We recently saw a strange pattern in the market. Houses are selling for significantly more than the asking price. We started asking…
What exactly is happening with the market and how will the pandemic trickle down to affect the real estate market in the future?
The Current Situation:
The market seems great right? Over in the 7 Figure Flipping Mastermind, we are both excited about the ‘bonus’ profit, and asking some very real questions. The market feels a little heated and inflated. Which prompts us to ask ‘how do you save yourself from the possibility of an overinflated bubble that feels like it’s waiting to pop?’
We ran our concerns by expert Terry Burger and he shared with us the data he is running to make market predictions. Terry says he combines data with human feelings. He gets a feel for not only the numbers but what people are currently going through, or the ‘pulse’ of collective emotion.
Terry is using market data and comps from 2018 and 2019 to make predictions.
There are 3 Major Factors to look at.
If houses are selling for 10-30% over the usual asking price you have to watch that inflation because it affects interest rates. For example if you can only afford a set monthly payment based on your income and if the interest rate on a $400,000 dollar house goes from 3% to 4% it decreases the price a buyer can spend on a house to get the same monthly mortgage rate, to about $355,000.
If higher interest rates become a trend, it starts to take out higher price points and you have to consider how that will trickle down. Those buyers are getting approved for more money because interest rates are so low, but when interest rates rise those numbers will drop and affect the market.
We are in the middle of a pandemic which would make you think it’s not a great time to sell your house. Has there been low inventory? We missed a summer selling season in 2020 at the start of the pandemic. Yet we are making up for lost time with record inventory. There is a pattern or a natural heartbeat to most yearly sale cycles. There is always one peak month in the market and it is usually June. In 2020 there were four solid months that came in higher than the highest peak of the last 5 years.
In November of 2020 we had almost 500,000 houses coming on the market at a time when it is usually the bottom of the season and it didn’t decrease in December. This is all odd considering you would think mid pandemic is a tricky time to sell a house and we expected numbers to go down. We had an increase of 70,000 houses on the market.
The thing to watch is the number of new listings coming on the market in 2021 and 2022.
We are going to be watching for inventory starting to stack because people want a piece of this action. People need to sell their houses regardless of whether or not it is a pandemic. Once we all begin to feel life is relatively ‘back to normal’ and people who were holding back put their houses on the market there will be even more inventory. Currently we are not seeing that because people want to buy right now. The demand is higher than the supply at the moment.
The catalyst becomes ‘When does the demand start dropping?’
The tipping point in the market can send us going in the other direction based on any one of many factors. We don’t however feel like this will happen fast so we have the opportunity to keep an eye on the market and prepare.
Change In Government COVID Financial Aid:
It will be interesting to see what happens when the government stops printing money and giving it away. People are not incentivized to work for lower salary jobs when they are getting unemployment and this trickles down to everything including mortgages. Renters cannot be evicted and when all this changes there will be a shift.
How long can people live in their houses for free? The government has been giving people opportunities to stay in their houses but if they must move they will be looking to sell and buy a lower price bracket home. This could potentially affect the higher priced houses on the market.
What Can You Do?
Run numbers based on not the current sales, but comps from pre-covid years. Smart flippers are also stacking cash away from the huge sales now so they are prepared for any possible crash in the future. Enjoy the fruits right now but know it’s not going to last.
Don’t push the numbers and become aggressive. The idea that I have to have a certain number of properties or overbidding to meet 10 deals instead of your usual 5. It’s wise to be conservative during these uncertain times.
Minimize your holding time on flips. If you sell now while the market is hot you won’t be left ‘holding’ any properties if the market drops.
Be Conservative but don’t worry.
We think it is going to be another 12 months before we are even worried about the fallout from this. We have people in the real estate game now that still have memories of the bubble bursting in 2008 and they are proceeding with caution which will help slow down any quick deflations.
Moving forward keep your eye on:
Low inventory/ high demand, how people’s attitudes and financial coping mechanisms change regarding the pandemic, and distress sales.