Invest in Real Estate now... or wait until the housing market crashes?
This question comes up almost every day. It's really two different questions: 1) Will the market crash (or land softly) and 2) When should I invest? My guess is as good as anyone’s, but here are my thoughts…
Will the market crash?
Based on a comparison of today's market and the situation in 2008-2011, I'm banking on a soft landing. Leading up to the market crash in 2008, the banks were making ridiculous loans to “anyone who could fog a mirror.” The sub-prime loan business took off. With mortgages readily available, demand for homes grew and new homes were being built in record numbers. Prices shot up.
The subprime mortgage problem was intensified when lenders began to repackage the high-risk mortgages into marketable securities and sell an enormous volume to investors. Then the bottom fell out because banks were creating toxic loans that had little chance of ever being paid back. Lending guidelines changed overnight and builders were left with tons of inventory and no qualified buyers.
Today, strict lending guidelines persist, and interest rates remain low. Although it doesn’t appear to be so in the metro area, new home construction still has not returned to its pre-recession pace. Builders are leery of over-building, having been burned badly in the recession plus there is a significant labor shortage. The result is not enough homes for eager buyers and that’s driving up prices.
Prices may be affecting affordability and interest rates are creeping up. That may slow home price increases, but it won’t cause a crash.
Should I invest now?
Everyone wants to buy at the bottom of the market. But, how do you know when that is? Timing the market is difficult for even the savviest of investors. And, it may seem really scary to buy now, when prices have been increasing for seven years straight.
Here’s a better way to think about real estate investments…1) Define your investment criteria and buy based on that – not what you hope the market will do. Whether you plan to fix and flip or rent, make sure the numbers work if prices don’t change. (If they go up, it’s a bonus).
2) Define for yourself the best time to buy. Are you ready to make a move when that time comes? You might also want to consider that you are not the only real estate investor waiting for prices to “hit bottom.” If fact, that competition tends to drive prices up.
So, in a nutshell, it’s all about your own comfort level when it comes to the risk of any investment.