In Lieu Of Perfect Timing: How To Think About A Potential Post-COVID Housing Market Crash

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In many social circles, particularly among eager market observers, the ghost of the 2008 Financial Crisis has been showing its head. The post-COVID market is similar enough to the 2008 era in two ways: there’s been a global economic crisis, and the housing market has, so far, shown incredible strength.

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In truth, the lack of any endogenous failure makes this economic moment markedly different from that fateful year when the housing market came crashing down. Noticeably, it’s happening this time in reverse order. Throughout the thick of the pandemic, the housing market has seen ongoing price-hikes, sustained supply shortages, and still-low mortgage rates. So it certainly won’t be the case that the crash of the housing market causes a global recession. But it’s also not hard to imagine that the current housing boom will follow the age-old laws of physics: what goes up must, eventually, come back down.

The trepidation among investors is certainly understandable. And in the current market, homeowners are sitting on assets that are more valuable than they ever have been; they’re having to think like established investors. For those who might be considering a liquidity event, holding out a month too long can represent thousands, if not hundreds of thousands, of dollars lost. Second, investors considering acquisitions in the market are caught in limbo. Caught between the desire to get in before prices continue to rise, they run the risk of acting too soon, or too impulsively, and overbuying.

Despite all of the opportunities it brings, it can be an anxiety-provoking market. And the answer offers no relief. It is nearly impossible to time the housing market. Even the closest market observers can’t claim with any certainty that they know exactly how the next weeks, months, and post-COVID years will unfold. Luckily, that doesn’t leave investors helpless; there are easy actions that anyone can take to understand, contend with, and prepare for the future of this once-in-a-lifetime housing market.

Preparation Beats Prediction

The famous Warren Buffett popularized the maxim ‘don’t try to time the market,’ a principle which holds true in the real estate space. This market certainly makes the pursuit of perfect timing tempting, but even an in-depth analysis of trends and contributing factors will leave homebuyers disappointed about their forecasting skills—there’s just no way to know what the future holds.

But there are many ways to prepare for whatever the future will bring. Prospective buyers and new investors can use this window of time to get a leg up on their financial preparation. Getting a clear picture of the key figures—credit score, debt-to-income ratio, long-term career and family goals—will increase the likelihood that those major decisions, like homeownership, are inline with the financial future that the buyer has in mind and in reach.

Financial planning can substitute for premature market action by offering that sense of forward progress. Understanding household finances as they relate to upcoming housing costs will make clear the actions that could be taken in advance of the big decision. To combat the understandable restlessness, homebuyers and new-to-market investors can make it a goal to improve their buying profile and earn a more favorable loan or qualify for a lower mortgage rate. The actions required will become a day-to-day focus, and that focus will be better spent than it would have been touring the next ten houses that are markedly out of price range.

On The Topic Of Refinancing

When rates hit a historic low in the latter half of last year, people’s purchase decisions were accelerated. The move to remote work had left every family wanting more space in order for work and home to fit in the same psychic arena. The result was a total wave of demand and a price hike that we’re still watching rise. But these are highly consequential decisions, and wanting to capitalize on the low mortgage rates doesn’t mean families or investors need to pack their bags and cast their bets on an inflated market.

Instead, homeowners, and investors with existing properties, can turn their attention toward the question of refinancing. As an alternative to moving, refinancing provides a way to capitalize on low rates without exposure to the current price hike in the market, or the risk of listing a home if a crash is soon to come.

Active Waiting

While we can’t be sure on the timing, a look at the major market factors does foreshadow an end to the ongoing price hike. It’s important to note that the current market is more likely a boom than a bubble. The factors introduced by COVID-19 can easily explain the spike in prices, and the new supply entering the market, combined with a possible return to more normal interest rates, will be a sign that the prices will begin to return to more normal levels.

In the short-term, the re-introduction of lumber supply and the fall of lumber futures is expected to have a quick effect in dragging prices down. Lumber was one of the major limiters on renovation projects and new construction starts; the National Association of Homebuilders estimated that the lumber factor alone was adding $36,000 onto the price of median sized American homes. With that cost now out of the way, projects will resume and new starts can commence, and it will be more than likely that the resulting influx of supply will help to remove some of the price-hike momentum from existing properties.

The actions taken in the interim are highly personal decisions—whether buyers want to wait for the expected return to normalcy or try to venture a higher down payment and take their place in the market action. But if the personal choice is to wait, it’s important to engage in an active kind of waiting. Standing firm in their reasoning, buyers will be less tempted by the ‘perfect property’ or by a skilled seller. Like always, investors should define their conditions for entry beforehand and play by their own rules. Defining and validating those subjective purchase prerequisites, whether it’s waiting on the price of lumber or waiting for personal financial factors to fall into place, will increase the investor’s chances of holding true. And in practice, it’s not the feeling of getting the market right, but the feeling of having acted in accordance with our own principles that offers real comfort in changing economic times.

About the Author

Zain Jaffer is the Founder and CEO of Zain Ventures, a global investment firm with over $100 million in assets under management. Zain Ventures invests in start-ups, real estate, stocks, fixed income, hedge funds, and private equity.