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Three reasons why now is a bad time to buy real estate

Three reasons why now is a bad time to buy real estate

Is now a good time to buy a house or other real estate?

I am an enormous fan of real estate investing. Although I am nowhere close to being a real estate tycoon, my rental condo in Seattle has performed well beyond my best expectations, with a return on equity in the 30% range annually over the past two years. 

The performance has been so good, and the process of landlording has been so easy, that I have been pondering if now is a good time to buy a house... another one I mean. Even though I strongly believe in real estate as an asset class over time, I am not convinced that now is a great time to buy more real estate. Prices are VERY high, and cap rates (aka the cash return for rental properties) are hovering around 3-4% in coastal cities like San Francisco and Seattle. Interest rates are also rising, which has the dual affect of making bonds more attractive as an income source, and making real estate more expensive, which will obviously have a negative impact on prices. 

So, the question stands: is now a good time to buy real estate? I don't think so, and there are three reasons why. 

Reason not to buy real estate #1: Prices have risen too much, too fast

Home prices have been rising at a rapid clip, to put it mildly. My own condo has seen around 30-35% appreciation in total value over the past two years in Seattle. As you can see from the Tableau Public visualization below from Zillow Economic Research, these price increases are happening across the country. 

Although all of this appreciation is happening on the back of strong economic fundamentals, it isn't guaranteed to continue indefinitely. As we all learned in 2008, what goes up can definitely come down, or cool off. I am not expecting a massive crash like in 2008, but it's hard to justify buying into any asset that has increased in value so much in such a short amount of time. 

Reason not to buy real estate #2: The economy is at the top of the cycle

I am not expecting a recession anytime soon, but it's impossible not to notice how PERFECT everything is right now. The economy couldn't be doing any better! Record stock prices, record profits, record unemployment levels (in a good way).

It's really hard to imagine how the economy could be doing any better. I guess productivity could be improving more rapidly and wages could rise faster for people with lower incomes, but beyond that there isn't much to tweak. 

Reason not to buy real estate #3: Interest rates are going up

The biggest reason I am not investing in real estate in 2018 is simple: interest rates are going up. When interest rates go up, houses get more expensive. When houses get more expensive, less people can buy them, demand goes down... and theoretically price goes down as well. You would think this would be a gradual change, but even small changes in affordability can have immediate impact on housing prices because the entire tone of the market can change in an instant. Today it's a frenzy to buy as quickly as possible before you get priced out; tomorrow it's a frenzy to offload real estate before it crashes. 

As you can see from the visualization of survey responses on housing price expectations from Zillow below, people are expecting higher interest rates and a slower pace of price appreciation. Their expectation of this happening will make it happen even more forcefully than it would on its own.

It's unlikely that rate rises will be significant enough to affect housing prices much this year, but in 2019 that could be a different story.

So when is the best time to buy a house?

The best time to buy a house would probably be when rates are low, prices have fallen a good deal in the recent past, and the economy is at the very bottom of the cycle. Although rates aren't super high, there's no doubt that the other two criteria are far from their optimum level for a house purchase at this time. 

Conclusion: Is now a good time to buy a house? Probably not.

It just doesn't seem like a great time to jump into the real estate market. Everything is too good! The market is hot! I do my best to buy low and sell high, and a big component of that is trying NOT to buy high, as much as is possible. This probably isn't the top, but it certainly feels expensive. 

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