Inflation and Recession and High-Interest Rates, Oh My!
By Pat Kilner
Remember when the last time the market was in a tumult like this? Well, it wasn’t exactly like this, but the feeling of uncertainty was the same. It was June of 2020 and the real estate market was stalled. Sellers were scared to allow anyone in their homes, buyers were scared to go out on the street and most jurisdictions had shut down commerce.
Then, some folks saw an opportunity and sprinted.
No two market shifts are exactly alike. But what is always the same is the fact that disruption always creates opportunity. Some will focus on and find opportunities. Others will bury their heads. Recessions have that effect.
Opportunities are often found by asking the right questions. Here are a few that we’ve been considering this week and some of the opportunities we are seeing on the horizon.
Will there be a foreclosure crisis of any significant magnitude?
It’s tempting to believe that another crash of 2008 is upon us: a crash driven by foreclosures. This is not the same sort of market shift. In the DC Metro area, we did not give loans to folks who could not afford them. If you won the right to own a house in the past three years, you have the financial means to live with that mortgage. What could change this ability? Widespread layoffs and a bad job market. Areas like ours will fare better than most with the stability of government employment, the deep pockets of legacy tech firms (not startups), and the general staying power of knowledge workers (the majority of DC-area workers) versus blue-collar workers.
Principal Opportunity: Savvy investors will not lose significant value when buying in the DMV, if they buy in the right neighborhoods.
Will demand be resilient (flexible) enough to buy homes in spite of higher rates?
The demand we saw over the past three years has been principally driven by a generation’s coming of age (Millennials) who have more savings than prior generations in addition to the help of their parents (Boomers). In the short term, they were lured by rates, but they will stay because of their average age and coinciding responsibilities as young spouses and parents. Families buy homes, sink deep roots and fight to pay the mortgage each month. In the short term, demand has been muted due to interest rates.
Principal Opportunity: Buyers who still have strong cash reserves will lock down homes without competition or the need to escalate 10-20% over the asking price to get the deal. In the short term, their rate will be higher, but if you buy with a 10+ year perspective, your options multiply. As an aside, an increase in your mortgage of 10% for an average home in the DMV equates to roughly the equivalent of a 1-1.25% increase in your mortgage rate. Pick your poison.
What sectors of the market will be most affected?
Condos have already been performing poorly relative to single families. Expect this to continue. Also, the very high end of the market will return to a more “soft” state, allowing for better negotiations for buyers. The middle of the market will remain robust. We do not expect supply to wildly outpace demand here. Sellers will need to be beautifully prepared and marketed to get top dollar and merit competition. The buyers who are looking will be serious and willing to compete for the best homes.
Principal Opportunity: Investors and first-time buyers looking to find less-than-ideal condition properties will find a glut.
