Winter is Coming and Luck Favors the Prepared

Rising mortgage interest rates, a lack of seller inventory and still high home prices have thrown the residential real estate industry and investment strategies into a tailspin.

With the average interest rate on a 30-year mortgage now north of 7% and a growing chorus of economists predicting that we may see double-digit rates in the near future, it is only natural that some have begun to question the logic behind attempting to purchase a home right now for buyers and investors alike.

But the reality is, carefully planned and executed purchases can still make financial sense right now, and best of all, the real opportunities may lie ahead. In fact, the events that are unfolding today may actually be the beginnings of what could become one of the greatest generational wealth-building opportunities of some of our lives. Even now, rents are at at all time highs, and while expected to slow their pace in 2023, are still projected to rise overall, creating potential upside for investors as well.

Winter is Coming

The Pandemic Housing Boom saw home prices skyrocket 43% nationally in just two years. As recently as May of this year, firms like Moody’s Analytics, Goldman Sachs, and Zillow were predicting double-digit home price appreciation through 2022 and into 2023. Fast forward to today, and not only has every major outlet in the country revised their home prices downward, nearly all are now forecasting home price declines ranging from 7% all the way up to 30% in some parts of the country over the next 12 to 24 months. Within the span of just 4 months this year, the Pandemic Housing Boom has turned into what may very well become the Pandemic Housing Bubble.

Much to the chagrin of those who said it wasn’t possible, it is clear now that winter is coming and it’s going to be brutal for the housing market. So obvious has this reality become, even the main stream media is ready to report on the possibility, with CBS news running front page coverage of the stark new reality yesterday.

Despite tight inventory and a strong labor market, the most trusted and historically accurate leading indicators tell a very different story. In fact, we’re already beginning to see the predictions made by these leading indicators play out, with the Case-Shiller Index showing yesterday that home prices cooled at the fastest pace ever recorded in August.

Remember too, that when the Case-Shiller U.S. National Home Price Index was updated with July figures, it posted a reading for July that was 0.24% below it’s June reading. This marked the first month-over-month decline in home prices since 2012.

Some of you may recall that on September 28, 2022, when the July figures were released, I noted:

“While this is a small drop, it confirms what many have come to realize of late: the trajectory is clearly shifting. What’s more, although the June to July decline is small, the story it tells is actually much larger because the Case-Shiller Index is a three-month lagged average. This means that the drop in July was large enough to wipe out all of the gains in May and June.”

Make no mistake, a housing correction is exactly what the Fed wants, and they have made clear that they are willing to subject the nation to such a correction - up to and including a correction that leads to a recession - if doing so helps them reign in inflation.

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Luck Favors the Prepared

Despite all this, there is a silver lining. As the saying goes, “Luck favors the prepared,” and in this case, the prepared stand to take advantage of what may well become one of the greatest generational wealth building opportunities of our lifetimes.

With each passing day, the current mortgage rates exacerbate the pressurized affordability dilemma, which combined with the Fed’s continued commitment to throwing the housing market under the bus in their inflation fight, are setting the housing market up for an absolutely brutal December, January and February. Mortgage demand continues to crater, and is now nearly half of what it was a year ago.

During this time, buyers and investors need to stay on their toes and look for opportunities. So long as interest rates remain at current levels, sellers who have to sell will be forced to drop their list prices and get out. With the housing market already posting the sharpest decline in sales in almost two decades in September, and the Fed indicating that it intends to stay the course on the Fed Funds Rate increases through this year and into next, those who have prepared properly stand to reap massive rewards.

Buyers need to remain patient and not be afraid to submit a lowball offer. Investors might also consider looking into short-term rentals, although this strategy needs to be approached carefully, as this segment has struggled recently and may continue to do so in the future. New construction is already presenting some incredible opportunities and these deals will continue to increase as time goes on.

For potential sellers, the days of multiple cash offers over list price are over. And while sellers may still see cash offers on their homes, with a recession looming, cash buyers a battening down the hatches and looking for deals. But, buyers will be quick to jump on opportunities when rates come down. For sellers that have prepared to list quickly and take advantage of this dip when it comes, a quick sale may still be possible.

The Keys to Success

Buyers looking to take advantage of the opportunities that lie ahead need to be taking certain steps in order to make sure that they are in the best position possible when the time arrives. This includes:

• Connecting with a local lender as soon as possible who can keep you updated on where rates are headed, when you should consider locking rates, and available loan products

• Hiring a highly competent buyer agent with access to a broad network of professionals and with a highly developed ability to negotiate. Only buyers who are working with the best buyer agents will strike gold here, so this is not the time to give your cousin’s friend who did two deals five towns over last year a chance to make some money.

• Increasing savings and reducing debt to the greatest extent possible to ensure you have ready access to funds and the lowest debt-to-income ratio possible.

Sellers too, should be making their own preparations. This includes:

• Hiring a highly competent listing agent with a deep understanding of market trends and ability to price homes effectively.

• Completing any and all outstanding maintenance items to minimize roadblocks and delays when the time comes to list your property for sale.