Suppose you're thinking of buying a house, but you're hearing a lot of scary things about the current market.
Maybe you're afraid that if you don't buy now, prices will keep going up and you'll miss your chance.
Or maybe you're worried that if you do buy now, the bubble might burst and you'll lose all your money.
Whatever the reason, here are four concerns I have about the real estate market right now.
- Interest Rates
- Home builder's confidence
- Investors are going to ramp up buying
- Mortgages are going to be harder to qualify for
And before I get too far into this, I don't want to forget: You can head to KatherineandDarin.com or look for our podcast, wherever you listen to podcasts, the name of the podcast is Real Estate, Money and Marriage.
Katherine and I did a podcast on these four things that concern me about the real estate market. And she reacts, she gives me her feedback and adds her ideas and insights and experience to it. So go check that out KatherineandDarin.com or listen to it or wherever you listen to podcasts.
4 Concerns About This Current Real Estate Market
1. Mortgage Interest Rates
The number one thing that concerns me is mortgage interest rates. And the reason why interest rates concern me is not necessarily about home affordability. But what we are hearing from, what we see from other real estate agents out there, maybe you've seen this in your social media feeds. Agents are telling buyers to buy now and then refi later. I think the mantra, the saying that they're coming up with is "Marry the house and date the rate" and things that rhyme are great.
We know Johnny Cochran used that famously in the OJ trial. Remember these words, “If it doesn't fit, you must acquit.” So obviously when things rhyme, it must be true.
In this case, my biggest concern about this idea, this advice is that if you're actually expecting that the rate will go down and it doesn't and you bought and the rate doesn't go down. Maybe you overextended yourself. You took out the max mortgage thinking like, Hey, I'm going to be able to make this up early next year because that's what my agent told me, maybe that's even what my mortgage lender told me.
As we head into more inflation, into recession, how secure are you really? If you're maxed out and inflation keeps climbing or recession hits us a little bit harder, how much job security do you have? It just concerns me that we're giving that advice in this industry then maybe it's not going to actually end up happening.
The second part of that is if you do postpone buying, you hope that rates will come down.
What happens if they don't?
Historically, what we know is that rates look like this.
If you go back to the early 1980’s, you're gonna see that interest rates were at 18%. Historically, even right now, we're still low. Mortgage rates are still historically low.
So I'm just not sure when we look at a chart like this, what makes us think that this is the new normal? That interest rates should be under 4% moving forward, always?
You can see that rates, even through this climb in the real estate market in that early two thousands, and then what led to the housing market crash and the great recession. Interest rates were sitting around 6%, 7% even. They dipped down into the fives a little bit here, but basically they're sitting around 6%, 7%. So when we're sitting around high 5%, 6% right now, that's still a point below. Why do we think that mortgage rates are necessarily going to come down when historically we are already low.
2. Home Builders Confidence
Number two thing that concerns me is home builder's confidence. The reason why this concerns me is, if people are renting, if they're postponing their buying process because they're waiting for rates to come down, or it just feels too expensive to them right now, home builders are going to stop building homes, which doesn't solve a lot of problems for us.
So if we look at this article from the National Association of Home Builders, we can see that builder confidence posted its seventh straight monthly decline in July falling 12 points to 55. This mark is the lowest HMI reading since May 2020 and the largest single month drop in the history of the HMI, except for the 42-point drop in April of 2020.
Now, just remember what was happening in April of 2020. That is right after all the lockdowns happened. So no one really knew what was gonna happen.
In Washington, for example, builders were told they were non-essential, so they couldn't even build homes. Why would they have a lot of confidence in their product that people are gonna buy when they can't even build the homes?
If builders don't feel good about what's happening, they're gonna stop building homes because buyers aren't taking advantage of the market right now.
But here's what we know: there's a shortage of homes.
So in this article, we can look at by one estimate the U.S. is more than 3 million homes short of the demand from would-be homebuyers. And here's another article that says that America is short more than 5 million homes, and builders can’t make up the difference.
So whether it's 3 million, 5 million homes, that still a lot of homes.
And if buyers aren't buying, then builders decide "we're not going to build,” we still have an inventory problem. That's a great concern of mine with whatever is happening.
If you're just renting or you're moving back in with family, or you're moving in with friends and you're thinking well, “I'm gonna wait.” That doesn't solve the inventory problem. We still are 3 to 5 million homes short and if builders decide we're not gonna build, I don't know how that problem gets solved.
3. Investors Are Going To Ramp Up The Buying
The number three thing that greatly concerns me about this market right now is investors are going to ramp up the buying. If they see that homes are sitting on the market, that buyers, especially first time buyers aren't getting in because a lot of investors and first time home buyers are competing for that lower end of the market, investors are gonna ramp up their buying.
They're going to see that there are deals. They're going see there's price reductions. They're going to see that they’ll be able to negotiate with these sellers and take advantage of this.
If the buyers of single family homes, if first time home buyers aren't going to get in there, then the investors are gonna get in there.
So what's waiting for you when you decide to jump into the market, it's just more investors have bought up the market and it hasn't allowed it to fall down as much as maybe you're hoping that it's gonna fall down.
4. Mortgages Are Gonna Be Harder To Qualify For
And then the fourth thing that concerns me about this real estate market is that mortgages are gonna be harder to qualify for.
Here's why that's a real problem. The Fed, I don't wanna get too much into this, the technical aspect but there's a thing called Mortgage-Backed Securities, where you go into your lender, you borrow some money, and then they sell that mortgage out to someone else. The Fed, the government, was one of the biggest buyers of those.
They have bought over a trillion dollars of mortgages over the last 10 years and right now the Fed is no longer directly supporting the mortgage market by purchasing Mortgage-Backed Securities, which helps to keep that market liquid.
Which means that a mortgage company, a mortgage broker, a bank, your credit union, when they give you money to buy a home, before, they could probably count on selling that mortgage probably to the government and they would set the standard.
The government, the people that are buying that mortgage, they would set the standard for qualifying for a mortgage.
The banks now have to keep those mortgages themselves. Most likely that's what they're setting themselves up for. And that's why we see mortgage rates increasing. The mortgage rate has nothing to do with this federal interest rate. It has to do with this Mortgage-Backed Security right here.
Once the Fed got out of this, that's why you see the mortgage interest rates rising because it's a risk/reward thing. If the bank has to keep the mortgage and they're afraid they can't unload it and you might default on it, they want to make sure they're getting paid the maximum amount they can get paid for it. So they increase the rates, maybe closing costs.
So those four things, the interest rates, home builders' confidence, investors ramping up what they're doing, and then mortgages being just harder to qualify, concern me about what's going on with this real estate market.
And like I said, Katherine and I did a podcast on this, where we go a little bit deeper into it. She adds her thoughts and gives me some feedback on what I'm thinking here and we just go deeper into this content. So you can listen to that on KatherineandDarin.com or listen to it wherever you find podcasts. The name of our podcast is Real Estate, Money and Marriage.
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