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Is Now The Time To Get Into Real Estate?


ASK BART: Is Now The Time To Get Into Real Estate?

 - By The Notorious CFP®


Summary

The short answer is probably No. 

The longer, more nuanced answer is that if you're getting in now, and buying he right property in the right location for a reasonable price that is within your budget and with low/no debt, then there's a good chance that the property or land will appreciate over the long-term. Typically, the goal of successful investing is to buy low and sell high, but you may still come out okay if you buy high and then sell high many years down the road (i.e. more than 10 years). Anything under that opens you up to risk of loss if mortgage rates rise and stay high, local demographics deteriorate or you fail to maintain the property. Real estate that is income-generating is even better, of course, as long as it also doesn't require debt to purchase and is part of a high-quality, diversified portfolio including securities and other alternative assets that complement real estate's strengths and weaknesses.  

Real Estate

Right now, we're fielding a lot of questions about the real estate market- both residential and commercial. And I totally get it. At a time when so many other investments have lost significant value or carry with them enormous risk, people understandably perceive land and property (especially income- generating) as can't-lose propositions. Land and property "are something you can touch," seem to 'never go down," "they're not making more of it.." and "if all goes to pot, at least I have something" (to pay taxes on). Property like rental real estate and the ubiquitous B&B currently offer a reliable source of income, of which there are no shortage of desperate interested parties in a zero-interest world. They believe the recent market trajectories in residential homes post-pandemic are real and sustainable, especially in Texas and The Hill Country. Like stocks, real estate has historically offered a degree of protection in a hyper-inflationary environment like we've experienced in 2022. 

Still other investors perceive the sector as artificially propped up by vulnerable government incentives and reckless Federal Reserve manipulation of the financial markets, and heading for trouble in a rising interest rate environment. They fret over how many commercial buildings and strip malls can be converted into Amazon warehouses or are going to sit empty and unleased. And with a much smaller portion of the population ever returning to full-time office, I think all of us wonder how much longer this property building and buying can continue, and at what point do we run out of those fortunate buyers, renters and builders for which money is no object? The only question that I get more often than the above is, "How much money can I take out of my stock market investments (at a loss) to buy real estate (at all-time highs?) [Emphasis mine.] 

The answer is specific, individual and nuanced (what financial questions aren't, right?!) but the short answer is, "How much paper loss on your investments do you want to make permanent?"

Some clients concerned about the greater economy are paying close attention to a collision of interest rates, inflation, supply chain and war/oil challenges in 2022 and 2023 and anxious about what else might be out there that could potential derail this already disabled domestic situation. They wonder whether a slowing economy may or may not be on the horizon this year or next. Even sectors that have demonstrated remarkable resilience in 2022 but literately could not survive on their own without huge amounts of borrowed government money (for instance real estate and energy), are heading for the own day of reckoning as interest rates creep higher and higher. Mortgage rates have already moved from 3% in December to above 5% - after only two rate hikes. Most economists are already factoring in further hikes in June and September. And that's in a best-case scenario.


 

Historically, as mortgage rates rise, inventory increases. Which is great news for all-cash buyers, realtors and America. Not so much for house flippers, speculators, builders and those who use debt to finance property purchases.


All of this might lead one to wonder how much longer the economically-critical and rate-sensitive housing sector can continue their red-hot growth of the past. As shown above, new monthly mortgage payments are up over 70% in the last five years. With home borrowing rates likely to hit or surpass 7% before year-end, monthly payments for home buyers (i.e. borrowers) could double from 2018 levels.  And this for a country where  2/3rds of households could not cover a thousand dollar emergency with cash. Most investors sense that now is definitely not the time to be making large bets or speculating on land or property...

Last month (May 2022), the MEDIAN price of an existing home sale rose to $407,600. And today's rates are now over 6% (and that's with 800+ excellent credit). So you do the math...


Just kidding! You know I can't let others do something that I can do on my own. With the average credit score of Americans at 700 (in an overheating economy with tons of jobs!), this is the significant barrier to entry for all homeowners in the "early innings" of this rate tightening cycle (translation: caveat emptor for any investment that requires sustained land/property prices, solvent borrowers and tenants that will go screaming to their closest politician to pause rent until they are "stimmy ballers" again.)

From Wells Fargo's own mortgage website...


How many first-time homebuyers do you know that could easily handle this mortgage payment (not including insurance and property taxes)?

The time has long since passed for a new generation of leaders (of any political denomination) to step up to find a solution (one that doesn't involve stealing from someone else's property via taxes or wealth distribution.)

"The rising rents leave more and more renters with little to live on. Today, one in four renters pays over half of their monthly income toward rent, leaving barely enough to cover food, clothing and healthcare, much less save for emergencies or build wealth. The typical renter saves less than $500 a year, not enough to cover run-of-the-mill financial emergencies let alone save for a down payment on a home." - Overcoming the Nation’s Daunting Housing Supply Shortage (Moody's Analytics)

When the stock market becomes this unpopular, my clients raise their voices and I begin looking for second jobs. Yet clients keep pulling money out of their investments to buy more real estate.