Are the Lights Going Down on Real Estate?
You know what's on a lot of my clients' minds right now? No, not Journey of the the 1970's, but the real estate downturn of 2007/2008. Many of these prospective buyers are getting a sense that maybe this is the top of the market and that perhaps they should sit things out and wait for real estate to go on sale --- just like it did during the downturn. I have some advice for them, but it has little to do with market prognostication. In fact, I'll be the first one to admit that my predictions aren't any better than the next guy's --- even if I am a better writer than him.
The Frontiers of Your Pre-Approval
Any decision to buy a home should have less to do with gambling on the direction of the housing market and more to do with three key aspects of your own financial profile:
- How much can you afford for a housing payment each month?
- How much do you have available to put down?
- How long do you see yourself in the home?
The first two are more finite (er, have less to do with Infinity...), but the last one does involve some guessing. I'll make it easier for you though. If you can't see yourself in any home or any geographical area for more than at least five years, buying a home gets exponentially more risky because you may not have the time to outlast market cycles. That notwithstanding, understanding these three personal finance attributes relative to the alternative, which for most means renting, is the KEY to getting a realistic grasp on whether or not you can advance to making predictions about home values, interest rates, etc. By modeling boundaries of all of these aspects, you can really get a sense of whether home ownership is a good fit and you can largely remove the emotion from the analysis. For now, this is a good thing. There will be time for emotion later, like when you start visiting open houses.
Escape from Your Fears About Another Recession
It's time to ditch the idea that we're going to see another 2008-style real estate crash. The circumstances that preceded that time and event simply do not exist today. Back in the run up, highly unqualified buyers got a seat at the table with everyone else, by way of stated income loans and zero down programs with artificially low payments. The mettle of these owners was tested when the easy money dried up and the home values went down. Predictably, many of them walked and by doing so, dumped a glut of property onto an already over-stressed market. Take comfort in the fact that over the last decade, buyers have had to practically give blood to get a mortgage and even when they did, they competed against all-cash buyers for the very same dearth of homes. These folks have a whole lotta skin in the game and it will take many more torpedoes to get them to abandon ship should we start to see home values retrace.
One last thing before we go our separate ways. What I saw happen in 2008 through 2012, when prices did go down, was the opposite of what our too-smart-for-himself borrower might be thinking after reading the above and essentially shrugging it off. When prices declined, buyers stopped buying. Instead of trying to predict the top, they shifted and tried to predict the bottom and more often than not, missed on both occasions. So, control what you can control and focus on your status and not the market's. Those who have historically purchased when they had to and could have fared far better, supported by observation over my career, than those who waited and then never did. The lights are not going down on real estate, but the wheel in the real estate sky keeps on turning and buyers will need to make adjustments too. You might even say this is an Evolution.
Send her my love,
Robert J. Spinosa
Vice President of Mortgage Lending
Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709
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