One of the most common questions I am asked is, “where do you think the real estate market is headed?”
It’s a valid question… Why?
Well, we are more than 7 yrs into a real estate bull market and price appreciation hasn’t let up since 2012. In some areas, we are even rivaling price levels seen only in 2006.
Additionally, there are several folks who were impacted by the great recession in 2008 and it’s taken them several years to rebuild their financial situation. Now that they are ready to get back into the market, they have concerns that history will repeat itself.
Kind of feels like déjà vu! – Yea, maybe a little
So in this situation, should the “would-be” home buyer / investor sit on the sidelines, wait for another market correction, or simply give up on real estate?
NO, NO, NO! Definitely not!
Sure, maybe it’s a good time to re-think the strategy, but NOT getting involved EVER? That’s NOT the right way to approach ANY market.
So, how do we eliminate the FUD (fear, uncertainty, and doubt), tune out the noise, and better insulate ourselves from market corrections?
Process before you panic
I want to start by echoing something my wife taught me…
“Process before you panic”
This phrase cracks me up every time because it is so basic, yet powerful. It stuck with me from the moment she said it.
Basically, it means that we need to take a step back when we get overwhelmed and assess the situation.
It’s because panicking can cause us to become emotional. When we become emotional, we tend to make impulsive choices. Impulsive choice can often lead us down the wrong path. The wrong path may lead to purchasing a home on someone else’s terms. Not really the chain reaction were looking for… You with me?
Point being, if you are uncertain about the market, the best thing to do is… keep calm, take a step back, seek professional advice, and process before you panic 🙂
Tune out the noise
Secondly, it’s time to tune out the noise!
By noise, I am referring to negative headlines, conflicting news, and opinions from folks who are not experts in real estate – sorry, this may rule out some friends and family LOL
Why is this important?
For starters, people are attracted to negative news. It’s more captivating than something positive. The media and news outlets understand this… therefore, they literally write headlines and articles that are designed to SCARE you! When people get scared and emotional, it’s easy to panic…. NOT COOL!
As for folks that are not experts in real estate, you can listen to their opinions and ideas; however, you must be very cautious about what you “believe.” – “Trust but verify,” is what I like to say!
Overall, be very selective about what you chose to feed your mind and always remember that every person’s situation is unique and different. It may be a great time for you to invest in real estate, but a horrible time for one of your peers.
Buy based on math, not emotion
Ever heard the term FOMO? – Fear of missing out
Well… FOMO is alive and well in a market that experiences price appreciation for years on end.
None of us wants to “miss the boat,” and we all want to “get in” at the right time and buy something that has the potential to increase our net worth.
Don’t fall victim to FOMO!
The “play” here is to purchase a home or buy a rental property based on the math, NOT emotion.
So, how do we do that?
Start with a housing budget.
By housing budget, I’m suggesting that you (and your spouse/significant other – if you have one), review how much money you have coming in, how much is going out, and determine exactly how much you would feel comfortable with allocating toward housing on a monthly basis.
Once you know how much you can comfortably spend on a monthly basis, then we can reserve engineer the mortgage amount, adjust for down payment, factor in utilities, and come up with a purchase price that makes sense for your situation.
Build an Emergency Fund
Building and maintaining an emergency fund is another critical component that will add an additional layer of security.
Personally, I recommend setting aside 6-12 months of total living expenses in a savings account depending on your income situation.
For instance, if you have a stable W-2 job and income does not fluctuate much, then 6 months of reserves may be enough. Conversely, if you are self-employed or a commission-only salesperson, 12 months of reserves may be more appropriate.
Use your judgement and build the account accordingly. Once the account is fully funded, then you can direct your savings toward something else and replenish the account as needed.
This one will help you sleep better at night knowing you have a little extra gas in the tank in case something unexpected comes up.
Consider your timeline
I am referring to how long you plan on living in the property or holding the property as an investment.
The reason this is important is that real estate markets are cyclical… meaning, your home’s value can rise and fall depending on the state of the market.
Let’s say for example that you are wanting to purchase a starter home. You plan to fix up the property while you live in it for the next two years. After two years, you want to sell the home and trade up to a bigger house.
This is a great plan, however, what if the market climate changes in the next two years and you are unable to sell at a profit?
Are you willing to live in the property longer? Perhaps, keep it as a rental? If not, you should definitely re-evaluate your purchase strategy.
In most cases, the longer you can hold a property, the higher probability you have of turning a profit. So with each purchase, consider multiple exit strategies upfront and build a 2yr/5yr/10yr plan in case the market shifts.
Wrapping things up
Timing the real estate market is near impossible.
It’s as difficult as timing a stock purchase or betting on a sports game… you basically cannot predict with a high level of certainty what the future will bring. There are simply too many variables.
With that said, it’s important to consider where the market is headed, how long we are into the cycle, and plan accordingly.
Taking the steps outlined in this post will help you to eliminate the FUD, further insulate yourself from market corrections, and sleep a little better every night.
Hope you find the information useful.
All the best!
Want to buy, sell, or invest in real estate?
Silva Realty Team can help!
We cover Sacramento & Placer County in California with a special focus on Roseville, Rocklin, Loomis, Penryn, Lincoln, Newcastle, Orangevale, & North Natomas (Sacramento).