As real estate professionals, we have been getting asked this question A LOT lately, by home owners and real estate investors alike. You've probably heard that historically low interest rates and low inventory have been driving the real estate market higher, not just in Rochester NY, but across the entire country! So this begs the question, "when will we hit the top of the market?"
Well.. in short... not any time soon. Here's why:
The law of supply and demand apply to all markets and their subsequent pricing. Demand has remained strong in Monroe county, not due to an incredible influx of population or a booming local economy but due to creation of new house holds. It's essentially "butts moving seats." Millennials move out of roommate situations and purchase their own homes to get their own space. When that demographic group purchases a home, the family that is selling their home to the first time buyer usually buys another home, which creates demand up the entire real estate food chain. Typically what alleviates this market inefficiency in most markets is supply will be stimulated through rising prices. This is true to most markets, but real estate has an incredibly long lead-lag time. The risk associated with developing new housing, the meteoric rise in the cost in materials, restrictive local zoning laws (which also artificially stem new housing development) have rendered the construction of new housing extremely cost prohibitive. And even with the rise in pricing of existing single family housing we've seen recently, home prices are still trading at a considerable discount to replacement cost.
Incidentally, supply of existing single family homes is actually down quite considerably from last year. In January 2020, there were 950 homes put up for sale in Monroe County. In January 2021, 622 homes! Supply down almost 35% according to data from InfoSparks, a real estate data platform that aggregates housing market data.
Housing Is Still Very Affordable
Because of the lack of supply, you can see how market pricing has been affected in the chart below. The median price has increased from $155k to $173k, an 11.6% increase in just one year. The main reason we believe that prices will continue to increase is, even at these elevated prices, housing is still remarkably affordable in our market when you compare it to national housing affordability metrics.
The Factor Of Area Median Income
According to Census.gov, the 2019 Monroe County Area Median Income (AMI) is $60,075 per household. Even with median home values at $173k, housing is still a bargain! On average American households spend between 30%-40% of their income on their housing costs. Keeping no more than 30% of income allocated to housing costs will ensure a home buyer doesn't become "house poor" or housing cost burdened. 30% of AMI is about $1500 a month in Principal Interest and Real Estate Taxes before a household would start to become financially burdened. If the average Monroe County resident bought a $173k house, put 5% down and locked in at today's 30 year interest rate of 2.962%, their monthly mortgage payment would be $688 month. At an average tax rate of $36.25 per $1000, the real estate taxes would be $522 a month (this could vary by town, but we used the average for demonstration purposes). Total monthly payment? $1201 a month or 24% of AMI. In order for monthly housing costs to be in line with 30% of AMI, or $1501 per month, housing in Monroe county would need to appreciate 24% to be in line with what average financially conservative Americans spend on housing!
Rising Interest Environment Not Likely
Obviously, rising interest rates could have a hand in tempering a rise in housing prices, but with the Federal Reserve Bank's (The Fed) continuing quantitative easing (QE), a rising interest rate environment does not seem to be likely any time soon. Keeping unemployment low is one mandate of the Fed but it's not the only mandate. So, what about inflation leading to rising interest rates? Significant inflation does not seem to be on the horizon either. With the world reeling from the affects of COVID-19, global financial markets have kept their flight to safety in buying bonds denominated in the worlds reserve currency, the US dollar. Furthermore, our friends in China help keep interest rates and inflation low by maintaining themselves as a huge buyer of our debt too.
The Bottom Line
If you are considering buying a home or investment property, don't wait on the sidelines trying to time the market, because you may end up paying more for it later.
A special word of caution for real estate investors. Do not buy on speculation of future appreciation. Only buy based upon good current fundamentals: a good location and cash flow based upon REAL NUMBERS, projection of actual rents based upon market rents of comparable product and factoring in adequate expenses for vacancy, collection loss, property management fees, realistic repairs and maintenance, and capital expenditures. I have been seeing a lot of irrational exuberance among real estate investors not using realistic financial projections. So be patient, but strike quickly when opportunity knocks!