As real estate investors go out into the 2018 real estate market, thinking of buying an investment property or selling one, they wonder: Is the 2018 US housing market a seller’s market or a buyer’s market? Who will have the leverage in negotiating during the sale of an investment property?
There are many factors that can determine if the housing market is a seller’s market or a buyer’s market, so let’s get into the ones with the greatest impact. Keep in mind that this information is reflective of the general state of the US housing market. Many individual real estate markets vary in whether they are a seller’s market or a buyer’s market.
The US Housing Market January 2018
Realtor.com carried out an investigation of the US housing market in January of 2018, comparing it to January of 2017. According to Forbes, these are the general numbers and how they compare to last year’s real estate market:
- Median House Price: $269,500, up 8%
- Days on Market: 89 days, down 7%
- Housing Inventory: 1.23 million listings, down 8%
From these numbers, there are three takeaways about the current housing market. The median house price is higher, meaning there is a rise in house prices. Even with this increase in house prices, an investment property doesn’t stay on the market longer than 3 months, showing high demand for homes and rental properties. With the average investment property selling in a relatively short time (compared to last year), housing inventory is coming up short. January saw 1.23 million investment property listings, 8% less than last year.
So, with these numbers, is the US housing market a seller’s market or a buyer’s market?
Seller’s market: The supply of homes for sale is less than the buyers in the real estate market; the demand for homes for sale is high.
Buyer’s market: The supply of homes for sale is more than the buyers in the real estate market; the supply is higher than the demand for homes for sale.
Essentially, all numbers point to a seller’s market for the current housing market. A real estate investor selling an investment property has more negotiating power than one buying an investment property.
What has led to this seller’s market for the current housing market?
Housing Inventory in the Current Housing Market
While there is a lot of housing development in the works across US real estate markets, what is planned for now won’t be enough to get the housing inventory back to a healthy state. At the end of 2017, there were an estimated 1.297 million units planned. This still falls short of the 50 year average of 1.5 million investment property units. The supply won’t meet the increased demand, inflated by millennials looking to be homeowners and real estate investors this year in the real estate market.
One of the issues is that real estate developers need to find areas for affordable homes and rental properties in order to massively develop and up housing inventory in the real estate market. These affordable housing areas are generally not close to major commercial and job centers which is what real estate investors are encouraged to look for when buying an investment property. And therein lies the issue. Real estate developers hesitate to start housing development in such areas as buyers and real estate investors are not likely to be drawn to such homes and rental properties that have longer commutes to booming economic centers.
This is one major issue that will keep housing inventory low, maintaining a seller’s market rather than a buyer’s market. With the state the real estate market is in now, it will take years of overcompensating in housing development to catch up on housing inventory and return the balance between a seller’s market and a buyer’s market.
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Not the Perfect Seller’s Market for Selling an Investment Property
While selling an investment property may seem like the ideal plan for real estate investors right now, there are a few things limiting the pool of buyers (and having another more interesting effect, as we will see):
The rise in mortgage rates will make financing a rental property all the more difficult in the current housing market. Within two weeks at the beginning of January 2018, mortgage rates rose from 4.0% to 4.15%. Mortgage rates haven’t increased at such a fast rate since 2016. While they dropped in 2017, mortgage rates are trending upward for 2018. In fact, many institutional mortgage lenders have predicted even higher mortgage rates as the year continues (up to 5% according to Realtor.com).
While these mortgage rates don’t make it impossible for real estate investors to go about financing a rental property, they mean investors will have to pay more monthly for an investment property.
2018 Tax Reform
One of the major changes in the 2018 tax reform was limiting the tax advantages for owning an investment property. Before, real estate investors could pay less on their taxes with a higher tax deduction by going for itemized tax deductions when owning an investment property. Now, however, with the limitation on itemized tax deductions and a doubling of the flat rate for standard tax deductions, the tax incentive for owning an investment property disappears. While this may not completely discourage homebuyers and real estate investors, it definitely limits what they get out of owning an investment property.
The Effect of Mortgage Rates and the Tax Reform on a Seller’s Market
No doubt, the demand for homes and rental properties will stay high, even if a seller’s market here and there loses some real estate investors because of mortgage rates and the 2018 tax reform. The more prominent result that real estate investors selling an investment property must note is this: buyers will gain some negotiating power. While buyers won’t have as much power as they would have buying an investment property in a buyer’s market, the seller’s hand will be forced.
The problem with a seller’s market is that sometimes selling an investment property can become more difficult if the overwhelming majority of buyers decide they don’t like the limited choice in the housing inventory or what they are getting from owning an investment property.
Real estate experts predict that, even though house prices in the real estate market are up now, the continued rise won’t be as sharp (2-4%) as buyers have more negotiating power in this seller’s market.
Buyers still have some sway in the current real estate market. Click here to find an investment property now.
Tips for Selling an Investment Property in This Seller’s Market
Because of this effect, when selling an investment property in this seller’s market, there are a few things real estate investors should adhere to as negotiating power (somewhat) resembles that of a buyer’s market. Make sure your investment property sells, and you get a great return on investment by following these key tips:
- Enlist the help of an experienced real estate agent.
- Don’t overprice the investment property, hoping for an inflated return on investment. Perform real estate market analysis, compare house prices, and price accordingly. Use Mashvisor to find real estate comps or hire a real estate agent to do this.
- Just because it’s a seller’s market, it doesn’t mean there is no competition. Minor repairs and upkeep will help sell the investment property and get you a great return on investment.
Tips for Buying an Investment Property in This Seller’s Market
Real estate investors buying an investment property shouldn’t be discouraged from a seller’s market. Follow these tips for buying an investment property in a seller’s market:
- Get pre-approved for financing a rental property. Rental properties will move fast, and you’ll look like a stronger buyer in a seller’s market with financing in place.
- Perform real estate market analysis so you don’t overpay for an investment property.
- Don’t offer below the house prices you find in a real estate market analysis.
- Don’t settle for just any investment property just because the housing inventory is limited. Remember to perform investment property analysis to ensure the best return on investment.
- Hire a real estate agent to help you negotiate deals for rental properties.
- Don’t be intimidated! As mentioned before, you will have some negotiating power in this seller’s market. Use it!
- Choose a buyer’s market for the best return on investment. They exist in the overall seller’s market.
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Until the issue of housing inventory is settled, it seems the trend of the current housing market will continue to be a seller’s market, rather than a buyer’s market. Even with the current housing market being a seller’s market, it is still a good time for real estate investors to consider buying and owning an investment property. Choose the right real estate markets and rental properties, and even in a seller’s market, you can go successfully about buying an investment property for a great return on investment.