Housing Market Update
What’s going on in the market? Here’s a broad look at the trends I’m encountering today in the southeastern Wisconsin real estate world.
Single Family Homes
The media is reporting record high sales prices and record low days on market before sale. This is all true. What they’re not telling you is that inventory is at an all-time low and that the number of sales is down.
Earlier this year we had too many buyers chasing too few properties. High demand and low supply means that prices rise. However, we reached a point where buyers looked at what was available, thought it was overpriced, and eventually abandoned the marketplace. Trade-up sellers also saw what was available, realized they may not be able to improve their housing situation, and decided against listing their property for sale. After all, what good is earning a great profit if there’s nothing to buy? There’s a reason you see so many renovation company signs in certain neighborhoods; if homeowners have no good place to move, they enlarge and alter what they already own.
Where are we headed? Falling demand due to high prices is a self-correcting problem. The marketplace creates additional demand through falling prices. I do not see a market bubble or any sort of pop, but we should expect 2018 to be a little calmer than 2017. The market will self-correct yet again as new properties come to market, which will excite buyers and increase demand. That demand will eventually lead to more stable price increases.
What advice do I offer to buyers? Don’t get desperate! Don’t jump on the first property that “could” work. Don’t overpay simply because there’s a shortage of property. Keep your head while others are losing theirs and you will come out ahead. Don’t be afraid to open your wallet for quality and value, but it is okay to keep it closed for junk.
What advice do I offer to sellers? Plan ahead. Since buyers are starting to rebel, wise sellers know that they must present quality and value to achieve the highest prices. Have a pre-listing inspection and make repairs before going live. If you need a replacement property and don’t already have one lined up, be sure your listing agent can address your needs.
We are in an asset bubble.
Frankly, I may be understating the situation. In an effort to find a decent return, investors are snatching up low cap rate and low cash-on-cash return properties. I have seen numerous sales where investors are blazing ahead while ignoring major profit and interest hazards. In addition, other agents and I are encountering numerous clients seeking outsized returns with absolutely zero experience and the wrong temperament to be a real estate investor. Some of these people will survive through sheer tenacity and by putting in extremely long hours. Many more will be grateful to sell at a loss or will lose the property to foreclosure.
Interest rates can only rise and all experts expect to see rising interest rates. Commercial loans are not fixed loans. Commercial loans reset in 3, 5, 7, and a rare few in 10 years. Buyers who purchased with minimal spread between their interest and cap rates will feel a major profit squeeze. Profitable properties will become marginally profitable. Marginal properties will operate near or at break-even. Break-even properties will become dogs.
These problems will not happen overnight. Expect the cycle to begin in 2020 and exacerbate in 2022.
What advice do I offer to buyers? This is not the time to overpay. I strongly recommend a 3-point spread between your interest and cap rates. Don’t be afraid to sit on the sidelines and find alternative places to invest while waiting for the right property.
What advice do I offer to sellers? If you’ve thought of selling, this is your time. Many buyers are losing their heads and overbidding. Some are even making up for bad appraisals out of their own pocket. To get the best money, spruce up the property and its financials before you go to market. Even if you do not want to sell now, I strongly recommend starting this process now.
Are you a buyer and worried by this new marketplace? Are you a seller who wants to take advantage of unprepared buyers? My name is Mike Kwiatkowski and I am a Realtor and Broker Associate with Coldwell Banker Residential Brokerage of Brookfield WI. It will be my pleasure to help you achieve your goals! Let’s talk; you can reach me at firstname.lastname@example.org or at 414-207-2938.