Housing starts are approaching an eight-year high.
Building permits hit an eight-year high in June.
Median sales price and sales of existing homes have reached levels last seen during the epic 2007 housing bubble.
Housing is firing on all cylinders, and I’m selling real estate. Here’s why…
It seems like everything housing needs to go right, is going right.
The labor market is improving, home prices are rising and people are purchasing new homes at rates not seen since the housing bubble. While most people are expecting more growth, I am in the process of putting a home on the market.
I am not a house flipper, but the market value of a home is just that, a market value. It can only be realized by cashing out — and right now is an excellent time.
Since the housing market bust in 2007 to 2008, it has been in a recovery mode, fueled by extremely low mortgage rates and an economic rebound driven by quantitative easing.
But, as we move forward, there are only two likely scenarios that remain for the housing market — and both point to a downturn.
The Fed Will Crush the Housing Market
Scenario #1: The Federal Reserve raises rates within the next six months.
Guessing when the Fed will raise rates is a difficult task. I am in the lower-for-longer bandwagon, but the Fed could always surprise us with a rate hike at any of the upcoming meetings. So I am looking out over the next six months at what a rate hike would do to housing.
This scenario seems to be the market favorite. The Fed Funds futures are pricing in odds for a rate hike at 73% in March. Whenever the Fed does decide to raise rates, there is one inevitable reaction — mortgage rates will creep higher as well.
And every one percentage point incremental increase in mortgage rates knocks off roughly $20,000 to $30,000 from the average home affordability — that’s nearly 10%.
A 10% knock off could easily crimp the housing market, leading to a significant downturn. As home prices slow their pace, or even decline, buyers are faced with higher borrowing costs, which will fuel a downturn in the housing market.
This is the opposite scenario of what has fueled the housing market thus far based on low rates.
That’s one plausible outcome. Here’s another.
Scenario #2: The Federal Reserve doesn’t raise rates within the next six months.
This is the direction I lean. The Fed has been expected to raise rates for years now, but these expectations keep coming up short as the Fed remains committed to delaying a hike.
The underlying reason for the delay: Our economy is not strong enough for a rate hike.
It’s easy to see a world in which the Federal Reserve holds off another year before even attempting to raise rates. And if it raise rates before then, it is likely a minimal tenth of a point, and a one-and-done situation. Either way, it is a sign that our economy remains fundamentally weak.
If the Fed continues to hold off on increasing rates, then mortgage rates will remain low as well. But no action from the Fed will signal how weak our economy really is, which will slow investment even with rates historically low to entice spending.
Simply put, there will be no one willing to pay interest on a declining investment, at least not enough to outstrip supply.
This will result in a downturn in the housing market as well.
Lock in Profits Now
Regardless of whether you see scenario one or scenario two playing out over the next six months, the takeaway is the same — housing is due for a slowdown.
If you are holding real estate properties and looking for an exit point, today is your day.
Market values are always fluctuating, and attempting to pick tops and bottoms is extremely difficult. Today is not likely the top of the housing market, but due to the two scenarios that are expected to play out over the next six months, both tell me we are nearing a housing downturn — and I don’t want to wait around for it to fall.
By locking in values today, you are capturing a significant rise since 2008, assuming you purchased your property any point since then and owned it for a couple years; you should be able to generate a decent return — anywhere from 30% to more than doubling your initial costs, depending on location.
In short, take some profits in real estate today. They likely won’t be there this time next year.
Editor, Pure Income