As the Coronavirus pandemic continues, one of the unexpected winners of the pandemic has been home sellers. House prices have been increasing at a rapid pace with little slowdown. Not only are homes selling fast, but they are selling at 5%-10% above listing price. I have a friend who is a Realtor and he told me a story. One of his clients looked at a house a day after the listing went up online and immediately put in a cash offer at 5% above listing price. Under normal circumstances the client would get an offer like this accepted, but in this situation the selling realtor never responded or even acknowledged their offer. After monitoring the property, my friend saw it sell for 7% above listing price.
There are a lot of reasons for the increase in house prices. For one, people want to upgrade their homes to have office space as people are now finding themselves working from home. Others are concerned about inflation picking up due to increased government spending as a result of the pandemic. While those two reasons make sense under the right circumstances, unfortunately there are a few other reasons why people are buying houses at this rapid pace−fear and greed. Some people are afraid that house prices will keep going up and that they will be priced out of the market. Others are looking at a rapidly growing market and buying houses they otherwise could not afford in the hopes of being able to sell for much more.
When fear and greed factor into people’s calculations for their financial decisions, the chances of making a bad decision dramatically increase, even for people who are usually very responsible and calculated in their decision-making. An example is the run-up in house prices before the Great Recession. Everyone thought the only way was up, so people were desperate to get into the market even if they could not afford to buy. That fear and greed eventually led to law-breaking in almost every part of the real estate market, which ended in people being overleveraged and unable to make payments. Eventually the whole system collapsed.
As we continue to move forward in this unusual environment, it is important to not get overconfident that prices will keep rising. The economy is still in a fragile state. Now it is more important than ever to make sure you are making financially responsible decisions.
While it is unwise to make rash decisions or to sit still during uncertain times, most likely neither one will yield you the best results. During times of uncertainty, there are strategies that can be employed to help you avoid making bad decisions. One strategy that many people find valuable is to have a person who you consult with regarding your financial decisions. Running your financial decisions by trustworthy people who do not have a financial stake in your life can help you avoid making an emotionally charged decision. If that person has experience in the financial industry that would be even more helpful. Another important thing to do during this kind of time is to review and analyze your long-term plans to ensure whatever decisions you make line up with them. Many times, people buy homes they cannot afford and, when they look in hindsight at how that decision affected their long-term goals, they realize they made a bad decision. Had they just stayed with their long-term financial plan they would have been much better off than they are after rushing into what seemed like a growing market, only to buy at the peak.
Like Jesus said in Luke 14:28-30: “Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it? For if you lay the foundation and are not able to finish it, everyone who sees it will ridicule you saying, ‘This person began to build and wasn’t able to finish.”
I think this verse not only applies to building, but also to making financial decisions in general. Before committing to a financial obligation, it is important to sit down and plan the costs to make sure this is affordable at the moment and sustainable under the many different life circumstances that you may experience, rather than just under the best-case scenario.