The Dallas Federal Reserve Bank says that its modeling anticipates the recent rise in interest rates will bring home values down by another 20%.

With the recession reportedly behind us according to recent government data, could this really happen? What other factors might put even more downward pressure on home values? What does it mean for formulating purchase offers?

Interest Rates & Home Values

Mortgage rates have already risen by more than double this year. Many believe that the fed isn’t done with its rate hikes either.

From 2006 to 2009 the Dallas Fed estimated house prices went down by over 30% due to rising interest rates at that time.

As we are already at an average of around 7%, it’s not a stretch that we could see many borrowers paying 9% or far more for mortgages in the near future. In the past they have been as high as 14%, and even 20%.

The higher they go, the fewer buyers that qualify for home loans. The fewer homes that may be sold. Which in turn puts more downward pressure on prices.

The Impact Of New Airbnb Changes

Airbnb has been busy making changes this year. Among their latest announcements are changes to pricing, and trying to attract millions of new listings. Even though they already grew by 15% over the past year.

Many existing hosts seem to think that this is resulting in fewer bookings, and more pressure to reduce prices.

In turn this could make acquiring and holding short term rentals much less profitable. Given this has been a major driver of some markets, any dip here could impact surrounding home trading prices as well.

Other Factors Impacting Home Prices

If the bulls are right, then if we are in a new upward phase of the economy none of this may be worth worrying about.

Of course, last week we covered several data sets that suggest borrowers and their lenders may be falling further into distress. The performance of credit cards, business loans, and auto loans all hit their worst point in two years as of the third quarter of 2022. If they can’t get on track, then together with inflation and higher rates, it is easy to see how many could end up defaulting on their mortgages as well.

A lot still depends on the segment of the market. The luxury end of the market still seems well insulated against any issues. Jeff Bezos can easily afford to lose billions, and still be able to purchase a new $100M home for cash.

Age and tolerance of higher rates may also be a factor. Some may just mentally not want to borrow when rates hit a certain point. Others will be more concerned with the monthly payment.

Pricing It In

Just because home values may be falling doesn’t mean it isn’t a great time to invest. In fact, many have been waiting for this moment to act.

However, it is very important to price in this drop when you are buying.

If you are fixing and flipping, and it is taking you nine months to turn around a property, and you anticipate prices down by 20% by then, you’ll need to factor that into your offer and profit margins.

Rental property investors may not see annual rental rates and income affected, though are wise to offer this much less to ensure they are not heading underwater and end up in a position where they cannot sell or refinance for another seven to 14 years.

Fortunately, this is much simpler for wholesalers. Yes, you still want to price in some cushion. Though if you are selling directly to your end buyer within 36 hours of closing, not much is likely to change. Besides, you’ve already resold it.

Bank banks, fund CEOs, and even the Fed are all responding to the changing economy in different ways.

What are they saying and predicting? How are they reacting? What does it mean for real estate investors?

JPMorgan Tries To Go Back To The Office

JPMorgan’s Jamie Dimon has been ordering workers back to the office. Even as other multi-billion dollar companies and new startups are finding that remote work is far more productive and profitable, if not an advantage and essential in today’s economy.

Especially in real estate, experienced pros know that you don’t make money being in the office.

At the same time it has been revealed that the company is working on finishing a $3B office building in NYC. This and any other investments they have in retail and office real estate may explain why they are so desperate to sell this return to old workplaces.

Goldman Says Housing Market Will Flatline In 2023

Goldman Sachs forecasts that US house prices will flatline line with 0% growth in 2023.

Black Knight reports that house prices have already fallen into negative territory according to its data.

Meanwhile Michael Burry of the ‘Big Short’ predicts the stock market is headed for the ‘mother of all crashes’.

 

Bank Of America Goes For Broke With No Down Payment Mortgages

At least on the surface, Bank of America appears to be the most bullish on the US real estate market. They just announced that they will be offering 100% financing, no down payment home loans for buying in predominantly minority markets.

They must believe that the market is going to keep on going up, or they would be immediately losing their investors’ money.

Of course, they also made similar moves right before 2008, and then lined up for big bailouts from the very investors they hurt, as well as the homeowners they put in such perilous positions.

For Real Estate Investors

If you are tuned into the market, doing deals daily, then you already know the state of the market, even without having to listen to these pundits casting their vision and trying to manipulate it in the press. Though it is always interesting to see both what others are saying, and how they are reacting, while watching their motivations behind the scenes.

There is always money to be made in real estate. Perhaps far more in the current conditions we are in.

More than ever, succeeding in this market appears to be about pricing deals right on both the buy and sell side, and moving quickly in and out of deals before you are caught by changes.