Sizing the Housing Market: Is Now the Right Time to Buy a House?

The Economic Indicators

We're going to dig into a lot of the economic indicators of what's going on with a lot of the real-time changes that are happening fairly quickly. I want us to figure out if it is a good time to buy a house right now. Whether you are on the residential side, looking for a primary residence, or if you are an investor looking to buy rental properties (like I do), or even fix and flip properties (like I do too). So let's get right into it!

I'm Johnny Lynum, a real estate fix-and-flipper and a multifamily investor. I love the BRRR strategy and I've been investing for a while now. I wasn't as active when the 2008 crash hit and we went through that downturn. I just had my primary residence at that time during the recession. However, I make it my point to listen to other seasoned investors to understand what it is that they're doing right now in the market and their sentiments. This is how one gains wisdom! You want to look for people with gray hair that's been around since the ‘70s - the last time we had enormous inflation.

We raise in opportunities so a lot of people are asking:

“Are we facing a real estate market crash?”

“Will prices be cut in half over the next couple of years?”

“How fast will this happen? Will it happen in one year? What has happened in 5 years?”

Me: Trying to understand the dynamic of the market.

25% cheaper

Like everyone else, I want to time it. If I know prices are gonna be 25% cheaper in 6 months, then why should I buy right now? When we start talking about the recession - How will it actually unfold? That's like trying to hit a moving target and I think that’s where most of us are.

Hedge Risk

It comes down to the fundamentals that we are looking at - where we want to be and what type of investor we're choosing to be. We have to become crystal clear on what it is we are doing, what niche we are focusing on, and where we have a straightforward strategy. That way, we can hedge our risk. As an investor - whether we're buying stocks, bonds, mutual funds, real estate, or whatever it is that we're buying, our job is to learn how to manage risks. In this case, investing in real estate.

Less $25 Per Square Foot

For me, a recent pivot was made, we subtracted off $25 a square foot in our market as we're underwriting, as we see things are standing on the market a little bit longer while more inventory comes online primarily in the above median price range.. We're also looking at where rents are in our market to make sense of refinancing out. This allows us the ability to pull all or the majority of our capital out and just keep it ready for the next deal - that's an option. One of the best things you can do is to make sure that you have a strategy and understand what's going on.

5 basis points

Right now, most analysts have the Fed probably raising rates again one last time (or they already did by the time you read this). It’s another 25 basis points that are going to be a record ten months in a row to combat inflation and cool the economy down.

Slowing down

We're seeing that the housing market is slowing down in most areas primarily in transactions. People aren't buying as much as inventory is trickling up in homes priced above the national median home price of $386,000 as of March 2023 according to Redfin.com. We see the same thing on the automotive side too, such as car loans. Refinances went down because people already have low rates locked in. They’re not trying to move and refinance their properties, which has slowed transactions down tremendously.

Less competition

There’s a change in the number of buyers that have normally been participating in the buying process. Housing over the last couple of years has broken a lot of records for the increase in the average price for a single-family residence and it's getting to the point where it's the outpacing income per household. It's just becoming untenable for a lot of people to be able to afford a house just based on monthly salary and income. Something has to change!

30-40% appreciation

I definitely believe there's going to be some sort of correction. To what extent? I’m not sure. But if we look at it, for the most part, a lot of areas have seen 30-40% appreciation in the last 2 years, and if we go back to pre-pandemic levels. Is that really a crash if the market corrects 20-25%? We then have to understand the dynamics of where we were a couple of years ago. However, I believe prices will drop 5-10% nationally and hold steady for the next few years as inflation catches up with housing prices.

Contraction

Being able to peel the onion back and be conservative when we're buying is the name of the game now. We shouldn't be banking on any near-term appreciation. We should be looking for some type of contraction in valuation. We are definitely factoring this into our price-per-square-foot analysis for estimating our after-repair value, so we understand that things are changing. It’s ok to be conservative looking at the past historic appreciation, nonetheless – we’re still buying.

Multifamily

I'm looking at small multifamily(40 units and below) as well. But we have to be conservative in our underwriting and prepare for the future here as well. There will be more pain in commercial real estate and opportunities to build wealth. At the end of the day, we must make sure that we're getting great deals. There will be great deals coming up and there are a lot of real estate investors who don't understand this business fully and will be on the sideline.

Media Scare

The media will work to cause more fear across the board of society. Now, we're already seeing it, with coverage of how the market bubble is about to burst and foreclosure will rise. The narrative that the media is pushing makes a lot of people scared. As an investor, we can use this to our advantage.

Opportunities

I let my consulting clients know that they don't have to overpay for a property and simply let sellers know what they can offer. It's not like we're competing with a whole lot of people today. We will be able to get some good deals from people that are just looking to cash out, especially in the tired landlord category. They just want to be done with real estate and therein lies the opportunity. We just have to find them.

So, when is the best time?

At the end of the day, the best time to buy real estate was 20 years ago and the next best time is today. I'll guarantee you, the price of real estate is gonna be higher 10 years from now. It may go back down some and push back by 2025 or 2026. But it's coming back up eventually.

Buy for cash flow - beat the inflation

The #1 goal with real estate investing is if you buy for cash flow (even with higher interest rates), and you're conservative on your rent projections, you're gonna be fine. You can ride out any storm. If you're in the right area, you will have debt pay down, your interest rates are lower than inflation right now. So you’re beating inflation and at the same time, you get the tax write-offs and all the benefits that come with it.

Get ready!

I think 2023 is going to be a great year for those that are prepared. In another 6 months, we're going to be a whole lot smarter about how the Fed is going to work. There's talk after this ramp-up in rates, we will start seeing a slowdown. When we hit a recession and start having job layoffs. The Fed will pull back on how aggressively they are increasing interest rates. Who knows what the Fed is going to do and what the government's next steps are? We can't control any of those things, but at the end of the day - you are a savvy investor and you got this!

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