Some buyers are Still Waiting for a Drop in Prices a Decade After the Recession
Some cautious prospective home buyers have embraced a strategy of waiting for a major price drop in real estate prices before entering the market. They recall the crash in home prices during the Great Recession of 2007/8, and calculate that if another dramatic fall in prices occurs, they could then swoop in and “steal” a property at a deeply discounted price, then sit back and as their newly purchased home appreciates handsomely in value over the ensuing years.
But this strategy is deeply flawed. To begin with, if the economy takes a severe downturn (real estate prices would fall significantly as a result), there is an excellent chance that your own income would be seriously affected. Economic downturns are always accompanied by layoffs, business bankruptcies – in short, high unemployment and less income for most people. If, for example, the company you work for received less orders, the number of hours you are asked to work could be lowered - or worse, your very employment could be threatened. Even if you work for the government, layoffs are common in the public sector during recessions. Therefore, waiting for a faltering economy to jump into the real estate market is a risky proposition.
Secondly, the current state of the economy is very strong: historically low unemployment, healthy GDP growth, rising wages, and a soaring stock market. Additionally (and very importantly) mortgage rates are at or near historic lows. According to NerdWallet, the average rate today (7/22/19) for a 30-year fixed average mortgage stands at about 4%. And the Federal Reserve has strongly signaled that they are planning to cut the prime rate at their monthly meeting at the end of July. It is therefore very likely that by the time you read this article, mortgage rates will be even lower.
Another factor to bear in mind is that the underlying cause of the Great Recession was the loose credit standards banks offered both residential and commercial real estate buyers. But congressional legislation to curtail irresponsible lending standards (subprime loans) have since been enacted to avoid another 2007/8 scenario. As a result, today, fewer homeowners are defaulting on their mortgages.
But for a prospective homebuyer with a descent credit rating, an average income, or the ability to deposit the amount required, a mortgage is well within reach in today’s market.
Another factor which should put buyers at ease is that according to an analysis by the Urban Institute, the overwhelming majority of buyers today are folks who plan to live in their home, rather than speculators/home flippers which also contributed to what became known as the Wild West real estate market of 2007/8, and the recession which followed. Today’s state of affairs is that price growth is organic, as opposed to artificial bubbles created by speculators.
Further, although there was an increase in housing starts in April, the Mortgage Bankers Association (MBA) reports there is still a shortage of single-family homes. According to Joel Kan, associate vice president at MBA, “We’re about 300,000 to 330,000 units short.” This indicates that price appreciation should continue. In short, we do not have a problem in oversupply, which would depress market price. Kan predicts price growth of 3-4% in 2019/20.
In this regard, Forbes reports that nationally prices are up 3.7% this year on an annualized basis. And the same article states: “Across the nation, home buyers are benefitting from lower-than-anticipated mortgage rates, rising wages, …” and that “ … rising demand against limited inventory of homes for sale means acceleration in house price appreciation may be on the horizon.
And the most recent Home Price Index Forecast from CoreLogic predicts a 5.6% uptick in home prices by May 2020.
The statistics and trends are uniform in that “a wait for the crash strategy” is not the wise path forward.