One of the key factors in real estate investing is purchasing a listing for a reasonable price. So, when will housing prices drop?
Table of Contents
- Why Rising Home Prices Are Bad for Real Estate Investors
- Reasons Why Home Prices Are Not Dropping Anytime Soon
- 2 Factors That May Cause Home Prices to Drop
- What Should Real Estate Investors Do?
- Recap
As an investor’s goal is to make an income, the soaring prices are making it difficult to make a profit. It makes them question if they should wait for housing prices to drop before investing in new real estate.
In this article, we will talk about why the housing market prices are so high this year. We will look into when the best time is for investors to start acquiring new investment properties.
Why Rising Home Prices Are Bad for Real Estate Investors
Being an investor means your goal is to be making money in real estate. In the housing market 2022, finding a home for a reasonable price may come as a challenge. Most are wondering when will housing prices drop again. But first, we will look into some of the causes that are driving up the housing prices this year.
4 Reasons Why Home Prices Are High Today
Below are the top four reasons for high home prices this year.
1. High Property Taxes
One of the biggest factors that are causing the significant rise in housing prices is the increase in property taxes. Unfortunately, for anyone looking to purchase a home, they must understand that property prices and property taxes are likely to go up as the other does.
From an investing point of view, purchasing a listing with high property taxes will influence how much you need to charge for rent. In some areas, people might not be able to afford the rent, which would cause you to lose money on the total investment.
If you come across a property with high property taxes that you think are not fit, you can appeal them. To do so, you would need to argue that other comparable listings in the area are sold at lower prices, and, therefore, are eligible for lower property taxes. Winning a property tax appeal can be quite difficult, and it varies among states and cities.
2. Low Interest Rates
An additional reason for higher housing prices is the fact that interest rates are so low. Even though the currently low interest rates might appear to make it easier for anyone to purchase a home, it actually does the opposite. Buyers are more inclined to purchase property when the cost of financing a home decreases. However, because the financing is lower, it means higher property prices.
It creates a problem for investors as purchasing a property for a higher cost means it will be harder and longer to make that money back. Investors question will housing prices drop when interest rates rise.
3. Changes in Local Zoning Regulations
In recent years, there have been quite a few updates to local zoning regulations. It means that it is more expensive to build properties that are up to code and get the right licenses. As a result, property prices must go up to offset the costs of the zoning changes.
New zoning regulations also make it challenging to build new homes. It means the properties already built will be sold for more, as there is a lower supply of homes on the market for potential buyers.
For an investor, such a predicament is the least likely to change. They must rely on other ways that can bring down housing market prices.
4. Higher Land Prices
As mentioned above, zoning codes are creating difficulties for building new properties. For that reason, land prices are also much higher than they used to be. It increases the cost of building new homes and raises the property prices of existing homes. Investors will need to take into consideration the cost of the land when purchasing new properties.
Reasons Why Home Prices Are Not Dropping Anytime Soon
Unfortunately, there is no foolproof insight into a possible housing market crash. Though we previously looked at why the real estate market is bad for investors right now, we will also discuss why the market will continue to see such high prices.
1. Supply
Since the pandemic, the US housing market’s been experiencing some supply issues. Specifically, there are not enough starter homes for first-time homebuyers. As beginner homes are usually priced to be affordable, younger generations are struggling to purchase such properties. Homes that were once considered good options for first-time homebuyers are now much too expensive to afford.
The lack of supply causes a few problems for investors as well. If there are not enough homes to go around, the prices will continue to stay high. Pricy homes make it harder to achieve a healthy return on investment.
Supply is also being compromised by older generations refusing to move out of their homes. Typically, the housing market expects the older population to move to retirement communities, but recently, that’s not the case. It means there are much fewer properties available to purchase, leading to the prices increasing on the ones that are.
2. Construction
The housing bubble is also happening because of construction issues. First, since the pandemic hit in 2020, there have been manufacturing delays in different types of construction materials. It slows down the builders’ ability to produce homes and makes it more expensive to do.
Due to the fact that more homes are not available because of construction, there are fewer homes to buy. Investors are not only competing with the buyer’s market for properties but are paying more to be able to purchase these homes. It is why you might want to wait for when housing prices will drop.
3. Inflation
Another big issue we have seen in 2022 is inflation. Basically, everything is becoming more expensive and less affordable, including houses. Inflation is causing property prices and mortgage rates to go up. It makes purchasing properties much harder for most individuals.
Investors may be wondering when will the housing prices drop so they can act and purchase a new income property.
2 Factors That May Cause Home Prices to Drop
Everyone is wondering when will housing prices drop 2022? Though it isn’t looking great now, there are some factors that can cause a decrease in home prices. Below are two things to look out for that might indicate a price decline:
1. Mortgage Interest Rates
One of the biggest factors that impact how expensive houses are is the cost of mortgage interest rates. Mortgage rates can increase, which then raises the monthly payments on your mortgage and drives up property prices. On the other hand, if the interest rates decline, more people will be able to afford homes, and more people will look to move. It will create more supply and therefore cause a decline in housing prices.
Investors should keep an eye out for interest rates on mortgages dropping, as that may be a good time to purchase a new investment property.
2. Location
Specific locations may result in a decrease in housing prices if they’re less desirable or there’s too much supply. People looking to sell their properties will then drop the prices on their homes to try to sell them faster.
Though certain locations may result in housing price drops, it may not be the best area to invest in. There must be a reason for the significant drop in costs, so it is likely people are not looking to move to the said area. In such a case, investors should consider waiting.
What Should Real Estate Investors Do?
Even though the projections on when housing prices will drop can be a hit or miss, some investors may be able to generate profits even in the current housing market. With housing prices so high, people who would normally be purchasing houses may be looking to rent instead. More individuals looking to rent means more opportunities for investors.
Even though it may be more than you want to spend to purchase a property, the likelihood of finding renters might be higher in such a market. It means not only are you able to change a bit more for rent, but you won’t see any problems finding renters. Creating a rate of return can be easier than you anticipated.
If you are not ready to take such a risk though, you may want to hold off investing until housing prices drop. Although the question of when will the housing prices drop cannot be answered with certainty, it may be the best decision for your investment money.
Is This a Great Market for First-Time Investors?
The housing market right now might not be the best for first-time investors. With property prices so high, you will need to spend more than you likely anticipated to purchase any location. It will result in a harder time making money in real estate.
Additionally, you will need to charge more in rent to make your investment money back. However, renters may be turned away by higher rent prices. First-time investors should consider waiting for prices to go down before purchasing a property.
Is This a Great Market for House Flipping?
Unfortunately, the current real estate market conditions are unfavorable for house-flipping. The first reason why is, in order to make money on a house, your goal is to purchase it at a low cost. Current property prices are much too high as they are to find a reasonably priced home to flip.
Second, renovations to the house will be much more costly than usual. Construction and manufacturing materials are low in supply, making them harder to get and more expensive. It will result in higher renovation costs.
Lastly, once you are ready to re-list the home, the only way to make back your money from the original purchase and renovations is to ask for a higher price to help cover the renovation costs. The new property price will be much too expensive for homebuyers, who are likely to sit on the market, as a result.
Investors interested in house-flipping should wait until property prices are lower to purchase homes.
Is This a Great Market for Wholesaling?
Investors looking to wholesale real estate should wait until property prices drop. It can be too difficult to find buyers for a home, especially the ones looking to pay more than the sale price. It is best to wait for a competitive market when wholesaling.
Is This a Great Market for Selling?
Sellers may struggle to sell their properties in the 2022 housing market. It is likely sellers will need to price their new properties with the intention of buying a new home. The adjusted asking price might be too expensive for other prospective buyers, leaving your house sitting on the market.
Is This a Great Market for Traditional Rentals?
This is a tricky question in today’s market. On one hand, more people may be looking for long-term rentals as they cannot afford to purchase a property.
On the other hand, for an investor to purchase a property as a long-term rental, they will need to charge higher rent. Investors can potentially make money in today’s market from traditional rentals if they are able to find the right renter.
Investors can look at traditional rentals to charge higher rent and make more money, amid the continuing increase in housing prices in the US real estate market.
When Will Housing Prices Drop?
It is not known when we will start to see a decline in housing prices. Once we see significant changes in the housing supply, as well as the demand for construction materials, we can assume a drop in housing prices will come as well.
Recap
It can be very hard to know exactly when will housing prices drop. The current housing market consists of high property prices, mortgages, and interest rates that don’t show any signs of decreasing any time soon.
Investors should consider waiting until a more opportune time to invest. Purchasing a property now might be a losing proposition. Additionally, it will be even more difficult to generate a passive income in the current state of the US real estate market.
Investing in any real estate market can be difficult, even for the most experienced investor. We recommend visiting Mashvisor to help with all aspects of investing. Mashvisor uses data from reliable sources such as the MLS database to ensure we provide accurate metrics to our users.
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