Would We Let Our Kids Buy In this Market?

A client recently asked us, “would you advise a close friend or relative to buy in this market?’

The question really got us thinking. If our kids were old enough to buy a home right now, what would we tell them?

It’s a great and very fair question. After all we are in sales. We undoubtedly benefit, at least in the short term, if clients believe the sky is not falling, we are not in a housing a bubble, and buyers just keep on consuming and paying those climbing prices.

Of course, we aren’t in business for the short term. Northern Michigan is a small community, and people’s memories of how you do business are very, very long. We want to build something that lasts, and more importantly, makes an eternal difference in the lives of those we serve in our community.

So, what’s the answer? Would we tell Evie or the Twinslows to buy in this market?

Well, it depends. On a lot of things. First and foremost, it depends on the unique circumstances of the client. And coming in at a close second is what we believe to be true about the market and its future deep down inside our little realtor hearts. Without the marketing spin.

Let’s unpack both of these for a moment.

What do we believe about the market?

There will be a correction. No party can go on forever and we have decades of business cycles to prove it. However, as we state every single month when we publish our market report, we don’t expect a precipitous drop off like in 2008. We won’t go in too much detail here, but even with rising interest rates, a possible downturn in the economy, and international conflict we still have a fundamental mismatch in supply and demand created by the number of buyers being greater than the number of new homes supplied through listings and, most importantly, new builds. Add to the mix a tight rental market, and we don’t see a significant downturn in home values in the near future. A settling back to normal appreciation rates? Yes indeed. And probably a little softening in pockets. We expect some investor dollars to come out of the market and people’s buying power to adjust with increasing rates. We just don’t expect enough of a correction to advise many types of buyers to get out of the game.

Which types of buyers should hold-off in this market?

Deal Seekers

Some buyers always want to feel like they are getting a deal and hate the idea of someone else making money at their expense. This market is not for those buyers. We can’t tell you how many times we hear “but they paid $150,000 less just 2 years ago and haven’t made any improvements.” Yep. That is a definite reality in this market. If you can’t sleep at night due to visions of the would-be seller of your home diving into piles of your money like Scrooge McDuck, this market is not for you. Sure there might be an incredibly rare opportunity to buy a property that is almost a complete tear-down, fix it up and flip it. But even those are getting bid up by the market. Another good one we hear is “this home is not worth that.” Remember the home’s value is what someone is willing to pay for it on the open market. This market is telling us in many cases, as shocking as it is, homes are indeed worth it. And when the home is priced too high, the market will quickly tell us that too. A simple price adjustment will fix it and the property will fly off the shelf like the others.

Some Investors

We are seeing an increase of investors looking to place excess disposable income into homes they can use a couple weeks out of the year and then put into a short-term rental program for the remaining months. For the most part, increasing rental rates will compensate for appreciation rates. Yes you pay more, but you receive more rent as well. That being said our market here is not an easy one for the DIY owner/landlord (think VRBO). Our seasonality requires a great game plan and a team to support you in turning over a property between renters to keep vacancy rates low. Northern Michigan faces the same hiring challenges seen elsewhere in the country, and it’s not going to be easy to turn that buck outside of a formal property management program. There are still great opportunities in this space, especially if you have a longer hold time, but it is becoming more challenging. And we would stay away from investing in this type of rental using a great deal of leverage, as the ROI is likely growing too tight to make sense as both prices and interest rates increase. If you are cash and are comfortable with a longer hold time, proceed with finding that great property. You will still find a sensible situation.

Some First Time Home Buyers

If you are a first-time home buyer with a good amount of cash saved, a pre-approval from a bank in hand that is north of $300k, and you feel pretty committed to remaining in the home for longer than 8-10 years there is nothing wrong with jumping into this market. Home values appreciate over the long term and the risk of losing money if your hold time is long enough is pretty low (see Michigan appreciation rates below). If it’s your home, then you are also getting utility out of it roughly equal to what you would pay in rent elsewhere. It’s hard to lose over the long term. In fact, it might be riskier to wait if we are correct and the market is only going to level off to normal rates or only soften a bit.

That being said, we would never advise buying your first home without a nest egg to help with all those expenses you will have in your home regardless of the quality of construction or taking out a predatory loan. Nor would we advise buying if you are uncertain you will remain in the home long enough to recoup the sunk costs of the purchase, any repairs and investments in the shorter term.

Who should dive head first into the market?

Sellers!!! And Most Seller/Buyers

The absolute best situation is the seller who has a second home or rental and is ready to cash out. If we know the market will correct or stabilize, then now is a terrific time to take advantage and liquidate an asset. This is especially true if you are facing the prospect of borrowing or have higher interest rate debt you could retire with the windfall you will realize when you sell.

I know what you are saying, duh Alisa! But what about sellers who want to sell and take advantage of high prices but don’t know where to go? The first thing we would say is read our March 23^rd blog on the topic.  Apart from the creative ideas to help in that article, we would never recommend selling your primary residence just to realize the gain. You will just be paying as much or more depending on where you are in your life cycle, or you will be returning to renting and building an investment for someone else. The decision to move should be based on wanting to live or build somewhere else now. And if that is the case for you, there really isn’t a bad time to make that decision. Your gains might be a wash with the price of a new home, but if it’s the home you want? So. What. You go after that dream and find that home. And very importantly, don’t underestimate your buying power when you do! You are probably able to get more for your home than what the algorithm on Zillow is telling you. Is buying easy right now? NO. Is anything worth doing easy? NO. Don’t be in a home you aren’t satisfied with because searching and competing for a home is hard. We are here to make it easier.

Of course, there are exceptions to every rule. We helped a number of seller/buyers this year who are currently renting as they build a new home or scope out their next one. They made a decision to sell without having a place to go either generate cash for the building process or to improve their buying power by being able to offer cash in a competitive situation. This is a terrific approach if you have the energy to go through the process of moving and building.

Regardless of where you fit in the above scenarios, we would be grateful for the opportunity to take a look at your situation and help you walk through an approach that works for you. Call us at 231-622-5076 or email us at info@winslowproperties.com