Is Now a Good Time to Invest in Real Estate?

If you follow real estate at all, you have probably seen the dire warnings in the news. The headlines are saying things like “Impending Crash Imminent” or “Interest Rates Threaten US Real Estate Market”. While there are some very real headwinds for the real estate market now, this news doesn’t necessarily mean that it is time to get out.

I will start out by saying that no one has a crystal ball. Even people that are very knowledgeable about real estate might be wrong when it comes to where the real estate market is headed next. That being said, I can try to summarize what has been happening in the real estate market recently and see if that gives us any clues to the future.

Inflation

Everyone is feeling inflation right now. Inflation isn’t only at the gas pump and at the grocery store, but also in the real estate market. Inflation, in general, is positive for the real estate market because it increases values and rents. There are many factors that have led to the inflation that we are experiencing currently, including monetary policy and the war in Ukraine, but people have differing opinions when it comes to just how permanent that inflation might be.

Interest Rates

Interest rates are intimately related to what we talked about above- inflation. One of the most important interest rates in the US is the Fed Funds Rate. The Federal Reserve uses this rate as a guide to implement policy, mainly to try and influence inflation and unemployment. So when inflation is high, like it is now, the Federal Reserve will raise the Fed Funds Rate to try and tame inflation. The Federal Reserve has been more aggressive than it ever has been in its timeline for raising interest rates in 2022. Many believe that interest rates will be lower in 2023 because inflation will moderate, while others believe that interest rates will be higher for a long time to come.

Prices

Real estate prices, in many ways, are higher than they ever have been. In 2021, some measures of the gain in prices were around 20%. The beginning of 2022 continued the trend from 2021, but in the last few months the trend has greatly moderated (much of the reason having to do with interest rates discussed above). The majority opinion on pricing is that we will not continue to see outsized gains in price growth, but will see moderation or even slight decreases in price.

To summarize, we are seeing a shift in the market. Inflation is higher, interest rates are rising and prices are moderating. These circumstances may cause some to stop investing, while others see this as a new opportunity. In volatile and shifting markets, each investor should take stock of their own personal financial situation and make sure they are not overleveraged or outside of their risk comfort zone. At the same time, investors should realize that these types of markets also mean that there are new possibilities that didn’t exist before.

Although recent changes should cause us to analyze the national economic situation and our own, we should not assume that it’s automatically a bad time to buy. One old adage that I hold to is that “time in the market is better than timing the market”. Consistently investing over time is what I plan to do and what I recommend to others as well.