This week’s Q&A column is sponsored and written by Peter Crouch & Katie Crouch of McEnearney Associates Realtors®, the leading real estate firm in Alexandria. To learn more about this article and relevant Alexandria market news, contact Peter at 703-244-4024 or email [email protected]. You may also submit your questions to McEnearney Associates via email for response in future columns.
Question: Why do Realtors always say “It is a Great time to Buy?”
Answer: Because residential real estate is an asset class that weathers virtually every interest rate or economic cycle. Plus, it has the huge advantage of “leverage.”
First, consider wage growth, especially in the Metro D.C. Area. Over 40+ years, overall wages in the D.C. area have averaged almost the same as the appreciation rate in property values. There have been many cycles, of course, but the long-term average of wage and appreciation growth is very similar. Coincidence? Doubtful.
So, with that relationship, what would it take to change the long-term outlook for owning residential property? It would likely take a huge disruption in long-term wage growth. That has happened in relatively short-term periods: some of the economic woes of the 1980s, for example, and more recently the Great Recession of the 2008-2010 period. Wages and real estate values, however, have always bounced back. Plus, the Metro Area is historically resilient in terms of economic growth.
So, unless you believe that the Metro Area is likely to undergo an extended period of wage deterioration and layoffs, real estate values and appreciation should be safe. Even with high interest rates.
What about those rates? The current rates are a bit of an aberration. They shouldn’t be this high, but with the fight on overall inflation, that is the tool currently being used to avoid even more price pressure. The key has always been to lock in the asset (buy property), and to look for opportunities to refinance the rate. “Marry the property but date the rate.” Make the sacrifices necessary to secure the property, then loosen the belt when refinance is an option. No one can guarantee when rates will change, but historically, this has been the pattern. Consider this: if you wait for rates to come down before buying, how many more bidding wars — and escalating prices — will you suffer through?
So, what is the effect of “leverage?” Consider this example: if you have $25,000 lying around (like we all do!) and are considering putting it in the stock market, you will own and control $25,000 worth of stock. If it goes up or down 5%, you gain or lose 5% of the asset.
If you use that $25,000 as a 5% down payment on a property, however, you own and control $500,000 worth of asset. You have a 95% mortgage ($495,000), which multiplies the effect of gains and losses by 20 times. The result is that if the asset/real estate loses or gains that same 5%, your $25,000 is multiplied by 20. You could lose the whole $25,000 investment if the losses in one year are 5%.
If, however, history repeats itself, the much stronger likelihood is that the asset will go up 5%. Not your $25,000, but the asset. The asset goes to $525,000, while your mortgage stays at $475,000. Your new equity position is $50,000, which means you had a 100% gain on your cash. The first year. Then let that compound over time.
This is the power of leverage on real estate, and why Realtors say it is always a good time to buy. The big question is what happens in the near future? Even if we go into a recession (now or years from now), the key is holding on to the asset. If you believe your personal economic future is solid, that is what should guide you in your real estate dealings.
It IS a great time to buy real estate!
Crouch Realty Group at McEnearney Associates is honored to have been awarded the National Association of Realtors Senior Council (SRES) “Outstanding Service Award.” Out of 1.2 million Realtors nationwide.
Pete Crouch is a Seniors Real Estate Specialist, which means he is well-versed in all aspects of moving as we age. His own downsize gave him tremendous insights into what is involved, from emotional matters to real estate considerations. Pete is a Board Member of At Home in Alexandria (AHA), our local Senior Village, and was the 2018 National Recipient of the “Outstanding Service Award” by the National Association of Realtors for his work with Senior Moves. Text 703-244-4024 or email [email protected] for a copy of his Downsize Alexandria! Booklet about living more simply in Greater Alexandria.
If you would like a question answered in our weekly column or to set up an appointment with one of our Associates, please email: [email protected] or call 703-549-9292.
McEnearney Associates Realtors®, 109 S. Pitt Street, Alexandria, VA 22314. www.McEnearney.com Equal Housing Opportunity. #WeAreAlexandria
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Get ready to Shake, Rattle and Roll with this one-of-a-kind, high-octane rockabilly concert experience! Rockabilly Rumble is the all-new, musical experience celebrating the southern rock music that exploded on the scene in the 1950s. Organized by Alexandria City High School Alum and pro-musician Sam C. Jones, this band of world-class performers will have you dancing in your Blue Suede Shoes all night long with songs made famous by Bo Ridley, Carl Perkins, Roy Orbison, Buddy Holly, Johnny Cash, Elvis Presley and more. Relive their most popular hits, along with some forgotten gems. “Rockabilly Rumble” is a dance-worthy, foot stomping evening you’ll never forget!
This show is 21+ only.
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