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What To Know Before Entering (Or Steering Clear Of) A Tight Housing Market

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The housing market has seen rapid changes over the past two years, and these changes show little signs of slowing down. Whereas these past two years were largely marked by high demand but low supply, we are currently seeing a sharp downturn in demand driven by high mortgage rates, spurred on by climbing interest rates as the Federal Reserve continues to combat inflation. For investors and home buyers alike, this represents a difficult situation.

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Many investors see the state of the housing market as a fairly reliable indicator of the state of the market as a whole. In terms of mortgage rates and housing affordability, many commentators have noted parallels with years such as 1985 and 2008, which has created tension among consumers and investors alike.

While these nerves are entirely justified, there is more to the present situation than meets the eye. In many respects, we are definitely experiencing a downturn, but I think it is important to get a firm grasp of the underlying trends before making too many comparisons to the past.

When we look closely, there are a number of unique factors affecting the present market that anyone interested in effectively navigating it should take note of.

A Balancing Act

The pandemic, and the widespread shift to remote work that accompanied it, had profound and often unexpected impacts on the housing market. Many white-collar workers, now able to work from anywhere, moved from city centers to less expensive areas, spurring bidding wars that drove up prices throughout these locales.

At the same time, supply chain issues caused by the pandemic but worsened by the war in Ukraine created a general shortage of inventory, causing even more intense competition among buyers.

Now, with the Federal Reserve raising interest rates, borrowing has become more expensive, which, when combined with spiking mortgage rates, drastically reduces housing affordability. To get a sense of the scope of these price hikes, consider that the typically monthly mortgage payment on a newly purchased home was $1,643 as of August 2022–in August 2019, it was $897. This is an 83% increase, which has hugely disrupted many people’s purchasing plans.

These high rates have the dual effect of making it difficult for first-time homebuyers to enter the market and discouraging current owners from selling their properties, as they do not want to wind up settling for a more expensive mortgage than what they currently have.

This is essentially the reverse of the high-demand situations that characterized the past few years. While this process might go some way towards stabilizing supply and demand, it will likely only do so in the long term, with short-term prospects remaining relatively bleak.

Location, Location, Location

It is important to understand that these general trends manifest differently across different geographies. Since prices vary quite drastically between states, and even between higher- and lower-density areas within states, these trends do not affect everyone in quite the same way.

Rather than just looking at ‘the market’ as a whole, investors need to remember to look at particular markets as well. Even if the overall situation is far from ideal, it is possible to find some lucrative opportunities if you know where to look.

In California, for example, where affordability has long been a serious issue (with only 16% of households able to buy at the end of Q2), home prices have seen some of their most significant declines in recent years.

In Austin, Texas, many local buyers were priced out during a pandemic-fueled boom, and sellers have begun dropping asking prices as far as 20% below their expectations. This reversal in pricing between these two areas might open up new opportunities for investors who may have previously avoided them.

In contrast to these more drastic cases, East Coast markets including New York and Boston, as well as some Sun Belt markets (particularly Florida), have remained fairly consistent.

While it’s impossible to predict exactly where things are going to go, the differences in prices across these various markets might give us some indication of future demographic trends, especially if many industries continue to operate remotely. There’s a good chance that the trend of white-collar workers moving into more stable markets will have a significant impact on prices.

Emerging Trends

All of these trends are complicated by the fact that members of the Millennial generation are currently entering their prime home buying years. For this reason, it’s unlikely that the present downturn in demand will remain for long into the future.

As the present patterns continue and fewer houses are sold, pent-up demand from Millennials will only grow. It’s entirely likely that this demographic will play a major role in shaping the post-downturn housing market, so I believe that paying attention to their demands in terms of location and housing type may provide a valuable glimpse into the market of tomorrow.

Even now, some Millennials are breaking into the market and trying to turn the current conditions in their favor. The general decrease in demand means that competition is nowhere near as intense as it was just two years ago, allowing buyers who are in a comfortable financial situation to secure homes without needing to engage in bidding wars.

For these buyers, the present situation is a perfect opportunity to purchase an otherwise-competitive property, with the prospect of refinancing down the line and mitigating the worst effects of the current mortgage rates. Investors interested in breaking into the short-term rental market or expanding their portfolio of properties might wish to take note of this trend as well.

To Buy Or Not To Buy?

As indicated above, there are some strategies that buyers are adopting to transform the recent downturn into an opportunity. Some individuals, understandably worried by certain parallels to 2008, are anticipating a crash in the near future and waiting until then to secure an affordable house.

However, I think it is important to note that the causes behind the 2008 crash, which were primarily predatory lending practices and intense speculation, are different from the current situation, which is more driven by a mismatch between supply and demand.

This fact means that real estate investors may benefit from paying special attention to the supply side of the equation. The ability to purchase properties at a lesser cost with minimal competition could leave investors well-poised to take advantage of the resurgence of demand when it comes.

Moreover, looking at non-traditional properties, such as short-term rentals and even flexible office spaces, could be an effective way to take advantage of the demand that currently exists.  

Although construction in general has slowed, it is an important sector for investors to keep an eye on. Its scarcity alone makes it a treasure trove of potential value, which will likely decrease as supply chains stabilize and more construction projects begin.

It has been speculated that mortgage rates, which are a primary driver of the present low demand, will stay high until at least 2023. We all know the value of location in real estate, but timing is equally important, and investors who buy strategically right now have the chance to reap serious rewards when demand begins to rise again.

The general situation might have many parallels to 2008, but I always like to stress that this is 2022: the past is an effective guide, but we have to remember that the present is a unique situation and make our decisions accordingly.