Bottom Line on Buying a Home Now OR Risk Waiting for Lower Prices
Mortgage Banker
Richard Blair
Published on January 7, 2022

Bottom Line on Buying a Home Now OR Risk Waiting for Lower Prices

If you are thinking about starting your home buying journey you are probably asking yourself several important questions.

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  • Is the real estate market in a bubble?
  • Will home values crash like 10 years ago?
  • Is it better to wait, continue to rent and hope prices come down?

Many home buyers, like yourself, face a difficult choice with rents skyrocketing and home prices increasing every month. Apartment List released its 1st National Rent Report of 2022 showing rents are up an average of 18% year over year. This is a new record for rent price increases.

If you are currently paying $1,500 monthly rent when the lease renews the projected increase would be about $300 a month.

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The Zumper 2021 Annual Rent Report listed 5 cities in Arizona in its list of Top 20 Cities With Most Rent Growth in 2021. This report was based on a one-bedroom apartment and an excerpt is shown below.

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Typical Signals That Home Values May Decline

Speculators and House Flipping 

One signal to watch for is when there are many “speculators” in the home buying market. A speculator is someone buying homes for the sole purpose of “flipping” the home almost immediately to make a profit quickly. Every time the home was “flipped” and re-sold the sale price went higher. This is what the market was experiencing in and around 2008. However, at that time many homes were in foreclosure or being sold in “short sale” (where the bank agreed to take less than what was owed on the mortgage) because homeowners owed more than the current value of the home. An additional factor was that qualifying for a home loan was far easier than the past several years so when values went down many homeowners just decided to walk away.

 

In 2020 and 2021, the real estate market did have many institutional investors buying properties, often for cash, but their purpose was not to immediately flip the property. Rather, the investors were buying to hold the property for a longer term hoping that the home will continue to appreciate in value and rent the home. The investors are typically looking to hold the property longer term, maybe up to 5 or 10 years.

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Buying a home in 2021

Homes were being sold by homeowners not because they were being foreclosed by the bank or the current home owner was forced to sale because they were “underwater.”  Meaning that homeowners did not owe more on their mortgage than their home value- they had equity. In addition, the homeowners after the last crash in 20008-2011, had to go through much stricter underwriting to qualify for their mortgage, so foreclosure and default rates on home loans were very low.

Inventory of Homes is Greater Than Demand 

In 2021, and into 2022, the supply, or inventory, of homes listed for sale has been historically very low in many markets. This means the number of homes for sale has been extremely limited. Now, this will vary by market location, so it is good practice to speak with a local Realtor to find out about the inventory in your neighborhood or city. Right now, in 2022, for most markets, there are many qualified home buyers looking for homes-this represents “demand.” So, when demand for homes is very strong and the supply of homes on the market is limited home prices will remain stable, or increase.

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The sign to look before any sort of housing bubble, or crash, would be an imbalance in the market where the supply of available homes is far greater than the demand from home buyers. Part of the supply shortage is related to home builders not building enough new construction in the past several years. During the past year home builders have been slowed even more because of labor shortages, supply chain issues and rising costs, like lumber. It will likely take several years for home builders to catch up to the demand for homes.

Rather than seeing a sharp drop in home prices, the more likely scenario is that it will take time for the supply of homes to outpace the demand from homebuyers.  When supply is greater than demand we will see home prices cool down.

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Quick Spike in Home Mortgage Interest Rates Can Cool a Market 

Typically, mortgage rates may climb steadily over time as the economic conditions change. When there is an increase in home mortgage rates it can influence the home market because some potential home buyers may no longer find it affordable to buy.  Often the home market can adjust to the slow rise in interest rates, and it will have a small effect on prices.

The warning sign to watch for is if mortgage interest rates suddenly spike by 1%, or more, within a very short time. The sudden rise in interest rate-which means home payments will also increase considerably- will cool off the demand for homes. So, if demand falls off sharply when housing supply is increasing it results in an imbalance that can result home prices decreasing.

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In the previous housing crash the supply of homes grew to 6 to 8 months, or more, which contributed to falling home prices. In many markets during 2021 and into 2022 there may have only been about 1- to- 2 month supply of homes for sale by comparison.

Discuss Home Buying Strategy With Your Loan Originator

If interest rates do move up considerable and you wait for the home prices to eventually cool down-will it actually cost you more to own a home? If your interest rate is higher but the home price lower, will the higher interest rate cut out any benefit from the lower price? Aske your Mortgage Loan Originator to run a report showing you the cost of waiting based on an increase in mortgage rates.

To make these important home buying decisions make sure that your mortgage broker or mortgage banker is providing consistent information about the market during your home search. Being educated about the market and interest trends will help you make the wisest financial decisions.

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No one can predict with certainty if we will see a crash even if all these factors line up. However, we would most likely see some sort of correction in home prices if all these factors do line up.

An educated home buyer is empowered to make the best decisions so make sure your Realtor and mortgage lender are providing you with timely information.

About The Author: Richard Blair (NMLS#213176) is a mortgage loan originator with 24 years of lending experience. Richard and his Team combine personal touch, ongoing education and cutting-edge technology to provide an amazing customer experience. Richard is part of the dwell Mortgage Team at Victorian Finance (NMLS#50635)  

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