The Residential Real Estate Market Slips



Interest rates are up and new home sales are down. The U.S. Commerce Department revised its June annual estimate of new housing starts from 455,000 to 394,000. An annual pace of 700,000 is considered a healthy market. The majority of the slowing market is attributed to a full 1% increase in the mortgage rate to an average of 4.74%. Certainly not a high interest rate by historic standards. However, combined with the tight lending market, it’s enough to cause a small flounder in the improving residential real estate market.

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It’s true that sales of previously owned homes reached close to a four year high in July. However, these are deals that locked in the mortgage rate a month earlier when buyers raced to lock in rising rates. The August sales of previously owned houses are expected to decline slightly.

Mortgage Rates Are Rising

As mortgage rates move towards 5%, you can expect a temporary surge in sales to lock in rates but only after a slight decline in August as buyers try to sort the market out. Buyers will come back to lock in rates before they climb even higher. As mortgage rates climb, home prices will stagnate after rising for more than a year.

How long the market will remain soft is hard to say. But a softening market isn’t necessarily a bad thing. We’ve had what is best described as a mini-bubble. At first, investors and home buyers had the advantage of a buyers’ market. As sales of foreclosures slowed significantly, house prices start rising quickly. The market began over heating. The coming short lull will help rebalance the market.

Changing Strategies for Investors

As the saying goes, follow the money. The opportunity to buy and hold or to fix and flip has passed, at least for now. Both of those investment strategies have the strong risk of losing money the way the market is poised today. Or at best, you’ll see your investment money not profit during the coming months.

There are two better investment strategies for today’s market. One is buying and holding mortgage notes when interest rates are rising and banks are still shy about making loans. With bank rates approaching 5%, private lenders making money available to borrowers with a credit score of about 720, can easily demand an interest rate of 7.5%. Make a loan to a credit score of 650 to earn an interest rate of 12%.

The other way to make money in today’s sellers’ market is with a positive cash flow property. It would certainly be preferable if you got into a positive cash flow property six months or a year ago. However, rents continue to go up in most local markets because mortgages are still difficult to come by. That means, even in a sellers’ market, there are opportunities to invest in properties paying rents with a profit margin close to what you could lend money for (7.5% to 12%). Lending the money is lower risk but investing in the property has the potential of seeing your asset appreciate in value over the long term. Depending on what you see in your crystal ball.

 

PhotoAuthor bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.

Comments

  1. Very Interesting.

    I was considering buying a home instead of renting near the campus of the college I attend but after doing the math it didn’t seem worth it. I considered it because I was wondering if housing prices would continue to go up and if that were to be the case if it would be a sound investment. But if mortgage rates continue to go up will prices stagnate do you think?

    • Brian Kline says:

      Hi Stu,
      Thanks for commenting on the article. Here’s my take on what you are considering. Home prices remain near historic lows. They are not at all likely to go any lower. Interest rates are also extremely low by historic standards. Yes, housing prices are likely to stagnate for a short period of time (market adjustment). Probably less than six months. Then prices will start going up and interest rates are likely to be north of 6%. Now, remains the best time to buy for the foreseeable future. The only draw backs are the low inventory means fewer houses to chose from and investors are still buying, meaning home-buyers have more competition. Even if prices remain stagnate for a longer period of time, buying means you are investing in yourself. When you finish school, you can sell to have a down payment for a home wherever you move to next.

      Let me know any other thoughts you have.
      Brian Kline