Real Estate Market Challenges (Let’s talk about vacation homes and second mortgages)
Recent events have made the real estate market challenging for many - Who fared well in recent years, who struggled, and why?
Imagine a science-fiction movie – or computer program – designed to model behavior when changes are introduced. The Matrix, The 13th Floor, and A Sound of Thunder, are but a few of several such examples where a small historical change gave rise to significant future consequences.
And now you’re a programmer interested in seeing how people will react economically to a health crisis.
With the COVID pandemic there was immediate panic: the stock market lost 35% in the early part of 2020. Emergency laws were enacted, and many people suddenly had to work remotely. Businesses closed. Travel was curtailed. Many things were put on hold. Heck, “life” was sort of put “on hold” and we are already referring to the “COVID imposed time warp” as “pre-COVID”.
The Federal Reserve, working hard to maintain a strong economy, kept interest rates artificially low during the pandemic. Inflation was under control. And these – and other actions – seemed to work. Despite the dramatic fall in early 2020, the stock market fully recovered. So, maybe “patience is a virtue”?
What about the behavior? People really started to think about how they were going to spend their time, especially work hours. If one is going to work remotely, is THIS where I want to spend my entire day?
By spending less and saving more, where is the best place to put money? Low interest rates mean pitiful low saving rates. And the stock market, while resilient, showed itself incredibly volatile … enter creative thinking and maybe owning a second home (vacation home, lake home, different climate home) becomes the investment answer.
Inflation is running at a 40-year high. The Federal Reserve has raised interest rates dramatically over the past two months, with rates poised to rise more throughout the year. The stock market has ebbed and flowed throughout 2022. And the housing market? Opinions differ, but for now we’re focused on the “second house” market buyers.
How did they fare?
|Who Fared Well||Who Fared Poorly|
|Significant savings and paid cash.||Moderate savings and financed with a variable rate mortgage of some kind.|
|Moderate savings but locked in a low mortgage rate.||Rates are going to increase over the loan term – making payments and the investment not as attractive.|
Perspective – all change has opportunity attached! With interest rates rising, for the first time in what seems like forever, and the chance for the housing market to get into more of a “stable state”, some outliers may be worth investigating. This brings us to the idea of vacation homes with second mortgages.
The Federal Reserve is on an interest rate hike expedition. What this means, according to most economists and financial gurus, is we are heading not just into a recession, but likely stagflation. Stagflation is primarily characterized by economic slowdown and high interest rates. Surging inflation rates to levels not seen since the 1980’s – focus on more aggressive monetary responses, along with already strained global supply chains – all of this leads to uncertainty, and dare we say, opportunity!
What is the stock market going to do? Some say it will rise, some say it will continue to fall, some say to stick it out for the long run – all “experts”!
What should one do when experts disagree? Focus on a niche! In the real estate market, the supply and demand should start to “level out”. Looking for opportunities in the market might start with a couple of things – vacation homes and second mortgages with variable rates. When the Fed increases interest rates, lenders will also increase the interest rate on variable-rate loans.
The increase may not happen right away, depending on the loan’s terms and conditions – maybe it changes annually, or monthly, or quarterly … whatever the terms, if you even somewhat like your friends, family, and neighbors – tell them to check the terms of their loans right now! (If unsure about the terms of your loan, call your lender and/or read your original loan terms/documents.)
An increase in your payment is never something you want to be surprised about! This leads to the possibility of overextended homeowners. Things might’ve been “just fine” with a first mortgage at 3.5% and a second mortgage at 5% … but, if that second mortgage now starts to jump to 6.5%, to 7.5%, etc., then things can get a little dicey. Now, attach that second mortgage to a vacation home or second home.
This is where one needs to take a look at “tightening the financial belt” perhaps.
The pandemic saw employees able to work from home, from anywhere – and a mortgage market that had extremely low rates – investing money wasn’t getting any return, and some folks turned to real estate. But, with uncertainty, especially in the way of monies, a second home isn’t a necessity. It might be time to consider what the inputs/carrying costs are (taxes, insurance, payments, upkeep, usage) and put pen to paper to see if this is the best use of current resources.
Look for possible overextended sellers – maybe they are not going to be able to keep up with the terms of a variable rate loan, as well as the general increases in home carrying costs?
Today’s housing market isn’t like it was with the “crash” in 2008 – that one was caused by cheap debt and shady lending practices with people in debt beyond what they could afford. The Fed is in search of the elusive neutral rate – an interest rate level that neither spurs nor restricts economic growth. A status quo.
Let’s look at home prices during times like these – in the past four out of six recessions home prices have actually appreciated! Prices dipped about 20% in 2008 and only about 2% in the early 90’s.
It’s all about diligence, research, information, and making on-time decisions … you can buy, sell, invest, flip, and enjoy this market!
BIGGEST opportunity in the real estate market – research potential buyers and sellers – the housing prices are going to stabilize, making it more of a 50-50 seller-buyer market. Some property owners are going to reevaluate their real estate investment(s) and possibly sell second homes where the pen & paper do not match their initial financial goals. Buyers in this market may want to finalize a move to a more “vacation home” setting and there you go, a seller and a buyer!
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