Last month, the National Association of Realtors published their most recent data on existing home sales. Unfortunately, October saw the ninth straight month of declines with sales of previously owned homes falling 5.9% from the prior month. The rise in mortgage rates, which significantly increase the cost of home ownership, was likely the biggest catalyst. Back-to-back months of declining sales bring back bad memories of the housing crisis in 2008… but there are several important reasons why this is unlikely to be the case today.
As a licensed real estate agent and investor in dozens of multi-family properties across the U.S., we are witnessing firsthand the impact on owners and their agents. First, while we are seeing a softening in the valuation of properties in both commercial and residential real estate, we are in a much different place than the 2008 housing crash. Several important regulations came out of that crisis, which changed the rules for lenders, forced banks to have more stringent underwriting, and perhaps most importantly, required borrowers to demonstrate a stronger financial picture. As a result, the mortgages being issued since then are much more sound. Plus, on average, owners have much more equity in their properties.
This is important to remember because the profile of who is selling now is vastly different. We are not likely to see the emergency “fire sales” that we once saw, which artificially drove down prices even further because owners were underwater – where the property was worth less than what they owed on it. Fewer sales in our current case are due to the fact that if people don’t need to move, they won’t.
Which brings us to our second point. The main factor driving a decrease in sales comes down to simple math. With the meteoric rise in interest rates, the cost of homeownership has increased, which pushes some buyers out of the market. This creates less demand, which in turn means there is more supply – and lower prices. These lower prices mean that homeowners who otherwise would have sold to make the return they envisioned will now hold off. Many prospective buyers would need to secure a much lower purchase price to make up for the difference in mortgage rates – and the fact is, owners just don’t want to discount to that level. So, the result is a decrease in prices and ultimately fewer sales.
Lastly, a change in prices only matters when it comes time to sell. I’m reminded for example of my first experience in real estate – before I became an agent or even an investor and entrepreneur. In 2008, I saw the value of my apartment sink back down to around the price I had purchased it for. I wasn’t “underwater”, but I certainly was sad to lose all the appreciation on it.
When I had purchased it, my father told me something that I don’t think I truly understood until 2008. He said, “you never lose money in real estate if you never have to sell.” It’s very simple, yet profound. The value of the property doesn’t matter while you own it. It only matters when you go to sell it. And as long as I made the mortgage payment, I didn’t need to sell.
Real estate, like the rest of the economy, moves in cycles. While many owners may want to sell when the market is depressed, it’s critical to be able to wait until the market is back up again. It’s certain that the markets will always go up, just as they always go down. The variables are how far up or down they go and the timing of those cycles. Predicting those variables? That’s something even the best and brightest get wrong. So, you need to be able to carry the costs if necessary, and wait for better market conditions.
While it sounds simple, this is likely the mindset that many owners have right now. The economy, at least as of now, is in a better position than it was in 2008-2009 and many owners want to get the value for their property they expect. And if they can’t get that now, they’re going to wait. Unfortunately, this means fewer sales to work with for now… but there are lots of factors to consider, many of which will continue to change in the weeks and months ahead.