So let’s get one thing straight… The real estate market is going to crash. Yes, you heard that correctly. It’s going to crash. And then guess what? It’s going to appreciate all over again. And then what? You got it, it’s going to crash again. That is simply the way financial markets work, they cycle. The stock market does it, the bond market does it, all financial markets do it… the real estate markets does it. It is what it is.
The next obvious two questions I think would be so when is it going to crash and is it a bad idea to buy a home now since the market is going to crash.
Let’s address question number one first:
The real estate market is going to crash. If we knew when, well we would all be rich. The are many excellent theories out there and some of the brightest minds on the planet get paid a ton of money to try and predict when this will happen but the truth is, any predictions are just educated guesses. It’s impossible to know when.
Consider that today’s facts are can be pretty convincing. Most real estate markets including my home market in San Diego are at all-time highs and increasing. The real estate market is riding a 12 year upswing. The home buyer frenzy is getting its fuel from two things for the most part:
Low interest rates and a massive shortage in homes to buy.
We haven’t seen interest rates as low as they have been through most of 2020 ever. Like never before. Then came march 2021. Interest rates are starting to tick up. When I say tick upwards, I’m talking 3.17 percent or so at the time of the blog writing. throughout 2020, rates were closer to 2.5 or 2.75. That slight uptick caused some people to slow down their search or maybe hit the skids. At least temporarily. In addition, we just saw a change in mortgage rates for investors. The end result is we are seeing less investors who feel the margin no longer makes sense. Most analysts predict interest rates to continue to rise throughout 2021. The end result here is we could see less buyers and an increase in homes to buy as buyer demand drops.
This leads right into question number two:
There is a massive home shortage right now. The nation as a whole is at or right around 2 months’ worth of inventory of homes for sale. This is real estate jargon but it basically means it would take 2 months to sell all the homes currently for sale, assuming nothing new came to market. Not new homes but new listings. It is how we measure and determine if we are in a buyers’ market, a sellers’ market, or a balanced market. We are at about 2 months’ supply for the country (we are actually at less than 1 month now in my home market of San Diego which is insane). 6 months is considered a balanced market. 7 months or more is considered a buyers’ market and that’s when you start to see home values decline.
If the change in mortgage interest rates causes buyers to leave the market, demand will drop and the supply or inventory will rise. As the monthly inventory rises and we approach 7 months, we could see prices drop. This seems like a drastic change but trust me, this can happen and happen quickly. Something to keep an eye on. This could cause a real estate market crash.
So that being said, is it a bad idea to buy a home right now?
My opinion on this is going to be a few layers deep. When you are buying a home, think of your home as a long term investment. Don’t expect to buy high and sell low. Your life should dictate where you live, not the market. Expect your home value to rise and fall. By the way, whether its high or low, its only matters if you sell right. Who cares what someone says it’s worth if you live in it and have no plans to sell.
Do not think of your home as an investment.
I know you probably think I’m nuts writing that but hear me out. There are far better options for investments on this planet than the home you live in. Good investments usually have a few common characteristics.
One would be appreciation. You got me there. Real estate usually does very well in the long term and does in fact make sense more so than renting. That’s in the long term. The second characteristic is cash flow. Guess what… Your home you live in does not generate cash flow. Unless maybe you have an ADU or rent rooms or do something outside the norm. A home you buy to rent out generates cash flow, investment funds can generate cash flow, stocks and bonds can generate cash flow, your home you live in does not. There are great tax advantages to owning a home but it’s not cash flow. It is not a great investment. A decent investment but not a great one.
Buy a home for peace of mind, buy a home so you can make your home into exactly what you want, buy a home for stability, buy a home because it is and still is the American dream pride of ownership is a thing. It can set the stage for equity and growth for future generations in your family.
Is it good to buy low? Absolutely. Is it good to sell high? Absolutely. Is this realistic? Some people get lucky but as far as timing the market when I buy my homes for me and my family, my life dictates the timing, not the current state of the real estate market. Don’t let the current state of the market or fear of a real estate housing crash turn you off from buying a home. This is short term thinking. You are in this for the long haul.