Another good question would be: How can I continue buying houses right now even though the interest rate is so high? 2023 is now half-gone and we find ourselves in the midst of another unusual cycle in the market. The Fed continues to raise interest rates and will keep on doing do, knowing it takes us to the brink of a housing crash. I’m not lamenting this. After all, yes, we are in a bubble. And if you are a person looking back to the glory days of 2017, saying “I should have bought more then.” Well, my friend, this is the post for you.
It’s a bubble. A nasty, stinking, putrid bubble. One that is full of the detritus left behind by easy pandemic money, easy pandemic loans, and the ever-present desire for bigger and better housing. This filthy bubble grows ever bigger and my bold prediction is that within 18 months it will pop, spraying its disgusting contents on anyone near enough.
How Exactly Is This a Bubble?
The bubble refers to housing prices. And how they are much inflated from the true value of the houses. Interest rates started dropping in 2018, just as a virus was discovered in China. As 2019 rolled around, concern of an economic collapse was entering the minds of rulers around the world. National banks began to lower interest rates in an effort to keep economies afloat. Add to that that people desired to live away from others, and more continued to buy.
Low interest rates was a stimulant to the economy, like methamphetamines, which give a quick high, more and more was needed. Rates continued to be decreased. Cheap interest rates meant that buyers could have the same monthly payment though they paid more for a house, and sellers got wise to this. Prices increased. Pandemic relief checks started coming in, giving many help with their down payments. Demand increased, driving prices ever higher. Now, the Fed has changed course and increased rates almost 4 percentage points over the last 18 months, with more increases looming. Small houses are priced at what large houses were five years ago.
Why are values still high even though rates are high?
This is the paradox we are finding ourselves in now. It’s all supply and demand and right now we have little supply. People aren’t selling. They can’t find a replacement house because the rates are so high. Those few sellers are still able to charge inflated prices. That’s the fallout from all the low rates and help we gave during the pandemic. Again, not criticizing it but when regulators look back, this will be a case study. These people are stuck in their houses now. They effectively cut off supply.
Who is at Risk?
- Anyone who bought a house from late 2018 to today. These are the people who enjoy a great interest rate. They have very little equity in their houses. They probably bought something bigger than they needed because they could afford it at the time. These people will be hunkering down right now, clinging to their jobs, because without their job, they will need to downsize. But there is nothing to downsize to, because everything is too expensive. These owners are likely not doing necessary repairs and will be looking to sell when the rates go down. That’ll cause a huge bump in supply, and prices will crash.
- Anyone who bought an office building between 2018-2020. We all know how working from home has affected the office sector. I don’t think it’s as bad as they are predicting, which is why I’m buying office right now. Previously, buyers paid top dollar and suddenly the bottom fell out. Everyone is scared about ‘work-from-home’ and top-dollar buyers are losing their pants right now in vacancies.
- Multifamily investors who used other peoples’ money. These are principals of syndications, usually. They paid top-dollar, buying on the promise of value-add by raising rents. Now, rents are stagnating and those without a backup plan are not able to cover their huge monthly mortgages.
- Multifamily investors using other peoples’ money, who bought 5 years ago and had no clear exit strategy. The mortgages for these guys are coming to term right now. They won’t be able to pay the huge monthly payments of their mortgages and will be forced to sell.
Who Are the Winners?
- Anyone who refinanced their current house in 2019. These smart people could be enjoying interest rates in the 1% range. They will never move. Of course, this isn’t great for the economy.
- Anyone in office space who can hold out for 5 years. That’s when we realize we are social people and need the office. This is my crystal ball prediction. Remind me in 5 years if I was right or not.
- Those multifamily syndicators who invested conservatively with multiple backup plans. They will be able to continue though rents are flat. I will brazenly tell you I belong to this group, but keep watching to find out if I’m right.
- Those who sold their single family properties in 2019. I can happily claim to be one of these. I sold my last single family house for a nearly 200% ROI 3 months before the first interest rate hike. I’m not prescient – I just wanted to go all-in on multifamily.
How Do I Know When It’ll Pop?
It’s all about jobs right now. Amazingly our economy has continued to grow despite rate increases. This will embolden the Fed to continue raising rates. Those people hunkering down in their houses will eventually need to retire, or get fired, or have a family event. Look to the jobs market. When unemployment starts to rise sharply, look for a crash in housing to follow.
Don’t ever stop buying. The market doesn’t dictate whether you should buy or not. You do. And your super power is that you continue to increase your knowledge and expertise with every year. Good deals come in any market, and you still have to be a shrewd buyer. The way to continue investing right now is to pay the right amount, taking account for the high mortgage. Remember: When is the best time to plant a tree or invest in real estate? 30 years ago. The second best time is now.