be good times. There will be bad times. Most people view the good times as the norm and are shocked when bad times come.

We are there now with the short term rental market.

Over the past few years, I’ve had several clients ask me about getting into the STR (Short term rental) market. I have always been cautiously optimistic. I tell them sure, you can make some money, but have a backup plan because one day, the market will be saturated and/or demand will not be as strong. We had several things line up perfectly all at once to create the buzz for short term rentals. We had many people wanting to travel after the pandemic, we had a robust economy, and we had people eager to try using an Airbnb. I knew that would not last forever, especially with so many so eager to buy a house and use it for short term rentals.

The downside of the cycle is happening now. I am on a facebook group for real estate investors. Just about everybody is saying their bookings are waaaaaaay down compared to last year. We have several things that have lined up but none of them are good: Everybody travelled a lot after the pandemic and demand is down, we have a not-so-robust economy, and people are a little more cautious of short term rentals (Excessive fees, terrible hosts, pretty houses in scary areas, etc.)

In time, demand will pick up. Those who were merely Airbnb hobbyists will get out of the market leaving only those who view it as a serious business. This is part of a cycle too.

So what’s my advice to anybody wanting to buy real estate for STRs? Have a backup plan. Make sure the numbers also work as a long term rentals. Be ready to pivot when needed. Buy a property that is a good investment. Don’t buy a terrible house in a slummy neighborhood where the only desirable feature would be your trendy decor. Have an exit plan because one day you will be as excited to sell your property as you were the day you bought it.