According to Wall Street Journal columnist Jack Hough, now is the time to get back into the real estate market! Below is a summarization of the articles key points and an application of them from a real estate stand point. Enjoy!
Despite what is displayed to consumers, through the media, now is not the time to be buying and flipping property; now is the time to just be buying property! What I mean is that with the market the way it is, one should be investing in property to live in or as a long term investment.
There are two main reasons for prospective buyers to be moving back into the market:
1. The ratio of house prices to yearly rents is nearly restored to its prebuble average. (home mortgage price/rent price)
According to moody’s analytics home prices to yearly rents is down to 11.3%, vs. 18.5% at the peak of the bubble. To give you a basis for reference, the average between 1989 and 2003 was 10%, so while we aren’t back to normal we are relatively close. For consumers this means that it is very affordable to own rather than rent.
2. Mortgage rates houses have never been more affordable.
At 4.12% on a 30 year mortgage, we are at less than half of the average rate since 1971!
Another key performance indicator is the NAR Housing Affordability Index, which in August hit 183.7, which is near a record high for the past 40 some years!
For these reasons property is seeming to become the investment of choice. If one considers that the S&P 500 is only proffering a dividend yield of 2.1%, and an investor is netting a median return of 5.3% (nationally, after other expenses are taken out such as maintenance and insurance), then the better investment is very obvious. However this is still based on averages, so I cannot stress enough that you must know your market, and work with an agent that understands valuation.
So, if property is such an obvious choice for an investment why aren’t we seeing an immediate increase in the demand for it? Well, I believe this can be explained because of two key factors: 1. People cannot qualify for credit, and 2. Confidence that the market has reached a bottom is not strong.
1. Why can’t people qualify for mortgages? As we all know after the tremendous losses financing institutions took, by making bad bets on under-qualified individuals, they are very reluctant to lend capital (even though it is costing them almost nothing to do so). Therefore even though property prices may be very enticing, consumers cannot access the capital needed to make the purchase. An obvious byproduct of this is the increase in cash buyers vs. financed buyers, that we in the real estate business have been seeing lately. Simply put: those with the resources to purchase are moving back into the market, and those that do not have the resources have to wait on the sidelines.
2. Why are consumers not confident that we are at a bottom in the real estate market? Uncertainty, whether it be with regards to your job, or the overall economy, breeds worrying. And worrying begets the hoarding of cash! Logically it is easy to follow this train of thought: things are shaky, I better save my money; however I believe it to be rather counter-intuitive. While there is the fear that the country could slip back into recession and experience a large decline in property prices, I believe there is a more real risk of inflation. If inflation did rear it’s ugly head that stockpile of cash one has been sitting on is now worth a lot less. Going one step further would the government not increase interest rates to fight it? Of course they would! So now you have a pile of worthless cash, and interest rates that diminish any hope of realizing a return on investment.
All of this being said there are precautions to be taken. In addition to working with an agent that truly understands finance and the market they work in, consumers must understand that some areas are not as great of deals as others! For example San Francisco and New York remain high cost ownership vs. renting areas. Something that will aid in the consumer in their due dilligence is a tool that Zillow is launching. This Zillow tool will give a property specific price/rent ratio, which if applied properly should give an accurate idea of the really great investments available.
In summation: real estate right now, in the right area and for the right price, is a great investment opportunity. It presents benefits not only to those that are thinking about owning instead of renting, but also to those looking to purchase and then rent out.
Hoard your cash at your own risk!!