The real estate market is currently in an interesting state. Home sales are slowing on higher interest rates, but prices have yet to fall in some areas. In short, the median existing home sales price in January 2023 was 1.3% higher compared to the same time last year, but house prices in expensive areas have fallen, while prices in less expensive areas have risen.
Given that house prices hit record highs in 2021, you would expect them to have normalized with the slowing market, but that has yet to happen. However, if interest rates continue to rise, prices should continue to fall.
But what does that mean for you and your finances? This article examines how the current real estate market can affect you financially.
Real estate situations that can affect your finances
There are several situations you may find yourself in where the real estate market can affect your finances.
1. Buy a house
If you’re in the market to buy a house, you’re going to pay a higher interest rate than in 2021. However, the housing stock is large and the number of buyers is falling. That means you may have more bargaining power with sellers. Prices may be higher, but chances are most sellers are highly motivated, putting you in the driver’s seat.
But you end up paying a higher rate, but with a lower price for the house, so it may even work out for you financially. You can also refinance later if interest rates drop and the game is ahead.
Be sure to do your research on what’s happening in your area in terms of prices and the number of sales that are happening. Every local market is different. Make sure your broker talks to you about current comparable sales and use your bargaining power.
2. Sell a house
If you plan to sell your home in the near future, you may be under pressure. In many areas, there are fewer buyers due to higher interest rates, so the people who buy have the bargaining power. If you can, it’s best to wait to sell until prices fall again. However, what will happen to interest rates and when is a big unknown.
If you need to sell and you want to make a certain profit on what you paid for the property or on what you owe on your mortgage, you can calculate here what price to stick to.
Often the best strategy in these types of markets is to price your home higher than what you actually need. That way, the buyer can negotiate and feel like they’re getting a deal. However, it cannot be stressed enough that the best strategy depends on your local market.
Do your homework and talk to your real estate agent about what’s happening in your market and what similar properties are selling for. And if you need to make a certain profit on your house, you can stick to your guns and wait for that buyer who “must have” your house.
Work with your real estate agent to make your home as attractive as possible to buyers by making repairs or upgrades and organizing the home properly. In a tough market, you need to differentiate your home from the competition.
Also, work with your tax advisor when considering the price you should get. Selling at a lower price means less capital gains tax, so that will have an impact on your finances overall.
Special Note: There was $400mm in sales in January 2023.
3. Investing in real estate
Investing in real estate is currently an interesting proposition. Warren Buffet said “be greedy when others are afraid”. Real estate investors are currently fearful of economic and market instability; however, having such a view depends on your goals and your risk tolerance.
If you’re looking to flip homes as an investment, it’s likely you’ll be able to find deals, especially for distressed properties. But with the number of home buyers declining, you may have trouble finding a buyer and incur transaction costs. However, you can still make a profit if you can put minimal money into the property and price it competitively based on local real estate conditions.
Now, if you’re looking to change homes, it’s best to carefully analyze each potential deal, including what’s happening in the specific area the property is in, and choose only the deals that make the most sense and involve the least amount of risk . With so many “anxious” investors, you have less competition, so you can afford to be choosy.
If you’re considering buying rental properties, it’s still a matter of looking at every deal. Higher interest rates mean fewer buyers are buying and renting, which can drive up rents. That’s great if you can find a great deal and pay cash for the property. However, if you need to finance the property, you’ll pay a higher interest rate, reducing your cash flow.
The bottom line is that if you’re considering investing, you really need to understand your local market. Do a lot of research before making a decision.
5. Refinance your mortgage
Obviously, if your current interest rate is lower than the current mortgage rate, refinancing your mortgage may not be a good idea, and vice versa. You should also consider your closing costs when deciding whether refinancing is financially beneficial.
If you refinance at a lower rate and take money out of your equity, when the bank assesses the market value of your home, it may be lower than you think. Again, it depends on what happens prices in your local market.
If you want to refinance to a shorter term, you may still be able to benefit. Rates on 10 or 15 year mortgages are generally lower than 30-year mortgages, but your payment may still be higher due to the shorter term.
Another thing to consider is that lenders tend to be more conservative in a sluggish real estate market, so it may be more difficult to qualify for the refinance. Credit score and income requirements will be stricter, so be prepared to go through a stricter application process.
It’s best to shop around for the best rates and terms, analyze your options, and decide which option, if any, is right for you.
Here’s a handy one refinance mortgage calculator to help you.
6. Mortgage Loans
If you’re considering getting a home equity loan, whether the real estate market will affect you depends on your goals.
If you want a home equity loan to consolidate other debts, current mortgage rates are likely still lower than rates for other debts, such as credit cards. However, similar to a payout refinance, your equity may not be as high as you expect based on market values.
If you want a home equity loan to remodel your home, if you’re only doing it because you want your home to be beautiful and you can afford the payments, go for it. You may want to consider a home equity line of credit with a floating rate so that interest rates fall when rates generally fall. However, rates may also go up.
If you want a home equity loan for remodeling but with the goal of selling your home for a higher price in the near future, you should consider it carefully. If rates continue to rise and home prices fall, you may not get your money back from the remodeling you do and the interest you pay on the loan. Be careful not to overdo your improvements.
Fewer people buying a house means more people renting, causing a rent deficit due to the high demand. As a result, many predict that in 2023 Rent growth is likely to remain highwhich is bad news for tenants.
Other economic factors also reduce the amount of income tenants can spend on rent. This means that rental properties in more expensive areas will be less in demand, which should depress prices for those rental properties a bit.
In the longer term, rents will probably start to fall again, so if you find it current rent difficult to payyou may only have a temporary difficulty.
As with all other effects of the real estate market, the impact of current conditions on tenants depends on location. If you’re looking for a new rental, do your homework and shop around, and don’t be afraid to negotiate with landlords to try and get a better rate.
The real estate market is currently interesting, and it’s difficult even for experts to predict exactly what will happen in 2023 and beyond. Many factors will influence the direction of the market, so you need to stay abreast of what is happening in the market, especially in your area.
If you find yourself in any of the situations discussed, make sure you do your market research and get advice from professionals, be it a real estate agent or a financial advisor. By doing so, you can find ways to successfully navigate this unpredictable market and protect your finances.
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