From the desk of Amir Chaudhary.
If you are waiting to invest in a lot of very cheap real estate deals through upcoming foreclosures, you are not alone.
Many people think the current hike in real estate prices is similar to the situation in 2007/2008 when the prices were high for some time, then the market eventually crashed and everything was over and so many people ended up with foreclosures.
Many people are expecting soon the bubble with burst and the foreclosure season will start, and they will get the real good deals.
The reality is that this time its different. The determining factors for the market crash in 2008 were the way that the mortgages/home loans were approved or processed. This time that’s not the case.
Here are the major reasons for such a high demand for homes in the market:
1). LOW MORTGAGE RATES:
The mortgage rates are a major factor in driving real estate market as well as any other business. With the low interest rates, more people will get qualified for home loans. This will lead to more potential home buyers.
2). SAVINGS DURING COVID-19:
An average American spends a good amount on leisure every year. This year due to the COVID-19 situation, most Americans could not spend much on their leisure and saved much more than any other year. This saving was a great help towards the downpayment fulfill to qualify for the home loan (mortgage).
Both low interest rates and increase in savings led to more people qualifying for home buying than normal.
3). LOCKDOWN AND CHANGE IN WORKFORCE:
During the lockdown and period of government assistance, there was a decrease in workforce of non-essential businesses. Lumber business was also one affected by COVID-19’s change in workforce. This resulted in a decreased supply of lumber to make new homes. Lack on nee homes eventually put more burden on the pre-owned homes sales.
4). LOW INVENTORY OF HOMES FOR SALE:
Sellers put the homes for sale due to various reasons (relocation, upsizing, downsizing, equity, etc). Every year, the number of homes on the market shows a certain pattern. There is not much difference in that part, meaning that the number of homes being put on the market for sale is not much higher but the number of buyers this year did rise due the reasons explained before.
Compared to the buyers, the total homes available for sale aren’t as much, which creates a bigger gap causing more demand. More demand means the buyers will be willing to offer a higher price.
Here is an example:
If in an average year, the number of homes on the market is 100 and an average number of buyers are also more or less 100. Then there is one buyer for one home.
Now consider the number of homes for sale are 105 but the number of buyers increase to 250. The buyer to home ratio is now 2:4 versus 1:1. That’s the situation where the demand is much higher and the buyers will be competing with other buyers and willing to pay more and more for the same home resulting in hike in overall market prices.
5). WHEN WILL THIS REAL ESTATE BUBBLE BURST:
As these determining factors are quite different so is the prediction of outcome. With the low interest rates, more savings for down payment, and low inventory, there is not going to be any significant decrease in prices. It may be a discoursing news for the folks who are waiting for the “real estate bubble” to burst. The reality is there will be no such thing. The market will certainly adjust itself as the situation of these factors change but not with a huge difference in prices.
My article might have disappointed some people who were waiting for a blast of foreclosures due to the high market. But that does not mean that you can’t invest under such market situation. There are still ways to invest in pre-owned and new construction. You just need someone smart to be on your side.
Feel free to drop me an email or PM me if you have any questions or if you would like to buy, sell or invest in real estate.
Managing Broker / Realtor