With home values skyrocketing as a result of the Covid-19 pandemic’s impact on real estate, some real estate investors are starting to ask…
Is the real estate market overpriced?
One could argue that there’s no such thing as an overpriced real estate market. After all, current sale prices are the prices that buyers are willing to offer, and sellers are willing to accept on the open market. By settling at a certain price point, both parties are agreeing that the property is worth that amount. And just in case there is any lingering doubt, a certified real estate appraiser is usually called in to confirm the value.
So how can a real estate market be overpriced?
Generally, when people talk about “overpriced markets,” they’re referring to markets that have grown in value so quickly that the market is not likely to support the current price range for long. In most cases, when real estate investors or real estate professionals say a market is overpriced, they simply mean that home values are likely to decrease temporarily in the near future. This temporary dip in values is often called a “price correction.”
So rather than explaining how to tell if a real estate market is overpriced, the real estate experts here at Gatsby Investment are going to explain how you can spot a market where prices might temporarily dip.
How to Tell if Home Values Will Drop
There are seven signs that home values might be dipping in the near future:
- Decreasing demand
- Increasing supply
- Increasing interest rates
- Home prices increasing faster than income
- Fewer sales
- Homes selling for less than the asking price
- Price reductions on active listings
The more signs you see in your local housing market, the more likely your market would be considered an “overpriced” real estate market.
Let’s take a closer look at each of the seven signs.
If buyers are no longer interested in your area, home prices will naturally stagnate or even dip. As with any other free market, the housing market is a matter of supply and demand. When demand outweighs supply, we have a seller's market, where property sellers have the upper hand in negotiations. And when we have more homes available than buyers, we have a buyer’s market, where buyers hold more power.
There are many reasons demand for a particular housing market can decrease. In fact, you’ll see some of these demand-based factors show up later on this list of ways to tell if home values might be coming down.
- Home prices have become so expensive that local residents can’t afford homes in the area.
- Interest rates are going up, making homeownership more costly.
- Local employment opportunities are drying up.
- Local taxes are increasing substantially.
- New policies or developments that make an area less homeowner friendly.
Whatever the reason, decreasing demand can lead to lower property values.
When the supply of available homes is low, buyers are willing to pay more. This is why the Southern California housing shortage created so many opportunities for real estate investors.
But as supply increases, buyers have more options, so they’re not willing to pay quite so much for any individual property.
Increasing Interest Rates
Interest rates are a strategic tool used by the Federal Reserve to help keep the economy growing at a reasonable rate. When inflation gets too high, as we saw in 2021 and 2022, the Fed raises rates to make it more expensive to borrow money. This slows the economy to a more manageable pace of growth.
In real estate, mortgage lenders adjust the home loan rates they offer based on the rates set by the Fed. When the Fed raises rates, mortgage interest rates also increase, causing the cost of homeownership to increase.
Since real estate is a hedge against inflation, those who own property see their net worth increase during periods of inflation. But new buyers are often discouraged by the added cost of buying a home. This can cause buyers to lose interest in homeownership, which can cause demand to decrease and home values to dip.
Home Prices Increasing Faster Than Income
Homes values have been outpacing incomes since the 1970s. In fact, this is one of the best reasons to invest in real estate. And some of the best cities to invest in real estate have seen home prices increasing faster than incomes for years.
But there is a point where the average American simply can’t afford to buy a home in his or her local area. And this can be a tipping point for prices to start coming down to more realistic price ranges.
It’s interesting to note that this does not apply to vacation communities. In markets where short-term rentals are profitable, out-of-town investors often continue to purchase properties at rates that the locals can’t match.
On its own, fewer sales isn’t a sign that home values will come down. After all, the number of homes sold is cyclical. More homes always sell in the summer months when families scramble to move before the start of the new school year. And sales are always slower during the winter months when buyers put their searches on hold for the holidays.
But when combined with any of the other signs of an “overpriced” real estate market, fewer real estate transactions can mean that there are fewer buyers and sellers agreeing on what a fair price should be. And this can mean that prices might be dipping soon.
Homes Selling for Less Than the Asking Price
When homes sell for more money than the listing price, it means that the buyer competition is so intense that buyers are willing to pay more than the seller asked to win the house. Bidding wars were common in many markets throughout 2020 and 2021 and into 2022. And buyers who wanted to avoid a bidding war often came in with offers far above asking.
But under normal market conditions, homes sell for slightly less than the asking price. Again, homes selling for less than asking is normal, and it doesn’t indicate an “overpriced” market unless multiple other factors are also evident.
Having said that, if you suddenly see homes selling for far less than the asking price (say 5 or 10% less), that could be a sign that prices are about to fall. Because, in that case, it’s clear that buyers believe homes are worth less than sellers think.
Price Reductions on Active Listings
The final indicator in how to tell if a real estate market is “overpriced” is active listings with price reductions. Reductions in listing prices are a sign that buyers aren’t willing to pay the amount that sellers and their real estate agents set.
Price reductions on a certain number of listings is normal in any market. There will always be unrealistic sellers who set prices too high and have to reevaluate when they don’t get any offers. But when you suddenly see price reductions on a large percentage of listings (like over a third of listings), buyers and sellers obviously don’t agree on what fair market value is. And a market correction may be coming soon.
Trust the Market Experts, and Invest with Gatsby Investment
So if you’re seeing signs that your local market is “overpriced,” is it a good time to invest in real estate?
The short answer is: there’s never a bad time to invest in real estate. Property values may fluctuate in the short term, but in the long term, they will always rise.
However, some investment strategies work better under certain market conditions. And if you’re looking to maximize your returns, it pays to have a team of experienced real estate analysts working to find you the best deals under the best terms.
And that is what you get with Gatsby Investment!
With Gatsby, you don’t need to try to time the market. We already know how to make the most of real estate developments under any market conditions. And we only offer investors real estate investments that we have personally vetted and feel confident in. We typically analyze hundreds of deals for every one deal we choose to pursue.
- Low minimum investment amounts (by pooling funds from multiple investors, you get access to properties that might otherwise be beyond your reach),
- Short-term and long-term investment options,
- A wide range of investment types,
- A user-friendly dashboard for monitoring your investments,
- Stable ownership structures in which you own a piece of the underlying real estate,
- Professional management of each asset, so your investment income will be completely passive, and
- A proven track record of successful projects and happy investors.
Whether a real estate market is “overpriced”, “underpriced”, or perfectly priced, there are deals to be had. You just need real estate analysts with the knowledge, experience, and skill to find them.
Sign up with Gatsby Investment today and find your next investment property.