Will the real estate market crash? It seems logical at this point to think that, and everywhere you look in the news all of the big pundits are saying the same things. Interest rates are rising and people are getting jittery. Over the course of the last few months, inflation has been so high that we’ve seen The Fed hike interest rates by record basis points over short periods of time. With that being said, demand in the United States, especially in particularly hot areas, is at all time highs. Due to this demand, we are still seeing the price of property go up at astronomical rates even though homes are becoming more and more unaffordable. How does this affect you and I as investors? Lets dig into it, analyze some trends, and make some predictions! After all no one knows what will happen in the market so the only thing we can do is prepare for anything to happen and make educated guesses.
Interest rate hikes
Over the last few months, we’ve seen interest rates rise exorbitant amounts over just a short period of time. This is The Fed’s attempt to de-escalate the inflation problem and stabilize our currency. Inflation, which is generally considered healthy around a rate of 2%-3% year-over-year, has climbed to a rate that is well above 8% year-over-year over the last 12 months. This means that the value of our currency is plummeting making the value of the money in your bank account worth less and less every day. This devaluation of money is hurting the American people and our economy in a big way as we see day-to-day expenses such as groceries and gas become more expensive at a more rapid pace than we have seen in a long time in recent history. What does all this mean for you as a real estate investor? Generally, higher interest rates means less people will be in the market to purchase real estate, but that trend has yet to be seen. Due to the lack of supply for the vicious demand of housing in the country today, the hike of interest rates has yet to show a true effect in the trend of the market. The price of homes is still going up, so if you are a homeowner or investor who has locked in a low interest rate on a fixed mortgage, congratulations, you are building your net worth in equity through appreciation. For investors, market conditions like this can be difficult to find solid deals due to high competition and price points that don’t make sense for your investment. At the same time, it is a very lucrative time to buy real estate and hold it. In states like Florida, rents are increasing, and appreciation is adding tens of thousands of dollars to your net worth. Short-term rental companies like AirBNB and VRBO are also giving investors massive returns, and due to the prediction of massive travel occurring this summer, we can expect the returns of owning AirBNB-type properties to be even higher starting around now. But what happens when this trend reverses and the market crashes? Do we still buy real estate or wait?
Great strategies for a painful market
True fortunes are made in bad markets. When there is a halt in the market and competition goes down, the true sharks come out to feast. In bad markets where people generally hold a bad sentiment towards real estate, it can be a great time to grab properties at a discount. In my opinion, due to stricter loan constraints and the all-but elimination of variable rate mortgages, we are extremely unlikely to see anything like 2008 again for decades if ever. If supply catches up to demand and interest rates finally rise high enough to make housing very difficult to afford, we will see some sort of market “crash” which essentially would just be leveling out this out of control appreciation we’ve grown accustomed to. It is at this point where people may realize they may have gotten into properties that were over their heads in terms of what they could afford. There may be some people struggling to keep up with mortgage payments and want to look to downsize or rent but can’t sell their property without paying out of pocket due to having no equity. In comes the subject to strategy where you as an investor can come in and purchase that home subject to the existing mortgage with little to no money out of pocket. How this strategy works is the deed of the property would transfer to you as a sale, and you would continue to make payments on the existing mortgage of that property. If the numbers make sense for you to cash flow when you turn the property into a long or short-term rental, you have just bought yourself an asset in which you will be able to collect monthly cash flow and increase your equity and net worth for little to no money. This is just one strategy that could be used to acquire more real estate in a bad market. So to answer the question, “Should you wait to buy until the market rebounds and interest rates get lower?”, the answer is an emphatic no. Always remember that every type of circumstance presents a new type of opportunity. Are you ready to take advantage of what opportunities lie ahead?