This is part two of a two part series. Click here to read part one.
4. Interest Rates And Investing Strategy are intricately linked. Rates have been controlled by direct Fed intervention for years now. It’s difficult to predict when they will go up or what the trigger will be. I’m concerned that retail housing has a fundamental weakness built-in if rates do go up significantly during 2014. My opinion is that were the Fed not directly involved in supporting the retail housing industry via QE, rates would be well above 6%. The consensus seems to be that rates will rise somewhat this year, but not all that much.
Real estate investing strategies generally move in tandem with interest rates. By this I mean that strategies which work in a low interest rate environment will struggle or collapse when rates go up, while strategies that work well in a high interest rate environment will tend to collapse when rates go down. Falling interest rates in the 90’s killed the creative finance strategies that were popular in the 1980’s, when rates got all the way to a peak of 21%. In spite of lower interest rates in the early 2000’s, rising costs of ownership undermined millions of real estate investors during 2006 and 2007 pushing the first wave of foreclosures towards what became the 2008 housing crisis.
As long as rates continue to be super low, it will help mask the eroding-wealth effect that inflation is having on would-be home buyers. This means more buyers can qualify, which benefits retail home sales. (I define “retail” as selling for full price, usually to an owner occupant buyer). But once rates start rising it begins to slow retail home sales. Investors must be able to adapt to both scenarios, as you will have both over a period of years. Janet Yellen is expected to continue Bernanke’s easy money policies for now, but everyone knows that it’s possible that something could undo the Fed’s efforts to suppress interest rates.
If interest rates rise fast enough, the shock to the economy could be significant, given the level of government debt, but generally investors can adapt by pursuing creative buying and selling strategies that bypass traditional mortgage financing. In some ways, interest rate increases could actually benefit housing by attracting more private money, but I think we’ll continue to see increases in private investment strategies such as seller financing, because at present, there is a lot of money out there looking for a better rate of return. If rates rise and fewer can qualify to buy, it bodes well for rental property demand, so investors need to watch rates and adjust strategy accordingly.
5. Lead Generation is becoming more challenging for single family investors. Finding houses that can be bought at deep discounts that allow for strategies such as “flipping” or what I prefer to call “wholesaling”, is becoming more difficult and competitive. Way back in 2003 I did a little analysis using property tax records along with recorded real estate transactions, in Fulton county, Georgia, where the city of Atlanta is located. At that time there were approximately 55,000 single family properties in the tax records, while more than 100,000 single family property transactions had taken place during the previous 12 months! Statistically every house in the entire county had been bought or sold twice in one year! Of course what really happened was that some properties changed hands several times, but you get the picture. In most major markets, the good inventory at low prices is long gone, and now the competition is very intense for properties in the best locations.
Many of the deals that various wholesalers send to me via email are for properties that are not in good areas, or they are very overpriced. Of course the big Wall Street funded companies have put a huge dent in foreclosure inventories, outbidding most small investors while removing a lot of the quality inventory from the market. A broker friend of mine who is also an investor, having rehabbed and sold more than 100 properties over the past few years, told me last week that he is having more trouble than ever finding good single family properties with decent investment potential. He cites all-cash Wall-Street-funded buyers who are willing and able to pay more than the smaller local investors.
Strategically, the big challenge in 2014 will be finding ways to generate leads that can produce enough decent deals to keep full time investors in business. Buying to hold is one good way around this problem as you only need a few deals to build a portfolio. When you are trying to turn houses quickly, you need a steady supply of inventory, which will require more money, time and effort than in years past.
6. The Integrity of the housing industry is a fundamental key to success going forward. If housing is to survive and thrive, we’ve got to maintain a minimum level of ethics and integrity, especially among professional investors, agents and brokers, real estate attorneys, appraisers and mortgage lenders. Home buyers need to be able to buy homes at a price that is consistent with real market value. Investors must have reliable numbers for costs and cash flow in order to make good investing decisions. A lack of integrity among any of the participants is the “rust” that can undermine the entire housing industry, making it more difficult for all of us to get real value for our money. When we damage the financial viability of others, we damage ourselves in the process.
We need to restore housing’s once proud tradition as the highest quality investment in the world.
Donna S. Robinson is an 18 year veteran of the real estate industry. She coaches real estate investors, manages investment properties, evaluates properties for investment potential and has authored several books and courses on real estate investing. Her website is www.RealtyBizConsulting.com
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