Bets on a top or forever climb!?

Question

I feel stuck looking at the market as a new investor. Not only are we getting outplayed on the mls, but the macro view is daunting.

If we consider historical trends, a massive correction is way overdue and buying right now is close to the top. On the other hand, we could assume this is a perfect storm for prices to keep climbing and never look back. Looking at the latter, I usually fall back on "this time it's different" as a sign of caution.

How are you navigating this market? "If the numbers work" is something I often here. If that's you, do you consider current rents and rents prior to the massive growth in your analysis?

Looking forward to hearing from anyone willing to share their perspective!

Jon Kelly · Answer

@Joshua Sonico Looking at macro trends is informative, but it usually doesn't mean a whole lot for local markets.

Focus on your local market. Focus on investing for cashflow instead of appreciation. Be conservative in your underwriting.

Justin Phillips · Answer

@Joshua Sonico While more focused on the stock market, I love Warren Buffet's quote: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." I was talking to a traditional lender buddy of mine, and he was telling me that he's advises clients that in our market if you pay $25k above asking, you'll make that back in 5 months on average due to appreciation. That definitely gave me pause. A good time to reflect and look at the implications. Where that leaves you is for you to decide...

Kevin Romines · Answer

@Joshua Sonico These are great questions all at a time where things are changing as we speak. Here is my view.

What are the things that are saying we should have stagnation on home values or maybe even a downward trend in home pricing? Currently due to inflation being out of control, the Fed has decided to raise the rates in 2022 as many as 4 times. They anticipate that the rates will be approx. .9% higher by the end of 2022 at least the over night rates that large banks charge each other for loans. This does not directly translate to the mortgage industry, however it affects most industries to an extent. Also the Fed will end MBS or Mortgage Back Securities purchases in March of this year and will start selling off the bonds they bought in past years, this too will lead to mortgage interest rate increases. So assuming mortgage interest rates will be approximately 1% or higher by the end of 2022. This will cool off parts of the market and should lead to some home pricing stagnation, and maybe some individual price declines due to over pricing for the market.

That said, what is a factor in the market that would lead to price stabilization or increasing home prices? That would be the fact that demand far out weighs supply. During the mortgage meltdown of 2008-2011 the builders got hit the hardest. The builders nationally have build 25-35% of the volume that they would have normally build in the last 13 years, leading to a high demand in relation to supply. Washington states demand is even heavier than most states demand. In WA State over the last 40 years, including the meltdown years on 2008-2011 the average appreciation rate is 7% appreciation per year. That means that the average home doubles in value every 7-10 years.

That said, we are right back to the same answer, if the numbers work for the deal, then proceed forward. You need to have more than 1 exit strategy. I.E. Selling, Renting, Creating additional value through additional Sq. Ft. or and ADU or other such improvements for additions or rental value.

I hope this helps?

Bets on a top or forever climb!?

Most Popular Reply