Experts weigh in on how homeowners should react to softening home values

Advisors weigh in on how homeowners should react to softening home values.

By Doug Bailey

With housing prices softening and interest rates spiraling along with inflation, many homeowners are faced with the question of what to do at the moment with what is likely their biggest asset and investment: their home. Should you sell now or ride out the market declines? Are we headed for a major market crash? Are there things to consider like reverse mortgages to help weather eroding market conditions?

We put these questions and a few more to a variety of real estate agents, economists, and market experts, to try and decode what’s currently happening and what the future might hold. As expected, the responses were wide ranging with consensus on certain points.

“A housing market collapse or a severe recession is usually caused by factors we weren’t thinking about at the time.” Nathan Demaree, investor analyst, Carpathian Capital Management

Generally, the dozen or more experts we canvassed don’t believe that a crash is imminent for several reasons – mainly that there is still a significant housing shortage, which will keep prices relatively stable. Most, however, think declines will continue but won’t reach “crash” territory.

“A housing market collapse or a severe recession is usually caused by factors we weren’t thinking about at the time,” said Nathan Demaree, investor analyst at Carpathian Capital Management, in Minnesota. “A prime example is 2008. Nobody had really given thought to people selling bad loans to under-qualified borrowers. To the factors we can see today, we will likely not have a housing market collapse. Supply of homes is still very far below equilibrium, meaning our housing shortage that is driving high home prices will only continue.”

Allyson Waddell, an agent and success manager at RealtyHop, a nationwide real estate listing service, says prices are declining as a direct result of increasing interest rates and home sellers have to resign themselves to the fact that buyers now have limited purchasing power.

“At this time last year, a typical home buyer could have afforded a home worth 24% more than what their current budget allows," she said, adding that now buyers are being forced to tighten their budget, leaving fewer options,” she said. “Sellers, and their agents, are responding to this trend by lowering their asking price to accommodate high-interest rates.”

Waddell and other believe interest rates will remain high for some time and prices will continue to reflect that, however, she, too, does not foresee a crash or collapse.

“For housing prices to drastically drop, we would either have to produce an incredibly high amount of newly constructed homes in a short period, or everyone looking for a home would suddenly have to stop their search and cease buying activity,” she said. “At this point, it is unlikely that either will occur.”

She said homebuyers who are in a position to purchase property should consider buying now as there is not a strong indicator to suggest that waiting will work to their advantage.

Sometimes, though, the likelihood of a crash or deep recession depends on where one lives. Dustin Fox, owner of Fox Homes in Virginia, believes the bottom is falling out of the housing market, though he is clearly in the minority.

“All the signs that are on the table right now suggest a housing market crash,” he said. “Some major housing markets in the U.S. are already in a housing recession. If the prices drop rapidly by the start of the next year, the crash can be halted.”

Is this a time to buy or sell?

This one’s a jump ball.

“During this time, investors might be tempted to sell off their assets to prevent a loss,” said Dan Belcher, CEO of Mortgage Relief, an Oklahoma-based mortgage consultant. “However, eventually, the intervention of the Federal Reserve to stabilize the real estate market will cause the ROI to normalize.”

A plethora of factors are weighed when trying to decide whether to buy or sell, experts said.

“If you are thinking about selling your home in the near future, then consider selling now before real estate values continue to decline,” Eric Jeanette, of Dream Home Financing, in Tennessee. “If you are looking to purchase a home that you plan to live in for a long time, then feel comfortable making a purchase today.”

Jordan Davey, digital marketing manager at Victory Property Management Inc., in North Carolina, said selling might make sense at the moment because prices are going down and are expected to decline further. However, there are other ways to utilize the situation to your advantage.

“If you had the opportunity to refinance and lower your rates, do not sell,” he said. “We're not expecting to see near the 2.7-3% mark for at least another five years. With such incredibly low mortgage rates compared to today, homeowners need to look at their homes as more than just a place to lay their heads at night. This is an investment opportunity. With rental rates on the steep incline, it wouldn't be any surprise to me to know that some, if not most, homeowners with lower rates could bring in an extra $500+ dollars a month by using their home as a rental investment.”

Still others said this may be a good time to actually invest more in a home thorough renovations and improvements.

“Most advisors recommend homeowners stay put and not sell their homes right now,” said Kate Diaz, an interior designer and self-professed real estate expert in Miami. “Selling now would result in a loss of profit. Homeowners should consider investing in home improvement projects that can add value to their property and improve its function. When it comes time to sell, these upgrades can help speed up the process and maximize profits.”

Should a reverse mortgage be considered?

While the terms of reverse mortgage – which enables borrowers to access the equity value of their property while relieving them from monthly payments – may sound inviting during economic struggles, most experts warn against them.

“Reverse mortgages and distress sales might not be the solution to preventing investment loss because you might end up shortchanging yourself,” said Mark Stewart, CPA at Step By Step Business, a consultant company for entrepreneurs. “Instead, all you need to do is increase the value of your real estate investment through redesigning, repair, and proper maintenance. You might not get a quick buyer willing to pay for the value they are receiving, but with time and patience, you will find a buyer who recognizes value.”

Overall, patience was mentioned by many experts as perhaps the best strategy for dealing with the current economic conditions.

“With recent news about a possible recession and rising mortgage rates, buyers have definitely taken a step back and lowered this historic level of housing demand,” said Klaus Gonche, real estate advisor and team principal of The KG Group with Compass in South Florida. “As in all things, with lower demand prices will show a reaction by coming down a bit. None of this will trigger a crash however – it’s just that buyers have put their plans temporarily on hold. This has not reduced the buyer pool for homes, it has just cooled down a bit. I believe that as conditions begin to normalize, this pool of dormant buyers will flood the market once again driving demand back up.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].