Is housing now an attractive investment? Now, that is a question that requires a lot of thought. If you casually explore the housing market you will find the following: mortgage rates are at historic lows, prices have declined, and alternative investments are paying low returns making them essentially negative. On the opposing side, there is still a large hump in way of the smooth sailing of the market place that owners are still trying to overcome. In high hopes of higher prices in the near future, owners are withholding foreclosed and underwater homes. Can you blame them? The intervention to prop up demand by having cheap mortgages and low down payments has introduced yet another uncertainty:
If this intervention declines, what happens to the prices?
The demand of investors can be split up in two groups. The first type of investor buys homes to flip and sale to make a profit. The flippers rely on non-investment buyers, like first time buyers. The second type of investors buys to gain rental income and future appreciation. They rely on the continuation on the high demand of rentals and household formation. Both of the investors reasoning are created by the continuing Federal and Federal Reserve support of the housing market through first time buyers’ incentives. The incentives are low-down payments, low interest rates. They are around about $1 trillion in mortgages that the fed purchased in 2009-2010. If private demand for housing and mortgages slowly replace government-stimulated demand; there is an assumption the outlook of demand and higher prices will improve. Basically, if either the support of housing/ mortgage markets from the government declines because of the rising pressure to trim economic deficits, or the private demand won’t replace it, improving statistics of the market weakens.
Other than the direct government support of the housing market, the rental housing market is supported by the government transfers. These transfers, such as Section 8, extended unemployment benefits, etc., make up an extraordinary share of household income. Common sense tells us the continuation of pressure to trim Federal deficits will ultimately influence all government spending. This government spending will include transfers and housing/ mortgages aids. If you put the vision of decreasing government transfers and a decline in household disposable income together, you get deterioration in the household income. These issues are highly important to investors because if the households receive less income, then affording the mortgage or rent is slim. Another issue that investors should consider is the increase that has overtaken disposable income. The flat-lined income and increase of rent suggest one of the following: either incomes rise to line up with the high rent or rents decline to even up with the flat-line income. What investors should be aware of is the chance rents will decline to match flat-lined income instead of incomes rising to match the higher rents.
On the other side of the record, there is a possibility that home valuations and rents have been artificially exaggerated or propped up by government interference and stimulus. Investors; ask yourself this, “What happens and what are the consequences when that prop is removed?” Will the housing demand surge as rates start to increase or will the rising rates crimp affordability? It is obvious that the future of mortgage rates is unknown. Along with the future of mortgage rates, the future for the picture of housing is uncertain as well. That said, there are more smart purchases out there today than all of 2006-2010 combined. It won’t be easy money, and you need to be conservative with your figures but in certain areas of the country the investment potential is huge. Not necessarily in appreciation but in mere cash flow alone. Consider this. In parts of Raleigh you can buy a decent home in a decent neighborhood for 80K. A savvy investor can rent this home for $900 a month whereas your payment would be right around $550. This is with a 15 year loan so in no time at all you could easily own an 80K investment free and clear. That’s assuming no appreciation over the next 15 years. The great thing is that you don’t need appreciation. Your dollar will most likely lose half its value in that time ( see what inflation has done over the past 15 years then compare to the recent spending globally). Meaning even without $1 in appreciation your home will be worth significantly more by default. Compared to if you held that 80k in cash you’d have the equivalent of 40K. In addition to value rents will also rise by default as the dollar loses value so your investment will probably be bringing in closer to $1800 a month. So, for the next 5-10 years you need to be careful, but long term it’s nearly impossible to go wrong. Never forget that real estate is the best hedge on earth against inflation. Even gold will never generate cash flow for you. My recommendations are almost always for lower end homes though. If you want to play in the high end luxury market, have fun. I’ll be dealing with homes almost anyone can rent or buy.