Should I wait for prices to decrease?

Disclaimer

Before I begin and before people misinterpret my statements I would just like to clarify that I am not saying everyone should rush out and buy a piece of real estate tomorrow. Investing in real estate is a major decision and should be made carefully and based on your individual situation. My overall stance is that if you are ready and have the desire to buy a house, don’t wait.

Some Background

Back in 2015 many people were telling me that they were going to hold off buying a house until prices came down. In their opinion prices had appreciated too much, so similar to how people try to time the stock market (buy low and sell high) they thought they could do the same with the real estate market. Many of these people felt very strongly, even though they were not in the real estate industry so did not understand the health and dynamics of the market. I attribute this to fear. Fear of either getting caught in another 2008 housing bubble/crash and being hurt financially or fear of looking stupid because they bought at the top. Fast forward 4 years and many properties in established or upcoming Atlanta neighborhoods have appreciated over 50%. If you factor in the use of leverage (small down payment with a mortgage for the balance) a 5x return on investments is not uncommon. So although we have experienced above normal price appreciation over the past few years and you might argue that hindsight is 20/20, I will explain why these results shouldn’t be a surprise. Even if a housing correction did take place, it was still a good time to buy if you had a long-term view.

Why it was wrong to wait in 2015

By 2015 houses in high-demand areas appreciated significantly from their lows in 2008, however in my opinion those were artificial lows. The economy was terrible and the housing collapse prevented banks from lending. That caused high-quality properties to drop well below what they were worth. As the economy started to improve many of those properties returned back to where they should have been priced in the first place. This appeared to some, who weren’t following the real estate market closely, as extraordinary price increases however, it was just things returning back to normal. It was clear that the most desirable areas in Atlanta were going to continue to appreciate at a solid rate. In 2015 the market became extremely hot because of a number of factors.

1. Interest rates were at historic lows and there were no signs of rate increases in the near future. That allowed people to afford much more than they could with a higher rate. For example, a $300k house with a 3.5% rate results in a monthly payment about $300 less than the same house with a 5.5%. That’s huge.

2. The economy was improving and unemployment was decreasing. I think it’s safe to say that if more people are working and feel more confident about their projected income they will be more likely to buy a house. Combine that with the extremely low interest rates and the demand was likely to stay high.

3. As the real estate market was heating up the inventory of available houses was drying up. This was partially due to people being underwater so couldn’t sell, turning houses in rentals, investors coming in and buying large amounts of the inventory, and builders not building new houses.

So demand was high (with no signs of slowing) and inventory was low (with no signs of increasing). There’s really only one possible outcome when demand greatly exceeds supply. Continued price appreciation. Not only did housing prices continue to rise but the pace accelerated particularly around highly desirable neighborhoods like Inman Park, Old Fourth Ward, Virginia Highlands and Buckhead. In addition, houses in upcoming neighborhoods close to the Beltline like West End, Adair Park, Capitol View and Bush Mountain absolutely took off. Bidding wars were common as people realized that although it wasn’t the bottom of the market houses were still relatively affordable and that wasn’t going to last long. Many newly renovated houses in some of the historically overlooked areas doubled in 2 years.

Why you should not wait today

I know it’s easy to look back and say people should not have waited to buy considering what we now know. Although I can tell you that I put my money where my mouth was by purchasing a few properties between 2015 and 2018 that doesn’t help anyone today. Once again many people are asking “is now a good time to buy”. The simple answer in my opinion is YES. That doesn’t mean I can predict what is going to happen in the future or guarantee any results, but if you weigh the risk vs reward, have a long-term view and do your due diligence to buy the right property, the answer is a resounding YES. That being said, if you buy an overpriced property, a property in a bad or declining neighborhood or don’t do your due diligence regarding the condition of the property, you can certainly lose on the deal. So the question shouldn’t be “is this a good time to buy”. The question should be “should I buy this specific property, at this specific time, for this specific price under these specific conditions”.

The argument for not waiting is fairly simple. We remain in an environment where interest rates are extremely low and inventory is extremely scarce while the economy is still pretty decent. Once again there are no signs of interest rates increasing (in fact they have been declining recently) or inventory increasing enough to offset demand. Assuming your financial situation warrants it and you’re looking to keep the house long-term (at least 5 years) don’t hesitate to buy a great piece of property now. Interest rates will only go up (at some point) and prices will continue to rise (over the long-term). So locking in a super low interest rate now may be the last chance you get to do so.

Devil’s Advocate

To be thorough, let’s consider the worst case. You purchase a great house in 2020 with an extremely low interest rate, the economy goes into a recession and the housing market corrects. As we have seen from history the market will comeback and houses will continue to appreciate in the long run. I think 2008 is a great use case to believe in the long-term. So if the price of your house decreases temporarily but you’re not looking to sell, your situation isn’t affected at all. You’ll continue to pay your mortgage, pay down the principal of your loan, continue to benefit from tax advantages while living in the home you love. If you purchased the house as a rental property then you’re still collecting rent as the market recovers. As long as you have a long-term plan you will ultimately end up enjoying the price appreciation while paying down your mortgage and potentially collecting rental income. On the flip side, if you don’t plan to keep the house for the long-term I would never recommend buying. It’s just too risky. You’re too dependent on timing the market which is very difficult to do.

Conclusion

Consider the fact that inventory levels continue to be extremely low, more and more people are moving into Atlanta and the job market is strong. Outside of some external events that could affect the global markets I don’t see prices correcting any time soon. If anything they will continue to rise over the next couple of years. So the same house today will most likely be priced higher in 2 years and interest rates will most likely be higher, which just makes things worse. That being said, the real estate market if very dependent on location and Atlanta takes that to a new level. Due to the pace of growth Atlanta is experiencing and the large scale development projects like the Beltline, Ponce City Market, Suntrust Park and Avalon (just to name a few) housing prices vary dramatically from neighborhood to neighborhood. You need to be very informed about a particular neighborhood, building and pricing trends as well as local economic catalysts to know if a particular house is a good investment.

FINAL THOUGHTS

So don’t look back 2 years from now and say “I should have bought then”. If you’re ready to buy a house don’t let the recent price appreciation or fear mongers scare you from investing in real estate. If you were ready to buy in 2015 but waited for prices to go down, then waited again in 2016, then again in 2017-2019 please stop making the same mistake. Forget about the past and the price appreciation you “missed”. Look to the future and make a sound financial decision. You won’t regret it.

-Roger Bozza