2022 has been a roller coaster year thus far. We are five months in, and things are looking crazy, with the future looking like more of the same. If you want to buy a home, should you wait until the housing crash?
As investors, we have to make assumptions to continue the planning process. Today, I want to take what we know about the housing market, interest rates, the job market, and consumer debt and make an assumption about the future of housing. Let’s begin.
Interest rates. Interest rates may be the most important thing investors can understand. A couple of rates affect us daily, including the Federal Funds rates, the 10-year Treasury Note, and mortgage rates.
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The mortgage rates are increasing today as we move into a recessionary period. The Federal Reserve raises interest rates to cool inflation. Interest rates affect debt, and all investors should know the difference between debt and equity.
As mortgage rates head above 5%, coming from 2.5%, housing prices will stall. Why will housing prices stall or decrease? Interest rates and prices have an inverse effect.
Say a person had $2,000/month to spend on a house. They could afford a $419,700 home at 2.5% interest. But when the rates rise to 5.6%, they can afford $302,200.
That’s a whopping 27% drop in prices. So you must be saying we are due for a housing crash where prices drop between 15-25%. Maybe… Not.
The new world order. Since the 2008 housing recession, a lot has changed, mainly the investing landscape. Back then, single-family residences were mainly for single families (which makes sense).
How Would You Spend $5,000?
Because of the crash, many investors made a fortune buying foreclosed homes and renting or flipping them. This trend never really went away. Suddenly, everyone was buying, renting, and flipping houses—housing became an investment for the mainstream person.
Then came Airbnb. If the housing bubble was bad before, now even more people are piling in to get a share of the Airbnb uptrend. People use terms like leverage and diverse income streams to parlay into real estate investing.
Wait, there’s more. As I wrote in “Rental Takeover,” we have more real estate investment trusts, institutional investors, and foreign wealth coming into your neighborhoods. All these entities are on the sidelines waiting for a price decrease.
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They have cash. What’s the difference between the average person and big investors? Big investors have cash. Interest rates don’t affect them. If they borrow, they can use partnerships and private money to get rates much lower than 5.6%.
There is so much money on the sidelines that it has to go somewhere. As interest rates rise and a recession forms, stocks (equities) will crash. Depressed real estate prices may be the best place for investors to get yield, especially if they have cash.
Will rents crash? The real question is will rents crash? If rents decrease heavily, real estate investors will take note and stay away. During a recession, corporate profits disappear. When corporate profits go away, so do dividends (for investors) and jobs (for ordinary people).
If the job market compresses and rents decrease, we may see a small housing crash. Again, I don’t believe this will happen.
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My favorite REIT, Fundrise (affiliate link), is buying entire suburban neighborhoods. This scenario means they control all the rents in the area. They can prevent a crash, at least in their community. And if there is a good school in the area, they don’t have to worry about demand.
The book “The Two-Income Trap” says it best. The main concern for parents is a safe neighborhood near a good school. People are willing to pay whatever it takes to get into this situation.
How much will prices decrease? I think prices will remain stagnant for a while. Maybe we will see a 5% drop across the board. Some places got a little too crazy over the last year.
We may see a decrease in “over-bidding” and waiting lines. If you need a loan, nothing has changed for you. You still need to go to the bank and validate your income level. Your $2,000/month limit stays the same, no matter the cost of the house.
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Interest rates will keep you in line. Investors with cash have many more options. However, if you are location independent, you may have some options.
Relocate if necessary. If you can remote work, there may be quick spikes in inventory or prices. Price may spike downward in certain areas but will be temporary, quick, and violent. You may see a small region of Mississippi drop in home values by 25%.
As soon as a story is in the news, investors will swoop in to buy. If they don’t, the area has more significant problems, like crime, bad schools, or low vacancy rates.
Perform your due diligence. In my part of Florida, I know each neighborhood has its own dynamics. If you don’t know the area you want to invest in, perform deep due diligence. You could be in a warzone just down the street from a lovely, gated community.
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Should you wait for a price drop? You should be “stacking chips” or saving money now. If you get your money right, you won’t worry about a price drop.
Find an excellent remote work job, start a home business or create content. These things will make you a location-independent free agent. Build a dividend portfolio that pays you $1,000/month.
Find a couple of individuals that would move in with you as roommates. Do all of this, and when it’s time to buy a property in Alabama, you can move swiftly.
Don’t sit on the sidelines like a bump on the log. Get active, create wealth, read real estate books, and be ready to make a move. Plus, the banks love people who understand finances.
Conclusion. Create your investing scenario. Don’t wait for anything to happen—make your own luck.
More Content, More Cash Flow
My wife and I have no intention of buying house number four. However, we positioned ourselves to make a move if an opportunity arises. We know where we can buy, and we have the cash.
Do I think there will be a significant crash in the housing market? No, I do not. There is too much cash on the sidelines. If there is a crash, it will be because rents went bust, and investors aren’t getting the cash-on-cash returns they factored into their analysis.
Will the Federal Reserve let us plunge that far into a recession that corporations will start to perform mass lay-offs like in 2008-2009? That’s a question for another day. But, I believe that is the true catalyst for a crash.
Again, as an investor, you have to analyze each situation deeply. You can call these predictions or assumptions, whatever. It is making an informed decision and moving forward.
Don’t just say housing prices are high, so they must go down. If the average person is willing to pay 70-80% of their income on housing, prices may never decrease.
What do you think of the housing market? Will it crash by 25% or more, or will investors make a hard move to take over your neighborhood? I’m prepared either way, are you?
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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