The undeniable truth our industry is facing is not that interest rates are up or that there is limited supply of homes to select from on the market. Those are temporary conditions outside of any one person’s control. Rather, the undeniable truth is our job is to create real value and we are all under considerable pressure to figure out how to do just that. I’ve got a suggestion but before I share it, here’s some context on the market as I see it.
Housing Prices & Affordability
Housing affordability as we’ve come to understand it is under significant pressure. The pressure is of course created by rising mortgage rates coupled with significant appreciation in values. Generally, these factors have an inverse relationship to one another—when rates go up, prices come down. Under normal conditions, affordability remains relatively consistent. Why? Because homeowners tend to think of their ability to afford a home in monthly payments. If the monthly budget is $2200 per month, then we back into the amount of house they can afford given the prevailing interest rate. If fewer people can afford higher priced homes, demand comes down as does pricing, provided supply remains consistent. Basic economic theory-nothing new here.
However, we are not seeing prices come down as rates rise because supply (housing inventory) is not remaining consistent. Would be home sellers are deciding not to list their homes because they do not want to become would be homebuyers. That’s a rational response to the perceived lack of opportunity but that does not make it the right response. Herein lies our opportunity to add real value to our clients. Deciding where and how to live must be much more than an economic decision. Its our job to ensure our clients are making their decisions holistically and not just out of fear.
Based upon the latest numbers I can find- housing prices are 46 percent higher than they were in 2006-just before the once in a lifetime housing crash we saw in 2007/2008. However, housing affordability is down 29% from 2006. This tells us people are willing to invest more of their income and net worth into real estate today than they ever have been. Why??? It must come down to the non-economic reasons people make their housing choices. If history and data tell us the economics of housing may not be the primary decision driver- why do we as professionals spend so much time focusing on those? My counsel is to begin building your business around identifying non-economic (qualitative) reasons to sell and buy housing. You can start by evaluating your own life and build a story around why you live where you do. If you’ve personally made a choice to sit tight until housing becomes more affordable, give these questions some thought and use them as a part of the counsel you provide to clients:
- What specifically are you waiting for? When will the time be right and how will you know it?
- How do you value time relative to money? How many holidays will need to pass before you’ll be driven to act?
- Are you more motivated by fear or opportunity? There’s generally both inside each decision to be made—which one wins and why?
- How can we make the math work so that you are empowered to pursue what really matters?
So, in summary- we as trusted advisors, professionals, and counselors now face a new challenger and an exciting opportunity—take this period to re-examine your practice by adding real value to your clients in highlighting the ways real estate related decisions should be consistent with life’s priorities. I wish you much success and gratification in the effort!!
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