I’m in that camp and I’m starting to suspect there are enough people in that camp that any noticeable drop in prices will be immediately met by strong demand, even at current rates.
Since you cannot predict the future I recommend not waiting “for prices to drop”.
Instead, buy a house when you find one you love and that you can afford. Houses are not widgets- each have pluses and minuses and optimizing for price won’t make you happy.
Reducing the housing demand, and therefore prices or at least price growth.
Wages increased about 15%: https://fred.stlouisfed.org/series/CES0500000003
So home prices grew faster.
Also, since mortgage interest rates have gone up higher than pre-pandemic, homes affordability is even worse.
https://static.seekingalpha.com/uploads/2022/6/7/saupload_mo...
There is a sharper rise now of higher payments, but historically its not even where it was in 2006 and still is lower than figures not seen in this present chart, like the the 1980s.
In the end home prices don't march up in a vacuum, the money has to come from somewhere. People pay these prices and they can do so because they are skilled workers who are paid such incomes to afford homes in the Bay area or Boston or other high cost of living areas. It's not all private equity. When you add more high income jobs to an area than units of housing for decades, a housing crisis for the working class is the natural result, but for high income earners they will always be paid enough to afford the median mortgage payment or else the median will shift accordingly to meet the market where it is.
If inflation does come down rapidly, it’s likely to be coupled with a sharp increase in unemployment.
Rates fell significantly from 2005 to 2012, yet housing continued to fall. Whether lower rates or higher unemployment is the stronger force this time remains to be seen.
Given housing is by far at a historical peak in real terms, I suspect a reversion to the mean in real prices is more likely than not
It indicates that the market thinks the Fed will be effective. It's also (generally) indicative that a recession is on the horizon. We're starting to see the layoffs in certain sectors (tech especially). Unemployment rising tends to cause more mortgage defaults which will tend to lower home prices.
> As long as this is true, prices for houses will not go down as everyone assumes that a refi will be possible in 1-2 years.
A lot of potential buyers don't qualify at current (and rising) rates. They've been taken out of the market entirely. Wells Fargo saying that applications for new mortgages are down 90%. Assuming that's happening industrywide (no reason to doubt that) it's going to start effecting prices - and already is in some markets.
Your advice is mostly sound, but buying in a bubble can have severe and very real ramifications on you, even if you can afford the monthly payment. You may not be able to move without writing the bank a large check, and many won’t have the cash on hand
[0] https://www.macrobusiness.com.au/2022/05/australias-rental-c...
All of Florida, Vegas, Phoenix among others.
Some markets were down 60% peak to trough (Florida). The ones that rose the most also tended to be the ones that fell the most
Of course there is non-negligible friction if you need to move, so you do want to be mindful of not buying right at the peak, but in general I think you're overstating how much you need to worry about prices: you don't profit when prices go up, since you'd also have to pay more for a new place, and as long as you can afford the payments, your home moves in line with the market and don't need to sell, you also don't need to let falling prices affect your sleep. Your position is market neutral, you are mostly giving up flexibility.
I agree, of course you don't want to have bought right before a dip. But if you sketch out a few scenarios and look at the overall and your individual situation (eg, Would rental income cover credit payments, even in an adverse scenario? Do you have expenses you could claim in years when you're renting out? Do you have other uses for the property, eg within a family?), you might find that you can manage the risk (or not). It's definitely not risk-free, but there's also significant upside potential if you can make a long-term commitment.
Do you actually mean after the bubble has burst? Because during the bubble, why would your house price be a fraction of what you owe on it?
You need housing, but you can get that without home ownership.
In those states first mortgages are "non-recourse" loans. What that means is that if the borrower does not pay off the loan the lender's remedy is limited to whatever they can get foreclosing and then selling the house.
With a non-recourse loan if I find myself owing a lot more on my mortgage than my house is worth I've got the option of just walking away and letting the lender foreclose. I will no longer have a house after that, but my possessions and savings and investments and income will be safe.
In the other states first mortgages might be "recourse" loans. With those if selling the house isn't enough to pay off the loan they can come after you personally for the difference.
With a recourse loan the lender can come after me for the shortfall if the foreclosure sale isn't enough to pay off the loan. They might go after my possessions, saving, investments, and income.
It'd only be a tiny percent of people who found themselves underwater, but with so little equity they didn't care to lose it, and who also didn't care about tanking their credit score for the next decade.
Finding one that you both 1) love AND 2) can afford is the real trick. Most people have to choose one or the other.
This is questionable advice, and biased I guess.
It's quite easy to review historical sale data and see if a person is buying at a peak price. No it likely won't be the only or final peak, but it's a useful indicator.
> optimizing for price won’t make you happy.
On the other hand, not optimizing for price can make you significantly unhappy. Being immobilized due to an upside down mortgage, and stretching monthly finances can be really stressful.
The problem for us is the inventory has completely dried up. Our market has a lot of second homes. People who wanted to cash out already have. The people who weren't ready to sell, seem to be willing to "wait it out".
In the long run, it doesn't _really_ matter. We're well within our budget and plan to be in this home for a very, very long time.
By using Airbnb, I was able to continue living and working in the city by ceding away my rental protections in exchange for not needing good credit and other assurances for the landlord. Win-win.
I predict that will continue as potential guests tighten their belts. And as more 2nd homes are a drag on their owners cash flow, there will be more people listing on ABNB to make some cash. That will cause a glut of supply and further drive down prices.
As long as people are okay with buying insanely overpriced homes they will not fall.
But careful, you might be fired too. Or lending may be even higher later (forcing lower prices). Or rates will be high be many years. Or you'll go underwater and not be able to refinance. Or your taxes will also go up. Or maybe you need to move/divorce. Or maybe you die and your next-of-kin can't pay the house and be foreclosured. Or maybe you can dump the cash in bonds/stocks and make more money. You may have more kids and need to move to a bigger house and be forced to sell at a loss.
For that and more, /r/REBubble/
Waiting for a price drop doesn't really work.
Firstly, when prices start to drop people stop selling. You might want a cheaper house but the supply will be severely limited so you probably won't get what you really want.
Secondly, when prices drop it usually comes with other changes in the market. Mortgage lenders are weirdly skittish at the moment, and they stop lending the instant anything looks bad. If you need a high loan-to-value mortgage (eg 90% of the purchase price) you probably won't get it in a downturn.
I bought a place about 18 months ago and got a 5 year fixed interest mortgage because I figured we're going into a period of inflation and maybe recession so interest rates will probably go up. My timing was off a bit but it's going to save me a fortune over the next few years (and then I get a huge shock when the fix rate ends... yay!)
Most people who sell their home also buy a new one at the same time. So if those folks remove themselves from the market, it doesn't really change anything as they are decreasing both the supply and demand by an equal amount.
The net balance in supply and demand comes from first time buyers, investors (both buying and selling), immigration vs emigration, and the elderly (moving to care facilities or passing away). Investors have significantly reduced purchases, and as economic conditions deteriorate I expect them to start selling (for example a lot of AirBNB hosts bought at the top of the market and are starting to get nervous as bookings are declining).
Basically, you can have a market with record low inventory and still see significant price decreases if demand is also low. The fact that we have record high employment and inflation and we are still seeing prices either level off or decline is very concerning. If employment starts declining we are certainly going to see a lot more selling pressure.
Expect that to revert to the mean (people move back in with their parents, get roommates) if this is a long, deep recession. Less demand = lower prices.
So after years of holding our down payment money in low interest savings accounts, I am now moving it into CDs and bonds that have nice returns which will result in a nice chunk of change. And if prices don't come down anytime soon, I am more than happy to keep renting. I think prices would need to drop by almost 40% before I would really consider buying at this point.
For context, I am in the Bay Area so it might be a somewhat unique situation to our market. But in the four years that I have been renting at this particular location, rents have not really moved much while house prices are up 50%.
Having a long term reliable renter, which I'm sure you are, give them a rent that is a good deal (slightly below market), and they'll stay. Even if your rent doesn't cover mortgage and expenses, eventually you or other renters are going to buy the property for your landlord, and that's worth a lot.
Especially if home prices are up 50% - keeping your rent stable and you there paying it means your landlord is getting a spectacular deal.
Turns out “cash on the sidelines” disappears quite fast when assets broadly devalue.
Housing is correcting faster than GFC, though it remains to be seen if it ends up deeper. But when it falls at this pace, people start to get cold feet
The spenders of what they didn't have got rewarded for long enough.
The piggy-bank method does work. Maybe more people should be doing it rather than us having a system inflating the hell out of our economy through loans with negative real interest rate.
Sharing a 2br is even cheaper. And this is only if one wants to buy a house all-cash.
Another traditional route to homeownership in Midwestern cities is purchasing a 2-family house. The tenant's rent generally covers the house's mortgage, even at today's interest rates: https://www.zillow.com/homedetails/701-Broad-St-Menasha-WI-5...?
They couldn't be more wrong.
While the forklift driver is slowly saving 10k a year for a 150k house, the SF bro is saving 50k a year for a similar house for $1M. Guess who gets to the target first.
Of course, one may choose to work harder than average to make more than the average.
> I seriously do not think that is possible
Rents can be very low in these kinds of places, especially if you're young and willing to share a house with others. I personally knew a couple who spent less than $20k a year on all household expenses; granted it was a few years ago, but they weren't even in a very low CoL area.
Work 60 hours a week for 15 years so you can buy a 150k house?
I'm sure there are plenty of 18 years old willing to do that. /s
Same. I dropped out of the market last year after refusing to take part in the insanity. No, I am not going to waive all contingencies, give you 5% earnest, and bid over appraisal, for the hope of having my offer selected. Hopefully this will change with the corporate money drying up.
Interest rates are going up so we'd expect to see prices go down, and they likely will in some markets. However, we are also seeing inventory dry up since who wants to sell their house and get a new mortgage at a massively higher rate?
With a low interest rate and inflationary pressures, current home owners are living for free. They can leverage this as well as their appraisals have all shot up.
Plus there's the quality of life factor if the home you purchase is a better fit for your life... spending 10 years in a home you don't enjoy has a mental cost to it.
FWIW we borrowed $2m at 2.5% (thanks Bay Area prices!) Thanks to that low rate even if the house drops in value by 30-40% we still come out ahead on the mortgage cost assuming we stay in the house. And it is likely any money not spent on the down payment or paying it off early can be invested which thanks to the current market and interest rates can take a risk to get a good return (stocks are discounted right now) OR easily find safe investments that exceed the mortgage APR.
Plus we have a house that fits our family way better with a lot more space. We also have knock-on effects (installed Solar with a <5 year payback, something renters can't do).
It is hard to imagine a scenario where waiting out this downturn would have worked out better for us.
You buy a house at the top, find out you don't like it, and you'll stay 10 years in it just to break even.
My guess is most people doing the back-patting have never run the numbers on an adverse scenario. They just see the top-line number dip and say "see, I was correct to wait!"
tl;dr: Run the numbers comprehensively for several scenarios. Include gains you missed out on, rates moving against you, your time horizon, risk appetite, etc. It isn't theoretical, real people have lost real money by being correct about a downturn.
It's a $300K+ of lumpsum in the stock market. Usually it's the correct thing to do. But sometimes you buy at the worst time and lose ~30% or more.
We had to work hard to avoid areas in SF that had been overbid. We didn’t find a bargain but we found a good deal, something that the prior owners needed to let go off but which wasn’t in a super popular area. This was in a hot market. So I think in the coming market you will find good opportunities.
So, as I obsess over listings today pondering if there might be an opportunity… I think that there will be good deals to be had, but not necessarily steals. In the Bay Area, people trip over themselves to live in a few neighborhoods so I think prices in those highly sought after areas won’t reach absolute bargain levels.
But If you are prepared and ready to step in you can already find properties that I think are marked down.
I’ve been watching closely dreaming of a place for our parents, or maybe more space for us, or maybe a rental…
Great SNL skit: https://youtu.be/yEfsaXDX0UQ
There are no good deals in SF, those are probably the worst deals you can find in the country at any point in time.
At the time we bought we found a house that gave us more space than the apartment we rented previously and where our newly arrived daughter could spend her first few years. It’s not one of the trendy neighborhoods and yet it’s close to downtown SF and the peninsula, where we work. We can afford it on one income. All those factors made it a good deal for us. I feel ok about it so far, but I’m certainly open to the possibility that there are better options.
Glad because everything is likely to crash at this point and we would certainly have an underwater mortgage, but not glad because with the more than doubled mortgage rate since we were looking, it'd be stupid to sell our current home and upgrade now (especially with prices still high), so now we feel stuck (granted, stuck in a home with a fairly cheap mortgage payment, so it could be worse, but stuck nonethless).
We also held off on refinancing during the super low mortgage rates, because we were pretty sure we were going to buy a new house so it would have just been wasted money, but now it's obvious it would have saved us some money. I had a feeling that would be the case, but my wife seemed adamant we were going to move last year (until we both got too busy with work), so I held off on pursuing it.
In my case, I think it is increased AirBnB demand. Don't know if that will start to ebb.
What you're missing is that when the bottom is in nobody will want to buy a house. They'll be way too terrified or plain incapable of acting. Afraid of losing their job. Of further declines. Of the bottom falling out of the economy. Of homelessness invading their area. Of they job they lost.
If you want to see significant drops in pricing thats going to depend how the winter macro economic environment hits everyone. Next summer is when you will see movement is my suspicion.
Investors have been ~20% of the market in recent days. The smart ones hedged for interest rate risk, but most didn’t
However we did hedge that decision by buying my mother in law an apartment and essentially becoming her landlords. We timed it as well as we possibly could have and locked in 2.5% on a 30 year in December of 2020.
And what part of economic collapse do you all not get yet?
Whatever the Boomers are going to start doing, the majority of them have probably already done it. I'm the last of the Boomers, depending how you measure, and typical retirement age is single digit years away for me. The first of them started whatever they were going to start doing close to fifteen years ago.
When I took my two year old trick or treating last week, I got a lot of comments on how nice it was to see kids in the neighborhood again.