Home Construction Slows – Good or Bad?

The AP headline this morning says “Stock Market Slumps as Home Construction Slows”.  Oh no!  We can hear the pitter patter of mutual fund investors’ feet running to their computers to check the damage to their 401k.

Funny, but when we look at our computer, we see interest rates on 30 year fixed mortgages back under 5%.  Even jumbos are under 6%!  Meanwhile, gold, oil, car prices and CPI (Consumer Price Index) are all up.  (Hint: those are signs of inflation).

When you put all that in the blender, what do you get?  Well, it depends on what color glasses you’re wearing. (Too many metaphors? Sorry.)

Here’s the deal plain and simple: In the US, home and apartment construction is not growing as fast as the population.  Rents are not falling as fast as prices.  Interest rates are ridiculously low.  Toss in gobs of people unemployed, which means they’re missing payments and wrecking their credit.  They won’t be able to buy a home for awhile, so if they can’t keep the one they have, they will be renting.

So what do we have?

• A growing population and influx of people going from homeowner to renter means more demand for residential rentals.

• Less new apartments and homes coming on line mean less supply.

• More competition for fewer rental units means upward pressure on rents, in spite of a weak job market.  Why?  Because people need a place to live.  Next to food, it’s pretty high on most people’s priority list.

• Low interest rates means if you or your investment partners are credit worthy, you can get great (i.e., low) long term interest rates on loans just before what many believe will be an inflationary cycle.  Inflation means anyone in debt will win as the value of the dollar falls.  This is why China is a little miffed at Uncle Sam.   China holds a lot (if you think a trillion is a lot) of US debt and are concerned about a falling dollar.

• Low interest rates also mean lower payments.  Lower payments make it easier to get a property to cash flow without 80% down.  To quote from that fabulous book Equity Happens, “Cash flow controls mortgages. Mortgages control properties. Properties will make you wealthy over time.”  This is true with or without inflation (i.e., appreciation), because you are using the tenant’s money to pay off the loan.   No other investment lets you do that.

Additional opportunities exist for the extra ambitious.  We call it finding and forcing equity.  How?  With less new units coming on line and many banks and overextended owners letting their properties fall into disrepair, there are opportunities to buy someone else’s problem cheap.   Then, fix it up, rent it out and wait.  If things go your way, you may be able to refinance to get your original investment out – and now you’re in for free.  Kiyosaki calls this “infinite return”.  We like it.

Of course, it’s not all rosy.  Unemployment is still a concern.   And financing (especially refinancing) is harder to qualify for.  But, if it were easy, then everyone would do it and there wouldn’t be opportunity.  Hey, wait a minute.  It’s easy to buy mutual funds, isn’t it?  And everyone does it, don’t they?  Hmmmmm…..

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