Regular readers know we follow the news pretty closely. Well, okay … we’re obsessive compulsive news junkies. But for good reason!
The economy and underlying financial system (two VERY different things) form the environment all our money-making ventures exist in.
When the financial winds change, alert investors adjust their sails to put the wind at their back.
Today’s “booming” economy is creating asset price inflation … including stocks and real estate … depressing bond prices (which in turn, drive interest rates UP).
PLUS the Federal Reserve continues to tighten monetary policy by raising its target rate.
Unsurprisingly, as we discussed last time, mortgage rates are rising along with the 10-year Treasury … and this adds to downward pressure on rising real estate prices.
Mainstream headlines tell some of the story. But we also watch trade publications for clues that don’t always make it to the mainstream.
So we opened up our news archive and scanned industry headlines for the last few months to see if there’s a discernible trend …
Worst home affordability in nearly 10 years – June 19, 2018
U.S. home prices appreciating at slowest pace in two-years – July 24, 2018
Foreclosure Starts Increase in 44 Percent of U.S. Markets in July 2018 – August 17, 2018
Home flipping returns drop to 4 nearly 4-year low – September 4, 2018
Rent jumps cool in hot markets, but for how long? – September 11, 2018
Down payments rise with stiff competition for homes – September 20, 2018
Without digging into the weeds of each article (though they’re all interesting reads) …
… it seems like home prices have risen to a resistance point … slowing their upward trajectory … while marginal owners are getting pushed off the back of the bus.
Meanwhile, real estate “day traders” (flippers) are finding it harder to get in and out quickly because the rising-price gravy-train is tapering off.
Okay, let’s take a breath here and process …
If you’re buying real estate for short term passive equity growth, this is probably bad news. The market isn’t just dumping generous portions of equity on to your balance sheet.
Also, if you’re in at the high end of hot markets, you may have to hold longer than you thought. Hopefully, the cash flow is there to help you ride out this phase of the cycle.
Those who went into the high-end of hot markets with thin or negative cash flow … whether as an investor or a home-owner … could find themselves land-locked and bleeding for a while. No fun.
We’d need to dig deeper, but these are often the source of increasing foreclosures.
BUT … if you’re in the middle price range of moderate priced markets, you may end up being the beneficiary of INCREASED demand …
… as folks from higher priced properties and markets, both as buyers and renters, crowd into your space.
Remember, when you’re at the top, there’s no one above you to move down in tough times to boost demand in a soft market.
That’s why we’re fans of middle markets … where there are people below you to move up in good times, and people above you to move down in bad times.
And when it comes to apartments, nearly all new builds add to the top of the market …. increasing competition and pushing down prices at that level.
But it’s not feasible to build new middle market inventory, so while it’s more competitive to buy those properties … there’s also good demand from renters once you have one.
Whether it’s rising mortgage rates, rising consumer interest rates, price inflation, or rising home prices …
… it seems the stars are aligned for strong demand for rental properties.
Just like the financial crisis, housing horror can be landlord hallelujah.
All that to say that the right properties in the right markets with the right financing, while harder to find, still make a lot of sense.
Just be SURE your underwriting is realistic … because right now, the market is saying the easy money gravy train is slowing down.
It’s also probably wise in any market, but especially now, to project growth ONLY on those things you can control (added value) … and not count on a rising tide to lift your boat.
And if you’ve got great properties with equity … and you want to keep them for the long haul … it might be a good time to look at liquefying some of that equity to keep as dry powder if prices soften.
With rising rates, you can probably lend out some of the proceeds on desirable properties for a high yield (first position with a good chunk of protective equity!) …
… or invest into high-yielding properties or pools (mobile homes, residential assisted living, etc.) where the income from only portion of your loan proceeds can cover the ENTIRE loan.
This lets you store the rest for picking up bargains when the falling tide flushes speculators who are out of position to make it to the next up cycle.
Bottom line is those who are great at managing cash flow will win. Those who aren’t will get flushed.
Until next time … good investing!
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