How many headlines have you read over the years predicting a market crash by 2019, 2020, 2021, 2022, 2023? How’s that strategy working out? Many buyers are waiting for the housing market to crash and economic cycles tell us that markets do tend to go up and down, although the average is an upwards trajectory.
Due to a combination of many factors, including historically low interest rates from 2020-2022, supply chain issues, new construction costs rising, and the Fed pumping $1.4T into the economy, we are no longer in a ‘normal’ market where we could expect at least a minor market correction.
The housing market has been rising steadily for a very long time and prices have skyrocketed for the past 3 years! With prices going up so fast, it seems like there’s an artificial bubble that’s going to burst any day now, but fueled by inflation and with the housing supply issues noted above, a drop in prices is not likely to happen anytime soon.
Inventory is at historic lows, equity levels are at historic highs, due to the proliferation of sub-3% mortgages and population growth has exceeded housing construction. Across the U.S. there is a shortage of inventory and in southern California, it is projected that there will be 114,500 missing for sale signs in 2023.
This year, we started with exceptionally low inventory and in Orange County, it dropped from 2,500 homes on the market at the beginning of the year to 2,050 today, plunging by 19%. Compare that to the three year average prior to COVID, when there were 5,800 properties on the market, an unbelievable 182% higher than today. This is especially concerning because typically, inventory steadily rises starting in January and peaks during the Spring selling season. Instead, inventory started historically low and continues to trend downwards.
While supply is dropping, the opposite is happening with demand. Buyer demand has been steadily increasing, driving the latest flurry of bidding wars and multiple offer situations. Again, homes are selling for above asking and this is happening throughout the country. The housing shortage is also creating greater demand for rental housing, which in turn is driving rental prices higher.
Want to Cash Out?
With residential and multifamily property prices high, investors would love to cash out and enjoy the fruits of their hard work and long-term investments. This would help and would at least partially offset the shortage of supply for would-be homeowners. One of the main reasons investors are NOT putting their properties up for sale on the market is because they don’t want to pay capital gains tax — and they also don’t want to do a 1031 exchange into another property because prices are high, interest rates are high and there’s not a lot of inventory to choose from.
Instead, the savvy investor who wants to cash out, can choose to defer taxes through an installment sale, a charitable remainder trust, or a third-party trust through a certified real estate tax attorney.
The third-party trust is a great solution for those who want to cash out from real estate and earn interest on the full proceeds from the sale, while deferring taxes. It also allows them to save or spend as much as they want, based on their desired lifestyle aspirations. And if they want to do a 1031 exchange, but want to wait until the right deal emerges and do not want to be constrained by the 45-day time limit, they can use it to sell high, have money parked in an interest earning or appreciating account, while waiting for the right opportunity to buy.
Conclusion
Home buyers and real estate investors are waiting for prices AND interest rates to drop and at the moment, there is no indication that both of those things will happen at the same time. Instead, the opposite seems to be happening. When interest rates drop, we’re seeing a large influx of buyers entering the market which is driving prices even higher. These are unprecedented times in the housing market and the only thing I know for sure is that due to historically low inventory, it’s a seller’s market right now.
If you have questions about buying, selling, doing a 1031 exchange or cashing out while prices are high and deferring taxes, I have partnered with a tax attorney who can calculate a no-cost and no-obligation tax savings illustration for you. If this sounds interesting to you, call me now at 714.330.9999 or email me at [email protected]. I’m Mercedes Shaffer, a real estate agent with Coldwell Banker, helping you build wealth one door at a time. DRE 02114448