Many investors I know are currently following the advice of Warren Buffett to be “fearful when others are greedy.” Buffett himself is presently sitting on the sidelines with $128 billion.
You may be thinking that he is a stock guy and does not own real estate. Actually, he owns quite a bit of it! While Buffett isn’t counting doors, he is smart enough to hold a substantial amount of hard assets.
Even if you don’t love the Buffett, there are a substantial number of factors that every investor should be considering in this real estate climate.
Properties currently seem to be selling like hot cakes for ridiculous prices. You may be making a ton of money right now if you are dialed into your niche and are a seasoned flipper.
But if you are just getting started or getting the feeling that every property you touch will turn to gold, you may want to read on and reconsider the facts.
This party, just as all parties, will end. No one knows precisely when or how long it will take, but there are some changes coming ahead.
Why You Shouldn’t Buy
1. You don’t grow wealth by following the herd.
Remember real estate rule number one: Buy low and sell high.
The buyers in this real estate market seem to be in a frenzy. The low interest rates seem too good to be true. People are buying larger homes to create a work-from-home space as a result of COVID-19. Plus, everyone knows cash is protected more in an asset than sitting in the bank earning .002%.
All of these are good incentives to buy. But the question remains, how much are you paying for your property?
Do you have reserves if you lose your job or business slows down?
Are you investing in a property that cashflows now but won’t if rents decrease when the market corrects by 10-20% in Q1 and Q2, as many predict?
Knowing that you are buying high at what many consider to be the market’s peak presents a risk. When following the crowd, the ones at the end of the line never win the prize.
Related: Why Real Estate Beats Stocks During a Recession
2. Foreclosures and evictions are on the horizon.
The CDC is serious about slowing the pandemic and current laws do not allow eviction or foreclosures until December 31, 2020. Many landlords are struggling. They are not receiving rents, can’t cover the bills, and are now going to banks and requesting forbearances to let them have more time to pay the mortgage.
Calling a bank and requesting a deferral of payments is currently very easy, but the money is only an extended loan. As of May, CNBC reported that 4 million homeowners requested mortgage forbearance. While the banks currently are not charging interest for late fees, the unpaid mortgage payments add up every month. The bank will eventually foreclose on the homes when landlords cannot settle their bills on time.
It is logical to think that some people will not get caught up with their mortgage payments, so they will need to sell properties. The number of forbearances could create a flood of inventory, which would mean more supply. Many predict that when the government ends the moratorium, the fallout will start.
Part of what has been driving up the housing prices is the low inventory. As long as there are fewer homes available than people who want to buy, prices will remain high, and sellers will have the upper hand in transactions with multiple offers. The question is, how high will prices continue to go?
3. History indicates there will be a correction.
Historically, a full real estate cycle lasts 18 years. It takes time for the market to slow and then rebound. We are around year 13 if you count from 2007. That said, something usually predicates the downturn. With COVID-19, inflated prices, high unemployment, and foreclosure predictions, the turn may be starting sooner than later.
Money Instructor explains the reason for fluctuations in pricing: “The housing market tends to cycle between shortage and surplus. Therefore factors that impact supply and demand influence housing market changes. Factors that have a widespread effect include interest rates, economic conditions, and consumer confidence levels.”
In looking at all the variables, it is clear why the real estate market is still booming.
With real estate, a great deal can present itself in any market. Given the circumstances, though, a good deal now may be a great deal in the next six to nine months.
4. Avoid shiny object syndrome regarding low interest rates.
Interest rates are at an all-time low, and people don’t want to miss out on borrowing money for a ridiculously low amount.
But if rents start to fall with unemployment and evictions, and real estate prices begin to drop, a cash-flowing asset may go into the negative. If you are banking on riding high forever without much in reserves, you could be left vulnerable with too thin a margin, even at a 3% interest rate. Some experts already see a weakening in the real estate market while the pandemic continues to impact the world.
Related: The 4 Phases of the Real Estate Cycle (& What All Investors Should Know About Them)
5. Unemployment is at an all-time high.
With all the flurry to buy property, people forget that unemployment rose higher in the past three months than it did during the 2008 recession. Millions are out of work, and Yelp data indicates that 60% of businesses closed during the pandemic are not reopening. With that big of a hit on our economy, you need to figure that many people can no longer afford their homes.
COVID-19 has threatened our security, and people may be pursuing home-buying as a way to ground themselves. Still, it seems hard to believe that all of this home purchasing can sustain itself, given the unemployment numbers.
For every purchase, you should be asking yourself whether you can still manage a loss if prices in the rental market drop and values go down even 10-15%.
No one has a crystal ball and you need to do what works best for you. Just make sure you don’t ignore the fact that we are living in unprecedented times.
I can’t help but think it would not hurt to take a deep breath and see what a little more patience will be worth in the long run.
Telling a real estate investor to hold off on buying seems counterintuitive. Still, part of being a successful investor is the discipline to analyze historical patterns in the market and watch inventory.
No seller’s market lasts forever. And again, heed the words of Warren Buffett: “The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.”
Are you also waiting on buying new properties or have you dived right in?
Tell us why in the comments.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.