In our part 1 video/blog, we talked about how the buyer activity level has decreased in recent weeks. We went from seeing 50-100 buyers in the first week of a property hitting the market, to seeing 15-20 buyers in the first week of hitting the market. That has been a significant drop in buyer activity from what we saw during the pandemic, yet we are still in a sellers market. Before the pandemic hit, we were in a hot sellers market, and 15-20 showings in week one is very similar to the level of activity we were seeing pre covid-19. However, eviction moratoriums along with layoffs, unemployment, furlough, and forbearance are all significant factors that remind us of the financial crisis of 2007-2008. These are new factors that were not present in the real estate market pre covid-19. So how much of an impact will these factors have? Comparing things such as inventory, foreclosures & forbearance, along with interest rates & affordability can help realtors, consumers, sellers & buyers determine if we are headed towards the financial crisis all over again.
Inventory Then Vs. Inventory Now
Supply and demand is one of the most important factors in understanding any market. In 2006, the United States had roughly 116 million households, with nearly 3.7 million homes for sale. As of today, the United States has grown to roughly 128 million households, with only 1.1 million properties available for sale. Despite the increase in households by 10%, our inventory has been cut to almost a quarter of the inventory seen leading up to the financial crisis. This is one of the leading reasons why we are currently in a sellers market. With the largest first time home buying pool in history adding to the increase in households, the United States does not have enough inventory to supply the demand. These supply and demand numbers are certainly far different from the financial crisis. However, the moratorium that has been crushing land owners throughout the country has many wondering what impact it will have on foreclosures and whether or not that will increase the inventory to a level that will bring us into 2007-2008 all over again.
Foreclosures Then Vs. Forbearance Today
A large part of the foreclosure crisis 15 years ago had to due with the leniency of lending institutions. Banks made it far too easy for 1 person to purchase multiple properties they could not afford. As a result, if 1 person went into foreclosure on a home, it caused a chain reaction that put some people into foreclosure on 4 or 5 properties all at once. Today, lending requirements have tightened up. Buyers actually have to qualify for their homes now. The buyers winning the bidding wars today are those typically with the strongest qualifications and highest down payments. This is a big difference from the large amount of 110% loan to value mortgages being issued back then. If someone wants to purchase a second property today, they need 20-25% down with 6 months reserves minimum. Relaxed lending leading up to the financial crisis caused nearly 60% of homes to fall behind on their mortgage. Today, only 2% of homes are behind on their mortgage. Through the pandemic, banks popularized forbearance as an option to assist those whose jobs were impacted by the great economic freeze. Not only did owners get the option to pause their payments, but many banks offered other modifications such as tacking 3 months worth of payments to the back end of the mortgage, or in more extreme cases converting loans to 40 year mortgages which left far less people actually behind on their payments. Despite the modifications, what really set the forbearances of today apart from foreclosures back then is the fact that every single day that went by, owners grew more equity in their homes than they lost in missed mortgage payments. With the rise in home values, nearly no one owed more on their home than it was worth. For landlords who lost $30K in rent, the values of their properties increased by $60K in equity. The reason for foreclosures in 2007 was everyone owing more than their homes were worth. They were unable to get out from under their homes without a short sale or foreclosure. Today, the market is desperate for inventory. Those who fell behind are not only able to sell their homes, but are in a position to make a worth while profit by selling. Those who are truly upside down and owe more than their home is worth, makeup a small percentage of the 2% behind on payments. You could flood the market with all of them at once and it still would not impact the inventory enough to satisfy the current demand. However, there is one factor we ARE dealing with today that is posing a whole new challenge the 2007 market did not have to face.
Interest Rates & Affordability
Around the time of the financial crisis, interest rates were around 6.5%, nearly double the interest rates of today which fluctuate between 3-3.5%. Low interest rates have made mortgage payments far more affordable for buyers, which increased how much buyers are willing to spend, and how much sellers walk away with. One thing that is threatening interest rates and affordability today is the concern over inflation. Right now, the FED is carefully monitoring inflation to see if it gets too high for too long. In the event inflation stays above 11-13% for longer than the FED would like, there are talks they would have to increase interest rates to artificially slow down the market. If interest rates were to raise just to 4-4.5%, that would drastically change how much home a buyer could afford. Those shopping in the $450K price range would automatically fall into the $400K price range. A $50K drop in buying power changes a buyers options in terms of size, quality, and location. With every buying pool dropping nearly 10% in purchasing power, that could certainly impact home prices due to buyers not being able to afford them. We are waiting for the 4th quarter of 2021, as well as the 1st & 2nd quarter of 2022 to see what the inflation numbers turn up to be, and how the FED chooses to react to them. As for my advice on how to navigate the market based on this information, my principles to sellers and buyers still remains the same…
Advice To Sellers In Navigating This Market
For my sellers, this means the “F” it number is no-longer going to work. You are going to need to have strategy around your listing price as well as a game plan. Make sure you are using a trusted expert or local top producer who has their finger on the pulse of your market at all times. A trusted expert will be able to advise you on the best pricing/marketing strategy to get the most amount of money for your home. If you hire the expert, and listen to them – they will make sure to put you in the best position to take advantage of the market conditions which are still in your favor. The best listing price always results in the best sales price. This will become much more important with the market shift than it was a few months ago.
Advice To Buyers In Navigating This Market
For my first time home buyers who are just starting out today, you may not have experience in the pre-pandemic market, and you most certainly don’t have experience in a balanced market. When you are purchasing in a sellers market, you may feel like you are over paying – but the reality is you are paying market value. The best possible way to hedge yourself as a first time home buyer is to purchase the kind of property that can last you the longest amount of time. If you are purchasing a home that can only serve your needs for 5 years max, then I do not recommend purchasing that home. You are running the highest risk of getting caught holding the bag in the event you need to sell and an unexpected market down turn were to happen. You are running the risk of owing more than the home is worth especially if you are putting less than 20% down. If you purchase the type of property that can serve a growing family and perhaps last you 20-30 years, then do not worry about paying $25K over asking price. So long as you can afford the monthly mortgage, the 20-30 year home won’t force you to sell at the news of having another child and it will not matter whether or not you paid $400K or $450K. It won’t matter whether you paid $500K or $550K. In 20-30 years that home will either be paid off or close to it. That time frame is long enough to go through a complete down turn and still not only recover, but leave that $400K home worth $800K and that $500K home worth $1M. In only 15 years the market went from the worst collapse in US history, to one of the greatest markets in US history. As Warren Buffet preaches that the best stocks to buy are the ones you never have to sell, that same investing advise runs true with real estate. BUY AND HOLD! You will ALWAYS win in that scenario assuming you are not refinancing your home every 10 years (AKA purchasing your home all over again). Be patient. If you have a lower budget, either wait for the home that has larger bones but needs updating allowing you to grow into it, or wait all together until you can afford the longer term property. If you have a larger budget, be patient until the long term home that fits your needs comes up. It will come. Be patient, and make sure you’re using a top producing realtor with experience.
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