When your business is real estate investing, it’s critical to have the ability to look ahead and see what economic developments could have an impact. Though the economy is currently still strong, it’s slowing down. That, combined with the ongoing trade wars, is having a cooling down effect on a lot of real estate markets. At the same time, there’s not enough housing to meet the demands of the Millennial demographic.
To shed some light on real estate investing trends in the upcoming year, we asked Mike Nierenberg, formerly with Bear Stearns and since 2013 President, CEO and Board Chairman of New Residential, to share some of his insights with us. Here are the top trends he expects to see in 2020.
The Federal Deficit Could Have a Crucial Impact on the Housing Market
Taken as a whole, our country could be facing a recession due to a growing federal deficit. With volatile domestic politics, a decline in exports and unprecedented debt levels, the debt-to-GDP ratio is growing. It’s important to consider whether the current situation is sustainable — and if not, what the impact will be for real estate investors.
Mortgage Interest Rates Are Likely to Remain Stable
After three interest rate cuts in 2019, the Federal Reserve has communicated its intention to keep interest rates stable for the remainder of this year. As Real Wealth Network advises, this is a good opportunity for those investors who can afford the high property prices to lock in interest rates.
Moreover, as a result of stable mortgage rates, the National Association of Realtors expects the sales of new homes to increase by 11 percent to 750,000 in the upcoming year — the highest number in 13 years. The lack of supply will continue to drag down sales of existing homes, which will increase by a mere four percent to 5.6 million. On top of that, nationally speaking, the median sale price of an existing residential property is projected to increase to a total of $270,000, which is an increase of 4.3 percent compared to last year said Law Offices of Gary H Smith, P.C..
Ending Tariffs Could Help Lower Housing Prices
Approximately 500 items used in building new properties are currently taxed at 25 percent due to the trade war with China. Fortunately, experts predict that a trade deal between the two nations will soon be reached. That means that the costs of the affected building materials could drop considerably, making the construction of new homes more affordable.
Demand for Housing Will Be More Concentrated
Thanks to the changing nature of work and the fact that the economy grew consistently in recent years, more and more jobs have been — and are being — created. This increase in jobs has driven a growing demand for housing, as well as for commercial properties for support services. As a result, according to Forbes, 40 percent of the U.S. population now lives in 30 markets. These 30 markets saw 60 percent of the total new job creation over the past five years. For investors, this means that in big markets that are already doing well, the demand will continue to grow faster than the supply, and both house prices and rents will keep rising.
Home Prices Will Slow Down
When house prices climb, they eventually outmatch people’s salaries and slow down. In some markets — like Seattle, San Francisco, and Silicon Valley — they’ve actually even peaked. But even in other markets, they’re beginning to slow down after a five percent rise last year. This year, the increase is more likely to be around three percent.
If you’re considering investing in any of these high-demand markets, it might be more prudent to wait until prices drop. However, if you’re thinking of selling, now could be the best possible time. Remember that most boom markets eventually drop just as hard as they rose in the first place.
Smaller Markets Involve a Smaller Risk
A lot of the smaller markets still haven’t recovered after the crash of 2008 — in terms of both employment and property prices. Nevertheless, that means that there’s almost always a good market for rental properties.
Keep in mind that the lower end of the rental property market brings factors such as credit risks with it. Also, the location of the property is key to prospective tenants, and you have to take into account which employers are in the area and what their overall health is. For example, you don’t want to invest in a property where everybody is employed at the same automotive plant — only to see that plant relocate to Mexico in two years.
Furthermore, unless the local economy gets a boost, you really can’t count on any price increases to give you a good ROI if you plan on reselling the property. In other words, you have to make your bottom line by getting a bargain on the property price and then bringing insufficient revenue from rents to make the profit you need.
The Gap Between Renting and Owning Will Grow
In many markets — especially the big ones — the rising home prices have made it impossible for a growing number of people to buy a single-family home. And now the prices to rents ratio is not only high in areas like San Francisco and New York, but also in Boston, Miami, Seattle, Denver, Austin, Columbus, Charlotte, Portland, and Nashville.
This means that renting out a single-family home is also increasingly challenging because the number of potential tenants who can afford the rent is relatively small. That’s why instead of renting out a single-family home as a single unit, it’s advisable to split it into multiple, more affordable units.
Investors should also consider investing in apartments because, with high home prices, the demand for rental housing will continue to grow and as a result boost rental prices.
There Will Continue to Be a Shortage of Lower-Priced Homes
Unemployment is currently the lowest it has been in 50 years, and as we’ve seen, interest rates are also unusually low. Nevertheless, especially at the lower end of the housing market, there’s still a shortage of supply. The reasons for this are that homeowners aren’t selling at the rates they previously did, and not enough new low-priced residential properties are being built. Realtor.com predicts that this shortage will eventually cause a 1.8 percent drop in the sales of existing homes for a total of 5.23 million.
As a result of this scarcity, young and low-income families are predicted to opt for rental properties for the foreseeable future.
The Housing Market Will Become More Competitive
Union Leader reports that according to Redfin, the shortage of homes for sale combined with the low mortgage rates will create a highly competitive housing market. In fact, one out of every four offers will face a bidding war, and in the first half of the year, prices are expected to increase by six percent. However, with supply and demand balancing out around July 2020, the price increase will slow to approximately three percent, as mentioned above.
In conclusion, Nierenberg anticipates that economic developments will continue to have an impact on real estate investing. For the savvy investor, it’s critical to be informed about how the economy has driven past housing market trends in order to look ahead and make wise financial decisions in the upcoming year.