During the recent summer in the Los Angeles metropolitan area, housing sales have increased while prices continue to rise steadily. The exorbitant prices have made it difficult for families with annual incomes of over $200,000 to afford a home. In such a situation, what risks do investors face when buying property?
Roy Zhang, a senior broker at Landmaster Realty in Southern California, shared with reporters that one of his clients is a police officer and his wife is a teacher, with a combined income of over $190,000. However, even in the high-priced housing market of Orange County, they still cannot pass the loan qualification process. In Orange County, in order to purchase a mid-priced home (around $1.4 million in July this year), the annual income required to meet the conventional loan threshold may need to be around $290,000.
Data from real estate research firm ATTOM Data shows that in the first six months of this year, there were 177,400 properties in the US entering foreclosure proceedings.
Roy believes that if buyers are looking for a place to settle down, provide a good environment for their children’s education, or for convenience in work, and do not plan to move in the next few years, and have stable jobs with the ability to pay off the mortgage, then buying a house may be worth considering. However, if buying for investment purposes, there are three key factors to consider.
According to the National Association of Realtors (NAR), the median home price in the US reached a record high of $426,900 in June this year. Housing economists believe the likelihood of a real estate market collapse is small, and even if prices drop, it won’t be as severe as the housing market crash in 2008.
However, the fear of a market collapse persists. According to a Bankrate survey, 33% of sellers and buyers are questioning when the housing market will crash.
“I don’t think real estate should be the primary investment,” said Roy, especially in California where prices are currently too high. Timing is crucial when investing in property; buying at a peak could mean being underwater for over a decade.
He has observed cases where homeowners who purchased in the peak years of 2007 and 2008 finally sold in 2018 at the original purchase price. “There are many such examples.”
“Whether a house makes money or not, the selling time is important, but more crucial is the buying time,” Roy said. Many sellers may feel they are making a substantial profit compared to the original price, but when factoring in holding costs and opportunity costs over the years, the actual return on investment may only be around 2% annually.
Investing in bonds or the stock market might offer more flexibility and liquidity compared to real estate investments. It is essential to diversify investments, adjust asset allocation according to individual situations, and maximize returns within an acceptable risk range.
Roy believes that many Chinese people have a strong emotional attachment to buying homes, partly due to cultural reasons, and also because they are not familiar with other investment options in the US.
He highlighted that while homeowners hope for rising prices, potential crises in the real estate market cannot be overlooked, such as unexpected economic downturns or changes in political leadership, which could lead to unforeseen events affecting property prices.
The size of the American middle class has been shrinking, with the proportions of low-income and high-income families increasing. According to the Pew Research Center, from 1971 to 2023, the proportion of low-income families in the US increased from 27% to 30%, while middle-income families decreased from 61% to 51%, and high-end income families increased from 11% to 19%. Roy sees this change as a concerning trend.
The US labor market is also showing signs of tightening. Employment figures saw significant decreases in April and May this year, with unemployment rates exceeding 4% in June and July.
Since the end of the second quarter this year, the total outstanding credit card debt in the US reached $1.14 trillion, the highest since 1999. At the same time, US household debt totaled nearly $17.8 trillion, also reaching a historical high.
In conclusion, Roy warns, “In the next year or two, or even in the next three to five years, these unfavorable factors could impact the real estate market similar to the effects seen in 2008 or worse. It’s possible that there could be a housing market crash or a triggering event that leads to a chain reaction resulting in a decline in property prices.”