It’s finally spring (hopefully), and our West Michigan temperatures are starting to heat up almost as quickly as our real estate market.
Now is a great time to sell just about any type of real estate as the seller’s market continues in full force. The major issue I hear from commercial and residential salespeople alike is a lack of inventory to market to the hungry buyer community looking for their first home or their next investment property.
Many sellers simply don’t know what to do if and when they sell their property because replacement inventory is so tight right now. There also are a lot of sellers who seem to be waiting on the sideline for the ultimate market pricing peak. Well, we think the peak has arrived and here are a few reasons we believe it’s time to put that For Sale sign in your yard, like, yesterday.
1. Low unemployment
We’ve been experiencing very low unemployment in West Michigan. When more people are working, those market participants are fiercely competing for the properties you hear about with five cash offers with no contingencies. Meaning, sellers have likely the largest pool of qualified buyers for their properties right now.
2. Low interest rates
Rates on mortgages have been at all-time lows, bottoming out at 3.50 percent in December 2012. This gives buyers more buying power as they are able to sustain higher prices with the same amount of equity down payment. Therefore, the qualified buyers mentioned above have access to the most dollars they can qualify for today with lower rates.
3. Interest rate uptick
These low rates will not stay low, however; the Federal Reserve recently increased the fed funds rate again, which is how many mortgage rates are priced. When rates start to tick up, chances are they will not be returning to the historic lows we’ve seen in recent years. As rates continue to rise, buyers will no longer have as much buying power as before, which will put downward pressure on prices going forward. This signals a prime time for sellers to strike while the iron is hot and buyers are able to afford the highest prices.
4. Capitalization rate
This is a widely used ratio of net income to real estate value for investment income properties. Lower cap rates equal higher real estate values and vice versa. As interest rates rise, cap rates will eventually follow, which ultimately lowers property values even if the income stays the same. What that means is while values may be higher today, we will see values peak and begin to decline as interest rates increase over time. Therefore, if you own commercial or residential income properties, your cash flow is the highest value in this economic environment and it may be time to walk away from the roulette wheel and cash in your chips.
5. Owning vs. renting
Owning can be cheaper than renting in many cases. In West Michigan, we’ve experienced some of the most explosive residential rental demand in the country. Where there is demand there is competition for supply, increasing rental rates to new highs. Purchasing a home may provide a less expensive living cost than renting an apartment in West Michigan. For example, if someone is paying $1,000 per month in rent, they could potentially afford a home in the $150,000 to $200,000 price range with an $800 mortgage payment, leaving $200 per month for insurance and taxes depending on the type of mortgage they receive and how much equity they have. This is in addition to the benefits of building equity and tax deductions for interest expense.
There is no question the real estate market is on fire. The question is: when is the right time to cash in on the equity this market can deliver? The economic outlook is great for the near future, but there are a lot of reasons this summer could be our peak pricing season. Don’t regret sitting on the sidelines in three to five years. It’s always a good idea to regularly assess the value of your property and the options available to you to save, earn and invest the equity that has been created with your real estate investments.