High interest rates, declining property values, war, and supply chain issues are all over the news. Aside from the fact the U.S. economy still hasn’t slipped into a deep recession like many analysts predicted, there isn’t much good news to find about the economy or the housing market.
So should real estate investors be buying deals in 2023? In this blog, I’m going to demonstrate why not only is it a great time to be a buyer, but why this may be the best buying opportunity we’ll see for years to come.
The most important factor to consider is the lack of competition. According to Goldman Sachs, 99% of property owners have a lower interest rate on their loan than the current market rate. This has led many property owners to hold off selling, since they would end up buying at a higher price and much higher interest rate. With fewer people selling, you have fewer people buying properties to place their capital.
Additionally, as with all market declines, people are worried about where the economy will go, whether or not they will still have their job in the next year, and are generally hoarding the cash they do have so they can weather any storms ahead.
All of this has led to a dramatic decline in competition for properties listed for sale. Just 18 months ago, you could expect 10 or more offers to compete against, with most homes selling for well over the asking price. Today, the opposite is true, with many homes selling for at or below asking.
This means the buyer has all of the leverage in today’s market, which presents opportunities in the form of lower pricing and seller financing. I was able to secure my most recent acquisition in San Diego for $150,000 below asking price and with 80% seller financing at a lower rate than what the banks were offering. This almost certainly would not have been possible 18 months ago.
Low Inventory Across the Nation
According to Goldman Sachs, the United States is still short 6.5 million homes, and high interest rates are expected to slow down the development of new homes. By most estimates, it could take up to a decade for the U.S. to increase the housing supply to meet demand.
The supply problem isn’t getting solved anytime soon. The basic principles of supply and demand tell us that real estate prices are likely to be on the rise again once the threat of a recession passes. I recommend investors focus on markets with increasing populations and a limited supply.
Historically, when interest rates decline there has been an associated increase in home values. This is due to the fact that buyers qualify for higher property values since the the monthly payments are lower, making it easier to qualify their debt-to-income ratio. It’s unknown when interest rates will come back down, but when they do, you want to be a property owner benefiting from the rising property values.
A Golden Opportunity
Down cycles in the market are always the best time to buy at lower pricing. We only see these opportunities every decade or so, so the opportunity to capitalize on the market is now. With the lack of supply in housing, it’s unlikely that we will see depressed pricing very often over the next decade.
I’ll end this blog with my favorite quote from Warren Bufffet: “When others are greedy, be fearful. When others are fearful, be greedy.” Now is the time to be greedy.
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