It’s no secret anymore – the real estate market is well over its peak and on it’s way downwards. Some areas have dropped very slowly and others have taken a much larger hit. During times like these, many people who had unrealistic expectations of the market are starting to face hardship as the euphoria dies down and people realize that it’s not nearly as easy to sell a property in 2023 as it was in 2022 or 2021.
Let’s start with the good news. If you bought a property in the past five years and borrowed money, your interest rate is likely much lower than today’s rate. Your property may not be worth what you had hoped it would be but if you bought right, the mortgage payment is reasonable and you probably still have equity. If it’s an investment property, your rent has probably gone up at least 10-20% since 20and you’re at least turning a small profit.
Now let’s talk about the market and the near future. It’s likely that we’ll be in this high interest rate environment for a while, property values will continue to decline before they eventually bottom out, and rent growth will continue to slow (or even go into negative numbers in certain areas). What that means to me is many people will be forced to sit on their properties for a while. Many homeowners that had planned on moving to a better neighborhood or a larger house won’t do so anymore because even making a lateral move means their mortgage payment would rise 40+%. Investors will be less likely to sell because they don’t have nearly as much equity as they did a year ago and it’s more difficult to find a good deal right now.
What does this mean for you? If you own a home or investment property, now is the time to think about 2033. Do you really want to own that property in 10 years? Have you been keeping up with the maintenance or do you see any major hits to your pocketbook in the near future? Are you being realistic with your expenses? Do you have a loan that will be adjusted in the next few years? These are some of the questions that we have been thinking about ourselves with our portfolio and which have led us to sell every single one of our headache properties that we don’t want to be in a 10-year relationship with.
Why 10 years? Because that’s how long the market could take to come back to its current levels. No one has a crystal ball but it’s better to plan for the worst and be prepared than to be caught swimming naked with a property that is eating money out of your pocket every year. We may never see 2020/2021 rates again in our lifetimes and given how long the economy has been up (and many other factors which I won’t get into in this post), I don’t think it’s unrealistic at all to expect a decade of softening.
Real estate is a difficult (and fun) lifelong game of monopoly that leads many people to be swept up in emotion and make illogical decisions. I’ve found that the hardest part of making these decisions at the moment is thinking about the opportunity cost. All properties should theoretically go up over the long term but having funds sunk into one property means that you can’t use them to take advantage of another one. There are going to be a LOT of people caught swimming naked financially in the next 3 years and many opportunities to make deals of a lifetime. Don’t forget that as you’re making your decision!
Rodney Ross