Friday, August 26, 2022

Top of the Market? What now?

It seems we are at or near the top of the local real estate market. The big question is whether we have a soft landing or a strong correction. I see strong demand in place and we remain tight on inventory although not nearly as tight as it was in the first quarter of this year. I still feel like we are in for a soft and gentle landing with prices remaining flat or maybe just dipping a bit. Of course, a major economic shift for better or worse could change that dramatically.

For buyers and sellers of real estate the top of the market is a blessing and a curse. For first time buyers it can be a little scary especially for those that recall the last major correction back in 2009-2012. First time buyers that used low down loans for homes in 2007 and 2008 found themselves upside down for several years during the 'Great Recession' that began at the end of 2008. This market is a little better than that largely due to strong regulatory changes that were made in response to the crash of '09. Loan portfolios are in much stronger shape today than they were leading up to the '08 banking crisis. First time home buyers using low down loans should always plan on staying put in their new house for at least three years anyway, regardless of market conditions. If there is a dip in property values three years is usually enough time to recover the loss except in the most extreme circumstances such as those we faced a dozen years ago.

For those selling a house and buying another this can be a great opportunity. Take the empty nester with the larger home that is either free and clear or nearly paid off: If there is a price correction they will benefit by selling their current home at the top of the market and paying cash or mostly cash for the new home. If the market corrects negatively, they are still in fine shape. For those looking to move up or down that are in a house with a substantial mortgage, the top is the perfect time to sell. Here's why: Say a homeowner, I'll call her Jill, has a home currently valued at $700,000 with a $400,000 mortgage. She has $300,000 in equity and upon sale will walk away with roughly $250,000 in cold hard cash. Now Jill is in a strong bidding position to purchase her next home, whether it is a move up home or a downsizing home. She will be coming in with 30-50% cash down on a conventional loan. Say Jill is downsizing into a smaller home priced at $500,000. She will be able to get into her new home with a much smaller mortgage and likely have payments that are substantially lower. With 50% cash down, she is strong even in multiple offer scenarios, which are becoming less common these days. Now, what if Jill waits. Let's say there is a major correction in the market. She then either gets stuck where she is at, or decides to sell at a reduced price, let's say $500,000. So now Jill only nets about 80,000 in cash to put down. Of course the new property may only be $400,000. In this scenario Jill is moving from a step up house into an entry level house. The market tends to hit the upper price range homes harder than the lower price range homes, because demand for houses near the bottom of the price range is always higher even in contracting markets. Jill can still do a 20% conventional loan but now she has a $320,000 mortgage instead of a $250,000 mortgage she would have had selling now. If she had less equity then she might have to use a more expensive loan with mortgage insurance and that can make the move less desirable or maybe even kill the whole notion.

For the majority of sellers this is a great time to sell the market is not crazy like it was a few months ago, so the fear that sellers had before; "Where will I go, how will I find a new house if I sell..." is more or less gone. Sellers right now gain the advantage of a near top of the market price for their current home and maximum equity to use on the next house which will likely have flat or slightly declining values the latter placing them in an even stronger position.

Contact Rod Sager for an in home evaluation of your property.

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