In spite of rising rates and concerns about bubbles … real estate is looking pretty good right now. At least the right real estate in the right markets.
Of course, “real estate” can mean a lot of different things. In this case, we’re talking about good ol’ fashioned single-family residences. Houses.
Yes, we know mortgage rates are rising. But that just means it’s harder for renters to buy a home … which keeps them renting … from YOU.
And if you proceed with caution, there are some reasons to pursue single-family homes even though prices have recovered substantially from the 2008 lows.
Consider this Yahoo Finance headline:
“Small business earnings rose to the highest levels in at least 45 years last month, according to the results of a survey from the National Federation of Independent Businesses (NFIB) …”
“ … the 17th consecutive month of ‘historically high readings.’”
That’s good news for small business owners … and for the U.S. economy. It’s commonly believed that small business drives a majority of job creation.
So perhaps this CNBC headline isn’t a big surprise …
Of course, job creation is good for landlords. It’s a lot easier for tenants to pay rent when they actually have jobs.
But there’s the issue of wages. Even though the unemployment rate fell below 4% … which is considered “tight” … wages still haven’t risen substantially … yet.
While jobs are good, it’s hard to save up for a down payment when living costs are going up faster than paychecks … which keeps people renting.
And if all that isn’t a big enough challenge, there’s the problem of high housing prices. Obviously, higher prices also make it harder for renters to become homeowners.
So all that’s not horrible news for landlords … especially those who are investing in more affordable markets and property types.
But there are two more parts to the story …
First has to do with a deeper dive into the jobs market. The April jobs report didn’t seem great at first blush.
But in the past, the reports looked great at first, then you’d drill down and discover the jobs created were low-wage service industry jobs.
Notably, recent jobs reports reflect a subtle but important shift in the composition of jobs.
So while the quantity of jobs created might be not bad … the quality is actually looking pretty good.
According to this Wall Street Journal article, manufacturing added 24,000 workers in April … after adding 22,000 and 31,000 in the last two months.
“While manufacturing employment has been generally declining for decades, hiring picked up in the sector over the past year.”
Way back our 2011 blog, What Washington Could Learn from Real Estate Investors, we argued that not all jobs are equal. We like what’s happening.
Seems to us if the American economy can keep this up, it’s a tailwind for housing … in spite of rising rates, inflation, and high debt levels.
And speaking of wind …
As we discussed at length during Future of Money and Wealth, the entire financial system is based on debt. So to grow the economy, debt MUST grow.
The why and how of all that is too big a topic for today’s discussion, but if you take it at face value, it really explains a lot. It also has some big ramifications for real estate.
After 2008, lenders ran away from real estate … but debt still needed to expand. So new debt-slaves borrowers were needed.
Student debt soared. Sub-prime auto loans spiked. Credit cards hit record highs. Corporations borrowed heavily to bid up their own stock.
Corporations are slowing down their borrowing … with nearly 14% of the largest companies unable to pay their interest payments from earnings.
In fact, a recent Bloomberg article quotes Gregg Lippman of “Big Short” fame as saying corporate debt will trigger the next financial crisis.
“ … corporate debt and equities will face the biggest pain when the next downturn comes. Investments linked to consumer debt, unlike the last crisis, will be relatively safe …”
“The consumer is in much better shape than corporates. Consumers are less levered than they were pre-crisis. Corporates are more levered than they were pre-crisis …”
So let’s wrap this all up and put a bow on it …
If it’s true debt MUST expand, lenders will be looking for where they can make loans. Remember, your debt is their “investment”.
There are already tremors in the debt markets. Lenders will be looking for quality.
Similarly, there are tremors in the stock markets. Investors and consumers will be looking for an alternative for their wealth building (remember, consumers consider their home an investment).
So we think there’s a good chance the focus will shift to real estate again. Just like it did in the early 2000s.
Yes, we know the run-up from 2000 – 2008 ended badly. But not for everyone.
If you buy the right markets, use sustainable financing structures, and pay attention to cash flow, there’s an argument to be made that single-family homes still have solid potential for long-term wealth building.
Until next time … good investing!
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