Real Estate - What is Likely to Happen?
May 27, 2019
Real Estate is an interesting topic when discussing long economic downturns. We all know what happened during the economic meltdown of 2008. Real Estate tumbled and millions of people lost their homes. Logically, one would surmise that Real Estate prices will fall, if income drops and the economy slows.
Some Real Estate markets will fare far better than others depending on the following; the extent of the price increases prior to an economic slowing, the location (are people having to commute far), and the price range will all factor into how well the prices hold. Last week I wrote that in previous housing price declines, rents held their own or increased. This time around, it's hard to imagine prices falling to the extent that they did in 2008. Why? Because this time around lenders are smarter and they are qualifying their borrowers. Last time, people bought homes they could not afford and the moment the price fell below the mortgage amount, they bailed.
This time, it is my belief that homes are in stronger hands and that people for the most part have purchased because they want to own a home, and not because they expect massive appreciation. They want to pay off their mortgage, and stay in their homes. If I am right, far fewer people will bail IF the home price falls below the mortgage amount. I say IF, because most people have skin in the game this time around and they have credit to protect. Last time, we put people in homes that had no cash AND poor credit. How could anyone think that would end well? Again, if correct, people will tolerate a decline in prices and this should prevent a mass exodus. Keep in mind, housing is all about affordability. If prices do decline AND rates fall, (which they will, and they will fall a ton), then more people will be able afford homes. This will bring a steady stream of Millennial home buyers, ready to purchase homes, thus propping up the prices. Prices may fall 10-15% (maybe more), but if history repeats itself, rents will not fall and in fact may increase. Take a look at the below graph. Prices fell hard in 2008 and rents continued to rise.
Why would you sell your home, if in turn, you will have pay for a move, pony up a security deposit and wind up paying a similar amount for rent as you are for your mortgage? If these numbers repeat themselves, it could be that buying carefully selected rental property could provide a safe haven for your funds and aid your retirement. Rather than put money away to invest in stocks or bonds with negative returns, why not get a short term mortgage? If there is a negative cash flow, treat it is a monthly deposit into a savings account. In 15 years, you will own one or more homes free and clear!
If rents continue to rise, you will be sitting on a cash cow as you retire. Think about having one or two rental properties paid off in 15 years, that could generate $2,000 or more thousand per month each. The important piece here is to be sure and focus on shorter term loans; 15 years or less, and buy them in growth areas that are currently experiencing bubble type prices. I own a couple such homes, and the tenants pay enough to offset my entire payment, including maintenance costs. I have had them for a few years, and it's fun to watch the principle balance drop every month. As an example, one of the properties collects rents of $1250 per month and $500 of this money goes toward principle. The tenant is funding my savings account by paying down my mortgage. The rents have climbed considerably since I have purchased the home, but I have decided to leave the rents alone because my tenant is wonderful and always pays on time. However, I know that in 10 more years when the home is paid off, the tenant will have moved on and I will likely be collecting as much as $2000 per month. Do you know how much money you have to save, or how great your stock market portfolio has to grow to spin-off $2,000 in cash-flow every month? Well, if I am right about interest rates moving to zero, it won't be possible to generate such cash flow. If I am wrong and you could manage to find a 5% annual return, you will need to amass a $500k nest egg to spin off this much income. My point here is to think more about creating cash-flow, and less about risky assets that need market cooperation to grow. As always, do your own analysis and make decisions based on your personal assumptions, as opposed to mine. My hope here is to help open and expand your mind so that you are prepared for the "Japanification" that may be coming our way.
If you'd like to learn more about what we're doing at University of Options you can email me directly at [email protected] or visit our website at www.universityofoptions.com Thank you and I hope to connect with you soon!