Fact: All major indicators in the stock markets had an average fall of about 16% in 2022. The stock markets also threaded into Bear Territory several times. At the same time, the median average home price reached its highest point in history. Real estate prices then stabilized with the possibility of a slight downward trend. Which of the two do you think is a better place for your 2023 investment money?
Many real estate investors have been on the sidelines because there have been few reasonable buying opportunities for the past couple of years during the seller’s market. Today, these investors might find solid investment opportunities in a stable market with a slight downward trend in prices. We all know that real estate doesn’t stay down for long.
The price of real estate is a particularly important factor for investors. It directly affects the return on investment that you’ll be able to obtain. Pay too much in a slow rental neighborhood and it could take years before you see positive cash flow. Pay slightly below market value in a strong rental neighborhood and you’ll have instant positive cash flow and a steady increase in value. But clearly, that is not the only factor to consider.
If you borrow money alongside your own cash investment, interest rates become an important factor. Is 6.5% interest too high to be paying in today’s marketplace? Maybe. Or maybe it’s the slight risk that you take to acquire another rental house while prices are stable with the foresight that prices will again take off as soon as the economy recovers or proves that it is not going into a recession. Where we stand today, real estate has NOT lost 16% or more of its value. It doesn’t need to first recover a bunch of lost value. Real estate is on a stable platform and is more likely than not to return to its constant upward trajectory.
What higher interest rates are doing is creating a notable decrease in demand and, thus, less competition in the marketplace. However, interest rates have already adjusted to the Federal Reserve rate hikes and backed down from the low 7% range. The mid-6.5% range also looks to be stable going into 2023. Investors like a stable marketplace. It allows you to run reliable numbers through a spreadsheet to arrive at a dependable profitability calculation.
What interest rates are doing for investors is creating an uptick in inventory and helping ease the rate of home price growth. A trend that will likely continue in the new year. 2023 has all the signs for a decelerating housing market that may or may not be accompanied by a recession. Meaning it could be a tremendous buying opportunity to purchase rental homes at a discount going into a time of high rental demand. Take a little time to really think about what today’s market could mean to savvy investors.
What do you think 2023 offers real estate investors? Please leave your comment.