Is now the best time to sell my home?
Are real estate prices going higher? Can I sell for more then I owe?
First, every one situation is unique. The complicated nature of real estate makes the “when to sell” decision a mix of pros and cons that impact the individual situation. The article following is a basic real estate situation analyst of macro-economic and the general impact on housing prices. Take advantage of our free consultation with a Coffee Real Estate professional to evaluate your unique situation. It is completely free of any obligations.
There are factors that impact real estate prices. Some factors are the supply-demand balance, the local real estate market, the condition of the house, the layout of the house, access to money issues, and the affordability of the real estate market to name a few. The affordability and access to money can combine to form a powerful influence on the market. That is what is going to change and impact housing prices.
The Federal Reserve is in the process of changing their easy money policy. They are starting by reducing the QE purchases of government securities and mortgage backed securities. These have already had a small impact on mortgage interest rates. The mortgage backed securities’ market is very important to the amount of money available for mortgage lenders to access. When the Fed stops buying mortgage backed securities, if private money does not step in to purchase these investments, the pool of mortgage funds will dry up and very few mortgages will be funded. That is a game changer. All bets are off to where real estate prices go from there.
The next step in the Fed’s plan is to start raising interest rates. This will directly impact mortgage rates. There will be two strong forces to lower home prices at that time. The first is the affordability issue. This is a straight forward concept. As interest rates increase the mortgage borrower needs to buy less home to afford the same monthly payment. This puts downward pressure on the whole real estate market.
The influence of mortgage interest rates on an individual’s ability to purchase residential is so profound many people assume it is the only factor in real estate valuation. However, mortgage rates are only one interest-related factor influencing property values. Because interest rates also influence capital flows, the supply and demand for capital and investors’ expectation of return on investment also puts a downward pressure on investment real estate.
The income approach to real estate values is key to understanding this dynamic. The income approach is the most common valuation technique by investors to see if real estate is a good investment.
Basically the income approach establishes the valuation of the property by forecasting property income. The income generally is the amount of rent the property will generate. The next step is to take all property-level costs, including the financing cost; the analyst arrives at the Net Operating Income (NOI), or cash flow remaining after all operating expenses. By subtracting all capital costs, as well as any investment capital to maintain or repair the property and other non-property-specific expenses from NOI, the result is the Net Cash Flow (NCF).
The net cash flow equals cash available to investors and can be viewed as the property dividend. The NCF is used for valuing equity or fixed-income investments. By capitalizing dividends or by discounting the cash flow stream for a given investment period, the property value is determined. In other words the amount of return on investment as a rate number determines the property value.
This is the capitalization rate. The impact on real estate value is: the higher the capitalization rate, the lower the value of the real estate. One of the effects of interest rates on real estate values can be seen in capitalization rates. The capitalization rate can be viewed as an investor’s required dividend rate. Therefore the higher the interest rate return, not just in real estate, the lower the real estate value must be to achieve the higher expected rate of return.
Why is this important to most home owners who are not real estate investors? In some home price ranges investors make up almost 50% of the homes sold. If they go away because they can make a higher rate of return someplace else, then who will take their place and buy the real estate? The downward price pressure will be very powerful.
The downward price pressure will start at the lower priced properties but will impact the whole market in a short time frame. As property owners lower their price, other property owners will be forced to respond or not sell their property. The impact will be felt across all price ranges.
The two forces of the downward price pressure, the affordability issue and rate of return as expressed by the capitalization rate, will first stop the upward price movement and then move the prices lower until there is a balance of property value and willing able buyers. When will this start?
The saying goes, smart money looks ahead much more clearly and farther than dumb money. Many Wall Street and money managers have already slowed or stopped buying single family homes as investment properties. Some are even looking at the exit point of these investments.
So now may be the best time to sell. Before the rate increases of the Federal Reserve become reality. Interest rate increases are a powerful mover of real estate prices. But they are only two of the many forces. What pricing power does your property have? Can your property have hidden value to overcome the general real estate trend?
Work with a professional real estate agent that understands real estate market values. If a friend or family member is a real estate agent/realtor, but does not understand the current property value market, you could be losing many thousands of dollars of value. Or worse yet, not understanding now is the time to sell at the best price and hold onto the property until the price goes much lower or maybe unsellable for a profit.
Learn the facts about your property and understand when the best time to sell your property. Knowledge is power. Coffee Real Estate agents will give you the power to make the best decision free of cost and free of obligation.
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