Calhoun County, AL – Over the last few years, the price of housing has skyrocketed. This has led many to feel that homes are now overvalued and that prices will eventually come crashing back down. Although I’m a financial planner that primarily helps others with investing in the stock market, I do keep up with the real estate market rather closely. Just like the stock market, the housing market is affected by many variables, most of which have to do with the economy.
First, let’s discuss why home prices went up in value so quickly and drastically over the past 2-3 years. When the COVID pandemic began in the spring of 2020, the Federal Reserve slashed interest rates to historical lows. This move was to promote borrowing, which in turn creates more spending and stimulates the economy. The U.S. government also enacted maneuvers to stimulate the economy, which included stimulus checks, grant money to state governments, and PPP loans to small business owners. The results of all these actions proved to be helpful in boosting the economy, but the increase in the money supply and sudden spending caused inflation. Inflation and historically low interest rates created the perfect storm for housing prices. Mortgage rates were low, which made houses more affordable for prospective buyers. And inflation naturally made housing more expensive.
Many remember what happened to the housing market in 2008 and feel that we are due for a repeat. However, it’s important to understand what exactly happened back then. Leading up to the 2008 financial crisis, banks and mortgage lenders were partaking in subprime lending. Regulations were looser and banks were able to lend to borrowers with low credit scores and did not properly verify borrowers’ income and their ability to pay these mortgages over time. On top of this, the banks were bundling these mortgages into an investment product and selling them to investors. By doing this, they were passing on the risk to investors but labeling these investment products as highly rated and safe. Eventually, borrowers began defaulting on their mortgages and this created a domino effect throughout the economy. Many banks failed, unemployment skyrocketed, and people lost their homes. As a result, there was a sudden oversupply of homes on the market and a sharp decrease in demand/buyers. Therefore, home prices experienced a significant drop in value.
This brings me to my thoughts on the housing market today. Generally speaking, the price of something is simply where supply and demand meet, which can be better stated as the value at which one is willing to pay. The problem facing the real estate market now is simply one of supply and demand. Yes, mortgage rates are higher than they were a couple years ago. And we are starting to see data that reflects the real estate market cooling. However, I would not count on a drastic price drop in home values any time soon. The demand for home purchases is still elevated but the supply of available homes for sale on the market is quite limited. New homes have not been built at the same rate they were prior to the 2008 financial crisis. Until demand faces a significant drop or supply catches up with demand, I see no major change in home prices and expect home values to remain elevated at their current levels.
To summarize, the real estate market is like any other market. Markets go through booms and busts, ups and downs. Just as I tell my own clients when investing in the stock market, timing the market is very challenging and not something I advise attempting. I feel the same about real estate. If you’re in the market for a home, but you’re waiting to buy “when prices come back down”, please understand that there’s no guarantee this will happen any time soon. Until supply meets demand, especially in our local real estate market here in Calhoun County, AL, prices may remain at their current levels for quite some time or possibly even continue to rise.
Editor’s Note – Jonathan T. Jones® is a local financial advisor who will be a contributing author for the Calhoun Journal. He will be writing financial pieces to help readers understand the market and many changes that are currently happening in the financial world.
Jonathan T. Jones, CFP®
Wealth Manager/Financial Advisor, RJFS
501 Quintard Avenue, Suite 17
Anniston, AL 36201
256-237-2300
Any opinions are those of Jonathan Jones, CFP® and not necessarily those of Raymond James.
Securities offered through Raymond James Financial Services Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Wealth and Retirement Services is not a registered broker/dealer and is independent of Raymond James Financial Services.
