$1.2 million of real estate in 2021. How much will it go for in 2023?
The real estate circle of life:
- Interest rates change affordability.
- Affordability changes buying power.
- Buying power changes the profitability of your investments.
Knowing past and future interest rates, affordability, and buying power will help you make informed decisions about your next real estate purchase.
For reference, let’s work out some examples of affordability for real estate in 2021 compared to 2023.
Purchasing Power for Real Estate in 2021 for $1,000 Payment
If we had a buyer who could afford a payment of $1,000 today, they could buy a $150,000 home.
Just a year ago, buyers could get interest rates at 3% or lower. So in 2021, this buyer would have a purchasing power of $252,000.
That same buyer, in 2023, is anticipated to have a purchasing power of only $124,000.
Purchasing Power for Real Estate in 2021 for $5,000 Payment
If another buyer was going to buy a $750k house in 2022 at a 7% interest rate, what was their purchasing power in 2021?
For the same $5,000 payment, someone in 2021 could afford a $1.2 million house! In 2023, that payment could only get a $620,000 property.
How Affordability Impacts Sellers
As an investor, it’s wise to keep this reality in mind:
In a matter of two years, someone can go from being able to afford a $1.2 million house to a $600,000 one.
With no change in income. No change in qualifications. No change in credit score. The only change is how interest rates impact payment.
Although affordability changes so drastically in a short amount of time, mindset does not. People will still expect the quality of their previous higher price point while they’re looking at homes in their current lower price point.
In addition to focusing on the numbers of your flip, you also have to obsess on quality. If buyers don’t see the quality they expect, they’ll either stay in their current home, or find another property on the market that won’t need any fixes.
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