This edition of Clues in the News is coming to you from Bozeman, Montana, where we just wrapped up an insightful weekend at the Red Pill Expo with thought-provoking author G. Edward Griffin and other amazing speakers.
Perhaps the mention of this conference provokes skepticism. Why attend, you ask?
We’ve learned that as real estate investors, it’s crucial to examine information from all sides instead of taking a single account at face value.
That’s why we found the expo so exciting. It’s also why we read the news every day … and then examine it with a critical eye to see what lies between the lines.
In this all-new edition of Clues in the News you’ll hear from:
- Your at-the-helm host, Robert Helms
- His (tired of being kicked in the side!) sidekick, Russell Gray
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The rise (and fall?) of short-term vacation rentals
We find it helpful to look at the real estate investing world from both a big-picture perspective and a smaller local perspective. Often, local news gives us helpful insight into currents running underneath the big waves that make national headlines.
That’s why we took a look a Bozeman’s local newspaper, the Bozeman Daily Chronicle, where we found an interesting article about short-term vacation rentals.
Short-term rentals are a craze that has been sweeping across the nation over the past couple years … and local governments have responded in various ways as these rentals have risen in popularity.
Although Bozeman isn’t a large town, many residents and businesses are concerned about this issue.
Why? Well, think about who’s threatened by rentals offered through companies like Airbnb. Hotels.
A pragmatic investor or businessperson is aware they may meet resistance to their business model … and that’s what’s happening in Bozeman.
Companies threatened by these smaller rentals are taking the issue to local politicians … who are backing them up.
Think about it … who has a bigger influence on local economics, and thus a bigger say in local politics? The one-property Airbnb owner, or the hotel operator?
Investing is more than just making deals. An important piece of being a successful investor is being aware of the local political environment, including tenant-landlord laws and local issues that may affect you.
The lesson? It’s great to be optimistic and hope for sunny skies, but always pack an umbrella in case you run into rain (or resistance).
Market peaks continue to soar higher
When we took a step back and zoomed out to see the nation as a whole, we noticed a trend we’ve been seeing for a while … escalating home prices across the board.
Although home prices continue to rise, there’s a lot of variation in different markets. A close look at the data in Harvard’s Annual Housing Report tells us that while home prices in the 10 most expensive metro areas have risen a whopping 63% since 2000, while prices in the 10 cheapest areas have grown by only 3%.
That’s a big difference!
We think it’s important to dig deeper and find the over-performers. Looking at information at the macro level is great … but it’s up to you to take that information and move toward the micro.
Look at the nation … then examine your specific town. You may find surprising disparities, even between different neighborhoods in one city!
We zoomed out even further to see if the housing boom was a U.S.-only trend and found an article from an Irish newspaper that stated the average cost of buying a house was €338,000 (about $384,000).
That amount is nine times the average Irish salary!
Big, overheated markets aren’t a problem specific to America. They’re a worldwide trend.
As this trend becomes more obvious, journalists are taking note and coming up with their own interpretations of the data to satisfy the curious public.
We find it helpful to remember news isn’t hard data, and it isn’t the answer … it’s really the question.
The news gives you a starting place to ask yourself: Does this topic affect me? And what does this article really mean? How can I dig deeper?
We went through this process with a CBS article that contained advice for home buyers in the current market.
Many of the article’s statements were simply the opinion of the journalist. And although the journalist offered some helpful advice, we often find professional journalists don’t have the buy-in to catch some of the most important dynamics active in the marketplace.
That’s why as an astute investor, YOU have to be prudent and pay attention.
Rising home prices may mean it’s time for you to take some chips off the table. Depending on trends in income versus rent prices and other numbers, they may mean something else.
Either way, it’s up to you to do the math!
The cost of renting versus buying
If you’re a landlord, you know it may not make sense to buy rental properties in areas where tenants can afford to buy homes.
We found this infographic eye-opening. Although it only cites average numbers, it’s obvious that today buying a home is more affordable compared to renting than it ever has been.
What does that mean for you? It means you have to watch your numbers.
Analyze your own tenant base. Ask yourself the following questions:
- What is the income-to-price ratio?
- How affordable is your housing for your tenants?
- Do you have tenants with high credit scores who will be able to get easy loans?
- Do you have a competitive advantage over other housing options?
The overall idea is to find tenants that have income durability, but won’t skip when they can buy a house. One option is to invest in rent-to-own properties.
Finding that balance can be tricky, but if you’re paying careful attention to your numbers, it’s doable.
Rising mortgage rates and plummeting credit scores
Credit rates affect new homebuyers’ abilities to get loans and buy houses. In a recent article, we read that for every increase in mortgage rates, credit scores go down.
As real estate investors, we always want to understand the ratios of mortgage rates and interest rates.
We have no control over these rates … but they definitely affect what we do as investors.
So what do these changing numbers mean? Is there any correlation? We don’t necessarily think so.
What we do know is when lenders lower barriers to entry by decreasing the credit score required to get a loan or nudging the required debt-to-income ratio, it can be a warning sign credit markets are starting to get desperate.
When you start to see lenders giving borrowers up to 50% of their income, that’s when you know something problematic is happening.
A dimming outlook for brick-and-mortar retail stores
We’ll look at this next issue with the assumption that with the rise of mega-sized online retailers (think Amazon), retail is not the greatest place to be right now.
With this dimming retail outlook comes a push for shorter leases.
When retail tenants consider their options, they ask themselves a basic question: Do I pick a longer lease for more stability, or a shorter lease I can get out of sooner?
The trade-off of choosing a longer lease is that the landlord decides what the future 5-10 years will look like in terms of rate increases, even if those don’t match up to reality.
Retail tenants also have to consider how the location they choose will drive traffic.
If big-box stores pull out, can smaller retailers expect the same regular traffic? Uncertain about the future of these stores, more smaller retailers are pushing for shorter lease terms.
If you’re not in the retail business, you may be wondering how this affects your residential properties. Ask yourself, How many of my residents work at these stores? What will happen when local retailers shut down and my residents are out of work?
Big sea changes for retailers can also mean big changes for you. Retailers typically choose to close stores in places that are weak for core drivers. If you have a tenant demographic similar to the store’s shopper demographic, it may be insightful to look at where stores are shutting down, and why.
As an outsider, you’re not privy to why the big dogs do what they do, but you can observe what they’re doing and come to your own conclusions.
New options for homebuyers with student debt
We all know student debt is increasingly becoming a bigger issue amongst millennials.
This younger generation often forgoes buying homes due to high amounts of student debt.
An article in the Wall Street Journal reported on a new option backed by Fannie Mae that allows homebuyers with student debt to refinance and convert their student loan debt to housing debt.
This program gives younger buyers collateral … and may make them more likely to choose to buy a home.
The program could also drive home pricing in your area, depending on the makeup of the local population.
If you don’t have student debt, this program may not seem relevant … until you stop to consider the bigger picture.
That’s it for now until next week, when we talk about a major disruption in real estate markets!
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