2016 1Q Market Update - The timing of the drop is most important

Buying now, will you make it or get lumped?

This past week, the Fed floated the idea that negative interest rates is a tool at their disposal.  In response, rates tumbled and this presents a case for accelerated home price appreciation.  Or does it?

First, one of the Fed's tools is actually talking markets off of a cliff from economic bad news like falling oil prices and the idea that rates would rise amid a stagnant and weak economy.  Just because they said it, it doesn’t mean it will happen.  Actually, since the government didn’t explore this option during the 2007 and 2008 collapse, which means it will likely just remain a tool only used to talk about and not deploy. 

Chart of the 10 year treasury, underlying instrument for mortgage interest rates

Given where we stand with respect to home prices and looking forward, how will continued low rates affect the housing market in 2016?  There is an inverse relationship with interest rates and home prices.  So, if a buyer makes $10,000 a month and can afford up to a $4,000 first mortgage, if rates are 5%, that borrower can afford a $745,000 home, whereas if interest rates are 3%, they can afford $950,000.  So if rates drop, then everyone can afford more and supply and demand does its work to ensure prices rise.   Just as rates looked to be breaking out, they dipped back down in the face of a weak economy. 

So, off to the races, right?  Not so fast in my opinion.  While I believe that gains will be had, they will likely be tempered in the face of weak consumer confidence.  The stock market looks to be entering bear territory, we are in an election year, which is traditionally tougher for home price gains as people take a wait and see approach and the spectre of stagflation looms on the horizon. I believe that even as rates remain low, buyers have become tired and rising prices have forced many buyers out of the market and into increasingly expensive rentals.  The only thing keeping our current market one that favors sellers is the fact that inventory has remained so low that all buyers are making bids on the same few properties.  I predict that this year will be the year that inventory will pick up considerably going into the summer and that sellers who take advantage of current conditions will likely be the sellers that can sell at the best pricing of the year.

So, what to do?  Well, to be sure, investors need to be much more picky entering 2016.  While the best working play over the last few years has been to swoop in, buy anything and make money will no longer hold true.  Much more patience and uncovering true opportunity is the play.  If you are looking to buy your first home and have several years, you’ll have plenty of time to watch this play out and those who are looking to move up (sell their current home to buy another) won’t really be affected as they will play the role of both buyer and seller with limited net effect.  Sellers who own investment property – if you’ve been thinking about selling, now is the time.  Don’t second guess yourself, take advantage of the time to sell right now and drop in without looking back.  In my opinion, you’ll be glad you did and we can buy another home in a few years at pricing that is far more advantageous.

Let's examine your personal situation and discuss how these changing market conditions impacts your real estate goals going forward.