What to expect in real estate is a very hot topic. Everyone wants to know what will happen in the future. In addition to how this year will go, there is increasing concern about the future.
This is because of many factors. Primarily it’s the war in Ukraine, mortgage rates and inflation. Covid for now is not among the biggest concerns although there will be future spikes of course.
Let’s go through these factors so we can learn what to expect in real estate.
Ukraine
The war in Ukraine is impossible to predict. It is, however, having a devastating effect on oil and gas prices in particular. While the US economy is incredibly strong, there is a limit to how much longer Americans can slough off higher prices.
Everyone wants to stand with Ukraine so for now we are coping. But in a few months, with continued cost increases, Americans will begin to cut back on spending. This will become a drag on the economy as US citizens will be forced to spend less so they can cool their homes in summer, drive their cars and heat their homes later in the year.
Mortgage Rates
Rates are up a full 1% since the fall. Think about how quickly this happened. Every 1% rise in your mortgage rate means that house you want to buy will now cost you 9% more. This is in addition to eliminating entry level buyers who no longer qualify for a mortgage at these higher rates.
In order to compensate for this 1% rise in rates, home buyers must either reduce their price range or increase their down payment. As a result, you either accept an older home that needs more work or come up with more cash. Rates are going to continue to increase throughout this year and most probably 2023 too.
Inflation
Inflation is a big and the primary reason why rates must go up. This is really simple math. I loan you $400,000 to buy a house today. You pay me back that $400,000 tomorrow over time plus interest. Sounds like a plan doesn’t it? There’s 1 problem with this – you’re paying me back with dollars that aren’t worth as much tomorrow as they are today. To make up this difference, I do a calculation and raise the interest rate I charge you.
This also affects the price of goods when you’re talking about large scale production. Suppliers are getting hit with higher costs due to supply chain shortages so they pass that on to the consumer. Add in the higher transportation energy cost to get the finished product to a store.
Because of inflation, rates must rise to get the same value back tomorrow as what it is when I lend it to you today. This is true of everything, not just home mortgages. Inflation affects all aspects of the economy making everything cost more.
What To Expect In Real Estate
Jeff Otteau held his spring seminar on the real estate market today. He explained how the cumulative effect of these factors create a drag on the economy to such an extent that they will bring on a recession. We are way past due for one. The question is when and how severe.
It takes time for the real estate market to turn. Losing more and more entry level buyers does radiate through the market. Residential real estate is a chain of transactions. The entry level buys a home, that seller buyers a bigger home and on and on and on. I’ve seen this before a few times.
Jeff is right. I’ve been advising homeowners that now is the most secure time to sell because this process has been starting since last year. Eventually as it takes out more buyers, the market will contract and correct.
Move up buyers are taken out too. At least those who purchased since the Great Recession. Their mortgage rates are lower than rates today. When you add a more expensive mortgage to higher prices, a lot of them can’t move up. That keeps inventory low too since none of those homes they’d be moving up from will go on the market.
Because our economy and real estate market is so strong, it’s going to take a while before there will be enough of a drag on the market and consumer spending to create a recession. As a result, 2022 and most if not all of 2023 should be good.
What to expect in real estate? Another good year followed by a good but less robust 2023. Then a mild recession, This, however, assumes that the war in Ukraine will end by this summer. If that doesn’t happen, a more severe recession will arrive quicker.
