Will 2019 by a good time to invest in real estate — or will you be better off parking your money elsewhere, whether that means sitting on the sidelines or an investment in an entirely different industry?
While no one knows exactly what will happen with home prices in 2019, if you have the right sources of information and know where to look, there is enough evidence to make a sound educated guess.
Let’s explore this topic and see what we can learn.
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Will 2019 by a good time to invest in real estate — or will you be better off parking your money elsewhere, whether that means sitting on the sidelines or an investment in an entirely different industry?
While no one knows exactly what will happen with home prices in 2019, if you have the right sources of information and know where to look, there is enough evidence to make a sound educated guess.
Let’s explore this topic and see what we can learn right after a quick thanks to our sponsor.
We’ve seen a slowing down in the housing market this year, in most of the metro areas around the country. What’s causing this slowing growth in the housing market? Well there are dozens of factors in play, but the ones with the biggest impact over the next few months and into the new year include the following five factors:
Factor #1. Affordability
The real estate industry is facing a basic economic problem: lots of people want to buy homes but can’t realistically afford to do so in their current geographic area. This is because affordability has become an increasingly acute issue over the past decade.
Remember that affordability describes the percentage of one’s median household income spent on the median household mortgage in a particular area. Most financial experts suggest that households spend no more than 30% of income on housing, and many metro areas exceed that amount. Home prices, mortgage rates, household income, and local property taxes are all important factors in determining how affordable a certain metro area might (or might not) be.
Graphs charting the housing market have looked like a roller-coaster over the past decade: up and down, and since around 2012 to 2013, climbing back up again. But many markets haven’t been stable or steady, and that not only contributes to uncertainty — it also makes potential first-time home buyers less courageous about taking the plunge into home-ownership. Many of these would-be first-time buyers still remember the housing crash of the last great recession back in 2008, that affected people for many years since. So not everyone is in a rush to be a first-time home buyer right now.
And buyers who are ready to take the plunge are competing for a limited supply of homes for sale, which adds volatility to the market and can keep home prices high or cause them to rise, much like what we saw back in 2004. This is especially true in areas where homes for sale are particularly scarce (Denver, Seattle, and San Francisco).
In some of those areas, the problem has become so bad that residents are spending much more than 30% of their household income on housing. Thirteen of the top 100 MSAs passed that critical barrier in 2017. In total, 30 of the top 100 are above 30% — 5 are above 50%, and there are some neighborhoods within these metros that top 70% of one’s income solely for housing! Is that plain insanity?
So what does that mean for buyers? Not everyone is a millionaire, and many potential entry-level home buyers are also dealing with student debt and relatively low wages. There’s a segment of the market that may become long-term renters out of necessity rather than choice if housing affordability continues to spiral beyond the reach of the average wage-earner.
And what does that mean for real estate investors? If the market lends itself to making sense financially, that is the property generates positive cash-flow and an acceptable rate of return, then it’s a prospective market to invest in for buy-and-hold rentals. Remember that you don’t want to speculate on price in an appreciating market if the returns aren’t there. And overpriced markets are often not the best places to find smart deals.
Factor #2. Home Sales and Property Prices
The pace of home sales has gradually made its way up from the depths of the recessionary lows, but it remains relatively low compared to household growth.
For example, current existing home sales are near 2003 levels, but household growth has increased by 13.5% over the last 14 years. Put it all together, and there’s pretty much only one way for the number of sales to go, and that’s up. With the increasing number of new construction homes coming online now, I expect more buyers in the market for a home into 2019, whether as owner-occupiers or investors.
In 2017, 10 of the top 100 metro areas saw prices soften – that means growth was at least 1% slower than the annual growth over the past three years. And growth is expected to slow (or continue to slow) in another 41 of the top 100 metros by the end of this year.
My prediction is that this trend will continue into 2019 for a majority of all U.S. metro areas as the markets need to take a breather from the years of price growth we’ve seen.
Prices, however, are more diversified by locality. It’s true that collectively, overall home prices have gone up in the past few years, but the reality is that the housing market is much more granular than one national metric can represent. As I always say, all real estate is local.
Historically, when the economy was stable, most major markets moved up in unison — but when there’s economic volatility like we’ve seen, then sub-markets and local neighborhoods within the same city start to increase or decrease in price seemingly independent of each other.
We can expect to see much more of this hyper-localized fluctuation within markets in 2019. Home prices and sales trends are going to be more nuanced at a ZIP code, neighborhood, and even block level as opposed to broad swatches of movement for a major market.
So if you’re someone looking to invest in real estate you’re going to want to understand why homes in one neighborhood or area are fetching more money than homes in a neighboring area.
Factor #3. Mortgage Rates
Mortgage rates fluctuate up and down, influenced by such factors such as inflation, economic growth, the Federal Reserve’s monetary policy, and the state of the bond and housing markets.
With near-historic lows and relatively low inflation, the Fed has made it clear that it intends to raise it’s rates in 2018, which indirectly will influence mortgage rates.
By mid 2019 we may see mortgage rates rise another 0.5%. As rates go up, current homeowners who carry lower mortgage rates might be dis-incentivized to sell because both mortgage rate growth and home price growth will potentially price them out of their market or for a larger home.
At the same time, there’s a large pool of current and new home buyers who remember when mortgage rates exceeded 6% to 7% and will not be deterred by higher mortgage rates in 2019.
The bottom line is higher mortgage rates will keep many people where they are, reducing old housing stock potentially putting upward pressure on prices. This doesn’t solve the problem of low inventory levels and will continue to create housing demand for home buyers and tenants. As an investor, having desirable housing for these people provides you with a solid investment for the foreseeable future.
Factor #4. Tax Laws
The recent Tax Cuts & Jobs Act (TCJA) introduced big changes related to business taxes as well as real estate investment income beginning in 2018. But, many of the more complicated changes are only relevant for larger commercial real estate companies, with little or no impact on the typical small real estate investor who owns a smaller portfolio of residential rental properties.
These new rules are not going to change behavior much, other than possibly invest in more rental properties, but these new rules are not going to greatly affect the real estate investing world in 2019.
Factor #5. General Uncertainty
The housing market is just one part, but a large part, of the vast U.S. economy — so it’s going to experience a ripple effect in 2019 from changes in other parts of the economy, such as employment, education, infrastructure, credit, politics, consumer sentiment, and many other components.
However, there’s one factor that all parts of the market need to thrive and work well together, and that’s predictability. That’s the security that you know what to expect with a reasonable degree of confidence tomorrow, next week, next month, and next year.
When it’s difficult to predict what to expect tomorrow, next month, or next year, we have fear to take on major financial commitments. Generally speaking, there’s an overall “wait and see” strategy on future movement — all of which results in challenges for the housing industry.
Even though the overall economy in the U.S. is robust, the feeling of uncertainty is growing. There’s quite a bit of unpredictability surrounding inflation, economic growth, jobs and wages, and future economic policy.
But the one thing that is certain and predictable is humans will always need shelter. Housing is a necessity and it’s demand in the U.S. is growing year after year.
That doesn’t mean real estate is recession-proof, as you may recall from the event following 2008. An uncertain economy is going to influence who qualifies to get a loan and at what rate, and that will influence existing affordability, and housing equality issues in turn.
As a result, it’s going to become a necessity for investors to know as much as they can about the markets they plan to invest in, and the economy in general.
Investment opportunities are always out there. Knowing where and when to invest is your job, and ours. Being aware of the trends that affect the economy and drive housing will help make you an astute and successful real estate investor.
I hope you enjoyed this episode. If you did please remember to hit that subscribe button and leave a rating and review.
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