Today I answer that age old question: Is it the right time to buy real estate? Here you’ll learn if it’s a buyer’s market, the state of your local market, and if it’s the right time in your financial journey to buy a home.
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In this post, I’ll review the following topics to help you decide if it’s the right time to buy real estate. This information can help you if you’re deciding on a primary home purchase or an investment home purchase.
- How to know if it’s a seller or buyer’s market
- How to determine the state of your “local market”
- How interest rates control the economy
- How the time of year affects real estate
- How your particular life factors affect your decision
What is the general sentiment right now?
Over the last year, the voices warning against purchasing real estate have certainly been louder than those urging us to buy. High real estate prices and rising interest rates have created a tough environment for acquiring both primary and rental real estate.
Potential home buyers were certainly scared away from purchasing our primary home in Los Angeles, for example. This is the home that we lived in for four years prior to moving to Memphis, TN in late 2022. My wife and I had our home on the market for 3 months with lots of interest but no offers. In the end, we took it off the market and will rent it out instead.
Read more: 15 things to do when your house doesn’t sell
Our experience reflects the overall housing market. Redfin reported in November that compared to a year prior, house sales were down 36% and housing inventory was up 8%.
So if you’re considering making a home purchase despite the overall trends, how should you make such a big decision?
Let’s start out with a little empathy.
It’s never an easy decision
With so many factors to consider, it’s important to realize that it probably never feels like the right time to buy real estate. Even with the best deal, you’re going to have trepidation over buying real estate.
Typically, a real estate purchase is one of the most expensive investments you’re going to make (until you buy your next property). Therefore, it’s natural to worry about factors like home prices, the state of the housing market, and the affordability of the monthly payments.
These factors will cause anxiety whether you’re buying a home for your own use or as an investment. It’s completely normal!
However, by carefully considering the following elements, you can at least make an informed decision that is tailored to your specific situation.
How to know if it’s a seller or buyer’s market
Prior to early 2022, the national real estate market had been experiencing a seller’s market, with low inventory and high demand leading to higher home prices. Low interest rates dominated since the housing crisis of 2008, leading to a hot housing and stock market fueled by cheap debt.
But as we discussed above, the national housing market in late 2022 is very different. House sales are down by a third and housing inventory is starting to creep up.
Does this mean that it’s gone from a seller’s market to a buyer’s market? What do those terms even mean?
A seller’s market
If it’s a seller’s market, there may be more competition for homes and bidding wars may drive up prices. A seller’s market means that a variety of forces are converging to put the power into the hands of people who are selling their homes. In this type of market, sellers have more power to demand high prices and refuse to negotiate. In short, there is more demand for houses than there is supply.
A buyer’s market
On the other hand, a buyer’s market is defined by less competition and generally lower home prices. Home buyers may have more power to offer less than the list price and negotiate for concessions.
In a buyer’s market, your competition for a home purchase might be scared off by higher interest rates or the fear of falling home prices. After all, no one loves to “catch a falling knife” and purchase a home, only to find out that their property’s value has fallen just a few months later. Therefore, home buyers might be tempted to time the market and wait until the market “bottoms out.”
But just like investors who try to time the stock market, this is incredibly difficult to do well. By the time these buyers have decided that it’s the absolute best month to purchase a home, the market may have shifted quickly into another seller’s market.
So is it a buyer or seller’s market right now?
Despite strong forces making it difficult to purchase a house right now, like high interest rates, it’s hard to say if we are in a buyer or seller’s market. We stated above that despite home sales being down by a third compared to one year prior, inventory is only up 8 percent.
So despite the slowing of the housing market, the inventory of homes available for sale hasn’t skyrocketed. It’s hard to be in a true buyer’s market unless inventory goes up more than 8 percent.
Although this is hard to prove, there’s good reason to think that homeowners have locked in low mortgage rates that makes their carrying costs affordable. So it might be more attractive for homeowners to simply stay in their homes right now or rent out their homes if they need to move.
This reasoning is why we decided to rent out our Los Angeles home, rather than chase the market down and sell the property for less than we think it’s worth.
It’s important to realize one more thing though: Real estate markets are always local.
How do you know the state of your local real estate market?
The state of your real estate market can be very different from the real estate market in another city. The selling conditions in Los Angeles are probably going to be very different from the conditions in Indianapolis, for example.
So how do you figure out what’s going on in your local market?
One way to determine the state of the housing market in your area is to work with a real estate agent. They have access to data on median sales prices and can provide insight on the current state of the market. Additionally, by keeping an eye on the list price and asking price of homes in your desired area, you can get a sense of how much buyers are willing to pay and how much sellers are asking for.
This is easy to do, as you can work with a real estate agent to set up automated emails to your inbox with new home sales in your area. If you pay attention to the deals, you’ll soon get a good sense of trends in your specific city.
It’s also worth considering the type of home that you’re interested in purchasing. In your market, single-family homes might be incredibly competitive, but there are also other options to consider. Condos, townhomes, and even multifamily properties might be less competitive.
In my own investing, I have typically focused on small multifamily housing. Honestly I haven’t found this niche to be less competitive than single family homes, but this might be different in your market.
Interest rates control the economy
I mentioned above that the overall housing market is down compared to early 2022. There are a lot of factors that are causing this, but you don’t have to understand every single factor to decide if it’s the right time to buy real estate.
I think the main thing to understand is the way that the federal interest rate controls the economy. This is probably the most critical piece to understand. Because as I’ve written about before, virtually every industry is affected by the benchmark interest rate of the Federal Reserve.
If the federal reserve raises interest rates, it quickly has a ripple effect into the mortgage industry in the form of higher mortgage rates. The route is not direct, but exerts an effect indirectly via the 10-year Treasury bond.
When the effect ripples into the mortgage market, mortgage interest rates rise. This causes the monthly payment for home mortgages to become much more expensive. In the beginning years of a mortgage, most of your payment is interest, so a small change in the rates can make a big difference on your payment. Therefore, a home that was previously affordable at lower interest rates might suddenly be out of reach for first-time buyers.
The higher interest rate also makes it very tough for real estate investors to find a property that has positive cash flow.
Read more on this effect here: Why is the Federal Reserve Raising Interest Rates?
How about the time of year?
Now that you understand how interest rates affect home purchases, we should think also about practical factors like the time of the year.
The spring and summer are typically when most people put their homes on the market to sell, but that doesn’t mean that the winter isn’t a great time to buy a home. The winter months may see fewer buyers in the market, leading to less competition and potentially lower home prices.
Many real estate investors have stories about how they closed on amazing deals in the middle of the winter holidays, for example. If you’re willing to put in the leg work while most people are busy buying Christmas presents, you might find a fantastic deal sitting on the MLS.
This phenomenon is very dependent on the climate in your part of the country. In Los Angeles, where the winters are very mild, there may not be much of a dip in home sale activity in the wintertime. In northern New York, though, you better bet that there are less home sales during the winter months.
This can make the winter a good time to find a great deal on a new home.
According to the National Association of Realtors, the early fall can also be a good time to buy, as there summer rush winds down and kids go back to school. Families may be less willing to uproot at this time of year, leading to fewer buyers in the market.
Is it a good time in your life to buy?
This last factor might actually be the most important out of all of the ones that we’ve discussed to decide if it’s the right time to buy real estate.
The most important factor of all to consider is your own financial situation. Are you in a good place in your financial journey to start investing in real estate? This is something you should consider for both a primary home purchase or for rental real estate.
I talk to a lot of medical students who are very gung-ho about jumping into real estate investing. This is at a time when most medical students are drowning in student debt and spending every waking hour learning how to become a doctor. My advice to them is pretty consistent: concentrate on your studies. There’s time for real estate investing later.
The exceptions to this rule are those lucky enough to have a lot of assets to deploy, either through an inheritance or a former career. But for the rest of us, medical school and residency are the time to obtain a doctor’s most valuable skill: the earning power of a physician.
This same reasoning applies to everyone. To be a homebuyer or real estate investor, you want to have this mix of financial qualities:
- Good credit score
- Low debt to income ratio
- Ample capital and reserves
As with most lists, you don’t need all three of these things, but it’s best to have at least two before you decide to become a homeowner. If you don’t have at least two of these qualities, work on the basics before taking the plunge into owning a home or real estate investment.
And don’t beat yourself up. Soon enough, it’ll be the right time for you to buy real estate.
Read more: How to Save, Invest, and Become Rich
How this all affects my investing
In my own life, I’ve halted purchasing for the time being. I recently quit my surgeon job in Southern California to support my wife in her new career in Memphis. As I consider my options to practice medicine here in the mid-south, our income has taken a big hit.
We knew this would happen, and have prepared for it by building a strong financial position and generating alternative streams of income. So we have some breathing room as I think about my options.
But moving is quite expensive and we need capital to do some light renovations to our home in Memphis. So instead of purchasing new assets, we’ve been focused on optimizing our current portfolio.
I’ve done this through continued renovation of apartment units in Indianapolis and optimization of our luxury short term rentals in Palm Springs and Broken Bow.
- $325k Annual Gross Income | Anno Darwinii 3.25
- Our Short Term Rental Gamble Pays Off | Anno Darwinii 3.5
No matter what housing prices in your local market are doing right now, it may never feel like the right time to buy real estate. But hopefully you now have some tools to make this decision.
If you’re a first-time home buyer, I’d highly recommend working with a real estate professional or a mortgage lender to being your journey. Since the housing market has cooled significantly since a year ago, many of these people are hungry to work with investor or potential buyers right now. Ask your real estate broker to be signed up for automated emails with new homes available for purchase and you’ll soon become attuned to your local market.
Aside from the time of year and mortgage interest rates, you need to consider your own financial journey. Is the right time in your life to become a homeowner?
Finally, keep in mind that home values fluctuate over time, but in the long run, real estate is very forgiving. With fixed rate debt and inflation, real estate becomes increasingly more affordable the longer you hold onto it. Everyone wishes they bought into the real estate market a decade ago. With the exception of the years leading up to the housing crisis of 2008, it’s always been a good idea to buy real estate.
In the end, only you can decide if it’s the right time to buy. You have to consider your own financial situation as well as overall economic factors like the state of the housing market. By carefully considering all of these elements, you can make the best decision about when it’s time for you to wade into the real estate market.
— The Darwinian Doctor
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Do you feel the upkeep on your LA house will be expensive making it a less ideal rental?
i assume it’s a nicer home than a typical rental and might be more expensive to replace finishing that gets damaged during rental.
Yes maintenance is a concern. Typically, it’s said that you should expect to spend at least 1% of the cost of the home annually for maintenance. For this home, that would be over $20,000 a year. Therefore, we have to expect to make enough from rent to cover the debt, insurance, taxes and maintenance. It’s a tall order, but I think we can do it.
I agree that real estate markets are always local, and it’s crucial to understand the state of your local market. It’s also interesting to note that despite the slowing of the housing market, the inventory of homes available for sale hasn’t skyrocketed.