The insane market of 2021 explained

Today I want to talk about the current real estate market because, well, it’s a little crazy, and there is a LOT to discuss.

I can’t tell you the number of times that people have asked me to predict what is going to happen with this market, which I always try to explain as best as I can, but the underlying question that everyone seems to want to know is: when are prices going to fall?

I hear a lot of talk about a bubble, the coming crash, how these prices can’t be sustainable, how if you buy now you’re buying at the top of the market and you’re destined to lose, how it can’t be possible to have 30, 40, 50 offers on a home.

Well, I’m going to give you some statistics and facts, and then a few of my own opinions as to what I see happening in this market as someone whose job it is to stay on top of all of this and advise my clients accordingly.

I think it would be really useful to do this comparison with some of the data from the 2008/2009 real estate market, and compare that to what we are seeing today, so I’m going to do that throughout this discussion.

One of the ways we evaluate a market is a data figure called months of supply. All this means is that in theory, if every single person just stopped putting their house on the market right now, how long would it take for all of the buyers who are currently out there looking to buy to purchase everything? Well in 2008, that number vacillated depending on the month and area of the country, between 9 and 13 months of supply. So in many cases, it would still take an entire year for everyone who wants to buy a house to buy a house.

Contrast that with what we are seeing right now, the national average is a little over one month and in many places in Los Angeles that number is less than one month. What does that mean? We have a major major lack of supply. If we remember back to Econ 101, if supply is low and demand is high, we get higher prices.

Ok, let’s take a look at another figure, one we keep talking about: interest rates. We’ve said interest rates are at historic lows, but what were they really compared to 2008? Well, back then, interest rates hovered between 6 and 6.5%. Right now, they hover about 3%, with a point last year where they were definitely below that. The Fed has expressed that it will keep interest rates low through 2022, so what do these low interest rates actually mean for this market?

Well, with the median home price in Los Angeles breaking the 700,000 mark, lets use that number as an example. At today’s interest rates, that mortgage amount at 3% is $2,783. Hey not too shabby right? Well how about at 6%? Try $3,957. Yep, that same house today costs you $1,174 per month less to own. How crazy is that? That’s a massive difference

That’s why when we talk about interest rates, we talk about that in terms of purchasing power. Because at the end of the day, unless you’re paying cash, you have a mortgage on the home and you have a monthly payment associated with that mortgage. Prices themselves aren’t nearly as relevant to a home buyer, what they actually need to know is what is the monthly payment at the interest rate they qualify for at a given price and can they afford that? Right now, purchasing power is very very strong.

How about how easy it is to actually secure that funding? Well, I was not an agent in 2008, but I’ve done plenty of reading on the subject, as well as watched The Big Short (which is an excellent movie by the way, highly recommended). Back then there were reports of little to no income verification, no credit reports, very little if not zero money down, and appraisers that got kickbacks for appraising homes at whatever price was asked of them.

Now? Well if you’ve bought a home recently, you know the process is intense. They do multiple checks for income and asset verification, including right before closing date. There are now laws preventing lenders from even speaking to appraisers so that they are a completely independent verification of value. Finally, though we are seeing lower down payment requirements than 20%, there is intense scrutiny of funds and credit scores.

Basically, you can’t get a loan anymore if you really can’t afford it. New loan applications are at an all time high and lenders simply aren’t lending unless you’re very well qualified.

Because of many of these changes after 2008, there is a far greater amount of equity that homeowners have in their homes, which is a very good thing. Right now, in the United States, the average homeowner has 50% equity in their home, and I think I remember the number being 80 something percent have more than 30% equity in their home, basically, a really high number of people have a good chunk of money invested in their homes.

What this significant amount of equity means is that if things go sideways, homeowners have a lot of options. Either they can enter mortgage forbearance where they get the missed payments tacked on to the end of the mortgage period and re-amortized over 30 years. Or they could simply refinance, pull out equity at the new higher price valuations. Or finally, if they’re really stuck, they just sell instead of being foreclosed on, and they can take advantage of the high prices while getting to keep a good amount of that money.

These are the reasons why we won’t see a wave of foreclosures, so sadly, if you’re waiting for that to happen, it’s just simply not going to.

Finally, let’s talk about the big elephant in the room: inflation. Inflation is always a concern, it seems to be on the mind of anyone talking about fiscal policy in the past few years, and it should be: the United States is printing money to fund multiple major rounds of economic stimulus. And when there is more money in circulation, the value of that money goes down, and thus, prices go up. It’s why stagnant cash is not a great thing because by doing nothing it inherently loses value, usually to the tune of around 2% per year.

But you might think this is a problem. Yes, and no. It has impacts for a wide variety of economic factors, and yes, rampant inflation is not great, but controlled inflation, predictable inflation is simply a part of monetary policy. It happens, and because of this, the prices of all things, not just houses, goes up.

If that sounds confusing, all you need to know is that inflation is independent of the real estate market when it comes to judging the health of the market, but real estate is not immune to the effects of inflation.

Ok, you still with me? That’s a lot to digest there, a lot of moving parts happening, but let me try to summarize. This market has high prices due to low supply, low interest rates, and inflation. We won’t see a crash or foreclosures due to the large amount of equity in current homeowners. So then, what do I think will actually happen?

Well, I do think more supply is coming on the market. Vaccines are rolling out at an impressive rate, and the economic news looks good for this year overall which means anyone that has been waiting to sell due to some kind of uncertainty about the future...well, it’s a lot more certain right now than a year ago.

Second I do see prices plateauing and then eventually returning to their more normal 3 to 5% increase per year, not the double digit that we’ve been seeing in the recent years. It simply cannot continue to propel upwards this fast forever, so an easing is definitely in the future.

But! Notice I didn’t say drop. I don’t see anything in the economics that a drop in prices is on the 5 year or less horizon. Longer than that, no one can predict, but in the near term, I don’t see any crash or really any drop at all.

For example, the property that I sold recently got 15 offers. That means 14 other people have to go back out there and keep trying. At entry level price points, I’ve competed most recently against 36 offers. That means 35 people, my buyers included, have to get back out there and keep looking. Los Angeles specifically just does not have that kind of supply, and as long as demand is there, prices will continue to rise.

So, what advice do I have? Look, we should start out by saying the best time to buy or sell is the best time for YOU personally. No one should be trying to time the market, you should be working on your own time frame that aligns with your housing and financial goals.

If you’re someone who has considered selling because you’re looking to make a move, downsize, or retire, now is a fantastic time to sell your home. The pent up demand means there are many many buyers willing to compete to purchase your home.

If you’re a buyer, you need to recognize that things are tough out there right now. You need to be prepared by having all of your documents up to date, everything locked and loaded so you can see properties quickly and make offers efficiently. Most good homes are getting all of their showing slots booked within days of going on the market, and they’ll be showing for maybe four days before all offers are due. That’s it. So it's definitely very fast. Speed is key, so working with someone who can keep you updated to the minute is very important.

Also, you need to know that almost everything is receiving multiple offers, going over the asking price, and sometimes even removing the appraisal and loan contingencies. This is the new normal for the time being, so if you want to play ball, you need to realize what the competition is.

That being said, if you’re really on the fence about buying, I can’t say now is the right time. The market is just too hot for someone who kind of thinks that maybe they might want to buy their first home. But if you’re serious and you’re prepared, this market is still going to work for you in the long term and it will be a far better option than staying on the sidelines, paying rent, watching home prices continue to go up and up.

Whew! That was a lot. Thank you for watching, I hope you learned something, and if you did be sure to like and subscribe, and if you found this valuable, I’d incredibly appreciate you sharing this video with someone that could benefit by connecting with me. It’s super simple, and on my website there’s a button to Book A Consultation that connects directly to my calendar.

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