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.
Your Lexington Kentucky Neighborhood Expert 