Despite the coronavirus pandemic, real estate is on the rise in the U.S. In fact, according to the National Association of Realtors (NAR), total U.S. home sales rose to 6.76 million units, up 22.2% over 2019 numbers. That’s the highest level of annual growth since 2006, prior to the housing bubble burst in 2007.
Meanwhile, home prices are also up 12.9% from the year prior as of December 2020. That’s partly due to basic economics — total housing inventory has declined, with demand outpacing supply. The total number of homes available for sale at the end of December 2020 was down 23% from the previous year.
The price of investment properties has also gone up. It’s increasingly difficult to find even distressed properties being sold for prices that make sense for the two most popular investing strategies: to buy, rehab, and flip, or to buy, hold and rent.
What Are the Current Market Conditions?
In most, if not all, of the U.S, housing is experiencing a seller’s market that started in late 2019, heated up around the time Covid-19 hit the nation, and is continuing into 2021. In this seller’s market, there are more buyers — who are looking to make a move and take advantage of low mortgage interest rates — than sellers putting their homes on the market.
In my role as a realtor in Maryland, I’m seeing an even more intense gap between available homes and willing buyers since the new year began. New listings are going under contract within a few days and at the above asking price; it’s common for sellers to get 14-17 qualified purchase offers within three days. Sellers are faced with a frenzy of showings. They are resorting to listing with a tight offer deadline. Then, they must simply review all offers and choose one.
These market conditions favor cash buyers, as well as those who have a large down payment and are approved for conventional financing because they have the option of paying the above listing price. Unfortunately, buyers who can only bring the typical 5% down payment are left on the sidelines.
There doesn’t seem to be an end to price appreciation in the near future. “This momentum is likely to continue into 2021, with more buyers expected to enter the market,” Lawrence Yun, NAR’s chief economist, said in a press release.
Is Now a Good time to Buy Real Estate?
It’s a good time to sell real estate right now, whether you’re a homeowner or an investor.
It’s a tough time to buy. Real estate investing has this in common with stock investing: You make money when you buy low and sell high. Homes are selling for top dollar. It’s nearly impossible to buy anything under market value in the current market conditions.
How Do Low-Interest Rates Affect Real Estate Investors?
While low mortgage interest rates benefit all homebuyers, they have a bigger impact on retail buyers (who intend to live in the home) than on real estate investors. That’s because investors don’t qualify for the lowest rate provided to owner-occupied homebuyers. Lenders view investment properties as riskier and you’ll typically pay a higher interest rate (1.5-3% higher) as an investor.
However, for both retail and investor buyers, interest rates are still lower than they’ve been in decades. This has sparked an increase in demand and driven up acquisition prices of investment properties. In my area, most investment properties are significantly more expensive than they were 5 years ago when I started purchasing rentals. And most of that price increase has been in the last 12 months.
Seasoned investors know that it’s important to accurately estimate your maximum allowable offer (MAO) or acquisition price, and not overpay when acquiring an asset. While I’m a firm believer that there are deals to be found in any market, it’s becoming increasingly difficult to find investment properties where the numbers work.
It should be noted that if you’re rehabbing a property as an investor, the cost of materials has skyrocketed since COVID-19 hit the U.S. and interrupted the manufacturing and transportation of basic building supplies. That’s a double whammy for real estate investors — it costs more to acquire properties and it costs more to rehab them.
Are Homes Really More Affordable Today?
It depends. Real estate is extremely local, and prices are much more affordable in some areas of the country than in others. For most areas, however, rising prices are making homes more expensive for the typical buyer. This requires a larger down payment. And it pushes out potential buy dates so buyers can save more before entering the housing market.
That being said, low-interest rates drive down the monthly mortgage payment on any sized loan. The difference between the monthly payment on a $250,000 loan at 3% and the same loan at 8% is nearly $780. That translates into nearly $10,000 a year. As you can see, it’s more affordable to own a home today as interest rates have dipped to a historical low.
Hence the paradox: It’s a less affordable time to buy, but a very affordable time to own.
Should You Be Careful Buying Real Estate?
I think it’s advisable for investors to be very cautious right now. Finding an underpriced home to rehab and flip — or buy and hold for rental income — is very difficult at the moment.
As an investor, though, if the numbers work, the numbers work. If the property and location meet the requirements of your investing strategy, there’s no reason not to move forward. In fact, interest rates have only one way to go — up.
Buying now and locking in a historically low-interest rate for 30 years might just prove to be a very smart move if your strategy is to buy long-term rentals. But you still have to buy smart to be sure you’re able to maintain the property. And you need to rent to a reliable tenant to support the mortgage, taxes, and insurance each month.
Does the Current Housing Price Surge Mean Another Bubble Will Burst?
The primary reason for the housing bubble, and its subsequent burst less than a decade ago, was loose lending. This produced an influx of buyers, pushing demand to outpace supply and driving up home prices.
Thankfully, the days of buying a home with a substandard credit score and no money down are gone. The feds tightened up on the banks after the crisis. The exact conditions that led to the last housing bubble don’t exist today.
Still, there are other factors driving home prices up — namely, low-interest rates and a shortage of inventory. The current momentum could be culminating in another housing bubble. Only time will tell.
Should You Consider a Passive Investment in Real Estate?
Buying a property isn’t like plunking down $5,000 to buy shares of a specific stock that you can easily sell off in a few months if you decide you made a bad choice. Real estate is a long-term investment. There’s a lot more money involved, transaction costs are high and it’s typically not feasible to sell quickly. While the gains can be much higher if you actively invest, you need time, experience, funding, and motivation to be successful.
Investing with a passive strategy is a viable way to get started in real estate. There’s a lot you need to know and understand before you take an active role. Due diligence is key to making wise decisions. Until you have a foundation of experience, you don’t know what you don’t know!
REITs like Streitwise offer a passive way to diversify some of your assets into real estate. Just do your homework to learn what you’re investing in as well as the backgrounds and experience of the money managers. Crowdfunding through a site like Fundrise or Roofstock is another way to invest in real estate without buying real property yourself. Here’s a quick comparison between the three:
There are many crowdfunding platforms with different strategies to check out; just be sure to understand the terms, risks, and returns before you dive in. It’s always a good idea to look at customer reviews to see what other investors have to say about each platform.
It’s a Sellers Market
Annual home sales are at their highest level since 2006. Fewer homeowners want to list their homes for a number of reasons — from Covid-19 concerns about showings and job uncertainty to uncertainty on the direction of the economy or desiring to stay longer than the trend of moving every 7 years to a new home.
Meanwhile, low-interest rates have brought out more buyers hoping to buy their first home or move into a larger home for the same price they’re currently paying.
We’re living through a perfect storm that’s inflating the price of homes — a supply shortage and a demand increase.
It’s a great time to sell a home if you don’t have to also buy a home to live in. As an investor buyer, it’s a tough time to find deals. It’s important to be cautious and double-check your numbers before moving forward with an acquisition.
It may be a great time to sit on the sidelines building your cash reserves to buy 12-18 months from now. I anticipate there will be a rise in foreclosures due to forbearance programs running out and the economy beginning to feel the full effects of the pandemic lockdowns that have crippled many small businesses.