The complicated nature of real estate makes the “when to sell” decision a mix of pros and cons that impact the individual’s situation. The data of the real estate market is changing daily. Your situation can change at any time. The best time to sell a home is when the changing real estate market and the seller’s situation match to give the best value.
Your Home Your Price and Timing
First, every one situation is unique. The article following is a basic real estate situation analyst of macro-economics and the general impact on housing prices. Take advantage of our free consultation with a Coffee Real Estate professional to evaluate your unique situation. It is completely free of any obligations.
Real estate data that impact value
The major factors that impact real estate prices are based in hard data numbers. The supply-demand balance, the local real estate market, the condition of the house, the layout of the house, access to money issues, and the affordability of the real estate market all have real estate trend data that can be examined.
The affordability and access to money will combine to form a powerful influence on the market. All these factors are the pressure to affect real estate values. These are going to change and the impact housing prices will change.
The Federal Reserve bearing on housing prices
The Federal Reserve is in the process of changing their easy money policy. They are starting by ending the QE purchases of government securities and mortgage backed securities. These have already had a big impact on mortgage interest rates.
The mortgage backed securities’ market is very important to the amount of money available for mortgage lenders to access. When the Fed stops buying mortgage backed securities, if private money does not step in to purchase these investments, the pool of mortgage funds will dry up and very few mortgages will be funded. That is a game changer. All bets are off to where real estate prices go from there.
The influence of mortgage interest rates on housing prices
The next step in the Fed’s plan is raising interest rates. This will directly impact mortgage rates. There will be two strong forces to lower home prices at that time. The first is the affordability issue. This is a straight forward concept. As interest rates increase the mortgage borrower needs to buy less home to afford the same monthly payment. This puts downward pressure on the whole real estate market.
The influence of mortgage interest rates on an individual’s ability to purchase residential is so profound many people assume it is the only factor in real estate valuation. Veterans can get VA loans with lower interest rates. However, mortgage rates are only one interest-related factor influencing property values. Because interest rates also influence capital flows, the supply and demand for capital and investors’ expectation of return on investment also puts a downward pressure on investment real estate.
The income approach to real estate values
The income approach to real estate values are impacted by the higher interest rates. The income approach is the most common valuation technique by investors to see if real estate is a good investment.
Basically the income approach establishes the valuation of the property by forecasting property income.
Step 1 The income generally is the amount of rent the property will generate.
Step 2 is to take all property-level costs, including the financing cost; the analyst then arrives at the Net Operating Income (NOI), or cash flow remaining after all operating expenses.
Step 3 by subtracting all capital costs, as well as any investment capital to maintain or repair the property and other non-property-specific expenses from NOI, the result is the Net Cash Flow (NCF).
Step 4 the net cash flow equals cash available to investors and can be viewed as the property dividend. The NCF is used for valuing equity or fixed-income investments.
Step 5 by capitalizing dividends or by discounting the cash flow stream for a given investment period, the property value is determined.
The key concept in the income approach to real estate values is the amount of return on investment as a rate number determines the property value.
Step 6 is the capitalization rate. The impact of the capitalization rate on real estate value is the higher the capitalization rate translates into the lower the value of the real estate.
The effects of interest rates on real estate values can be seen in capitalization rates. The capitalization rate can be viewed as an investor’s desired rate of return on the money.
Therefore the higher the interest rate in all types of money or cash markets mean the real estate wants a higher return on their money because real estate ownership is a higher risk. The effect is lower real estate values are needed to achieve the higher expected rate of return.
Why is this important to most home owners who are not real estate investors?
In some home price ranges investors make up almost 50% of the homes sold. If they go away because they can make a higher rate of return someplace else, then who will take their place and buy the real estate? The downward price pressure will be very powerful.
The downward price pressure will start at the lower priced properties. The reason is most real estate investors want to make a cash flow on the money they invest in a property. Therefore the rental payment must be at a rate that will offset the price paid for the property. These numbers work best on lower priced single family homes. Multi-family properties have a different way of valuing the property.
The lower priced properties loss of investment buyers will impact the whole market in a short time frame. As property owners lower their price, other property owners will be forced to respond or not sell their property. The impact will be felt across all price ranges.
The two forces of the downward price pressure, the affordability issue on home prices
The two forces of the downward price pressure, the affordability issue and rate of return as expressed by the capitalization rate, will first stop the upward price movement and then move the prices lower until there is a balance of property value and willing able buyers.
Real estate as investment impacts home prices
The investment saying goes, “smart money looks ahead much more clearly and farther than dumb money”. Many Wall Street and money managers have already slowed or stopped buying single family homes as investment properties. Some are even looking at the exit point of these investments.
So now may be the best time to sell. Before the rate increases of the Federal Reserve become so high it damages the real estate market for years. Interest rate increases are a powerful mover of real estate prices. But this is only one of the many forces that have an effect on home prices.
How can Coffee Real Estate find value in your home?
- What pricing power does your property have?
- Can your property have hidden value to overcome the general real estate trend?
- Do you own a property in Sacramento County? They are in high demand now days.
- Do you own a property in Placer County? They are in demand.
Work with a professional real estate agent that understands real estate market values. If a real estate agent/realtor does not understand the current property value market, they could guide you to lose thousands of dollars on the sale price. Or worse yet, they may not understand that now is a good time to sell if the home is marketed correctly. The best price for you could be right now. And holding onto the property until the price goes much lower or take longer to sell may not be the best thing for you.
Learn the facts about your property and understand when the best time to sell your property is. Knowledge is power. Coffee Real Estate will give you the power to make the best decision free of cost and free of obligation. Reach out to us today…
