The big question… When should you invest in real estate? Is it time? Should you wait? Should you just bag it and put your money elsewhere?
This is a great topic that I’m honestly interested in myself, so let’s take a look together!
The Current Trends in Real Estate
The term “real estate” can mean many things. To keep this article fairly straightforward, I’m going to refer to real estate as ‘single family homes’. It’s the easiest real estate trend track, and it’s honestly my favorite type of investment.
- It’s an easy investment medium to get into,
- you often get good tenants (vs. crummy apartment setups), and
- it’s easy to get out of if you ever want to bag the real estate game (it’s not for everyone!).
So what have been the latest trends in real estate?
- First, I’ll give you an account of my experiences
- Then, we’ll take a look at the stats around the U.S.
Have you been following the real estate market? It’s been hot for what seems like forever.
Between 2011 and 2012, real estate values were at an all time low. It just so happens that I bought my first house in 2012 when the market was at its worst (which means it was the BEST time for me to buy! This was totally an accident. I was not yet a genius in the real estate industry like I am today ;)).
I bought that first house for $75,000. Today (less than 10 years later), it’s worth roughly $180,000.
Then, in 2014, my wife and I bought another similar home, this time to rent it out. We paid $81,000 for it and fixed it up for about $8,000. Today, that same house (which is still an AWESOME rental for us) is worth about $170,000.
And, in 2016, we bought still another house. This one was the biggest project of them all (it was old, it smelled, and some of the neighbors even said it was haunted!). We got it for just $75,000. We flipped it 8 months later for $133,000. Today, it’s probably worth $150,000 or so.
All this to say…the market has been hot! It started trending up in 2012 and I don’t think it ever slowed down!
Rents Have Been on the Rise Too
The real estate game is about more than just appreciating values. It’s about that monthly income too (ie. the rents!).
With the rise in housing prices, the rents have been going up too. After all, investors can’t buy and rent out their places for a loss!
When we first started in the rental property game, we were renting out a single family house for $1,200 a month. Today, houses in that same area are yielding a rent of $1,500 a month! That appreciation has certainly been nice from an income perspective!
Real Estate Trends Across the U.S.
What about the specifics? What has really been going on in the real estate market? And should you invest in real estate because of it?
According to Redfin, in just the last 5 years, housing prices have gone up by 47% – from an average price of $228,000 to $334,000!
Much like I’ve experienced with my own rentals, the rental rate hasn’t quite kept pace with the rising home values. According to CoreLogic Insights, since 2011, rental rates have steadily increased by approximately 3% each year. So, while single family home prices have increased by 47% since 2016, rental rates are up approximately 16%.
Apparently, the best time to get into rental properties was 5-10 years ago… But, will there be another opportunity coming?
The Reason For a Spike in Home Prices
House prices have spiked for two reasons.
- Demand is up
- Supply is down
Duh…right? But why is demand up and supply still struggling?
Why is demand up?
Demand for single family houses is up mainly because mortgage interest rates are at an all-time low. That, and they’re expected to rise again shortly. The pressure is on to find a house, buy it, and enjoy the low mortgage rates for the next three decades!
Why is supply down?
Home building trends have been low ever since the economic crash in 2008. Today, we’re feeling the pinch from a decade of slow growth in home building.
With low mortgage interest rates, more people than ever are looking to buy, which means homes are purchased quickly… So quickly that some people can’t even look at a house without it already being sold that same day!
Home builds need to happen, and they’re starting to, but it might take a while before supply catches up with demand. After all, home builds can only happen so fast!
Now we know that home prices have been going up for over a decade, and it’s due to low mortgage interest rates and a lack of home-builds. But, what about the future? Is there opportunity looming in the single family housing market?
What exactly would create that opportunity?
- rising interest rates
- a failing economy
- a decreased interest in owning single family homes
Are these things likely to happen?
Mortgage Interest Rates
Mortgage interest rates hit their all-time low in early January 2021, when the average 30-year fixed rate was just 2.65%. Since then, the rate has already bumped up to 2.79% and the forecast is for it to rise to nearly 3% by May 2021.
Initially, this rise will cause demand to increase as people make their panicked purchases to lock in the low rate. After about six months of this though, we should start to see demand soften a bit thanks to those rising interest rates.
Just a few months ago, many were anticipating an economic explosion in 2021. We’d be vaccinated, the pandemic would be behind us, and people would be out and about, spending money hand-over-fist – just like they did soon after World War II.
Now that we’re already well into 2021…that expectation seems a bit rosy. The vaccinations are behind schedule and the economy is still on shaky ground.
The World Bank expects the global output to improve by 4% in 2021, but to actually slow after that…thanks to:
- uncertainty in the future and therefore a reduction in investments (many individuals and companies have pushed ‘pause’ and are not hitting play any time soon)
- disruption to education that has slowed human capital accumulation
- concerns about global value chains that are weighing on international trade and tourism
All in all, this one isn’t as straightforward as I was hoping.
The economy could boom, but more than likely we’re heading toward modest economic growth with a continued ‘wait-and-see’ mentality.
The pandemic has brought quite a few young adults back home. At this moment, 52% of 18-29 year-olds are at home with mom and dad. This is up from 47% in the previous year.
This demographic is the next wave of home purchasers…but are they actually likely to make the move from their childhood bedroom straight into a single family home?
Prior to the pandemic, I would have said no. However, since many are now viewing apartments as ‘too-close-of-quarters’ (and, since remote working is now a reality for many) there may actually be a tick-up in single family home purchases.
Tying It All Together – The Future of Home Prices
What does all of this mean?
- Interest rates are likely going up,
- the economy may flounder for quite some time, and
- young adults are likely to keep the search going for single family homes
Rising interest rates will slow the demand of single family homes. A struggling economy will also slow demand. However, demand might still stay high because the draw of renting a small apartment in the big city is dwindling. Instead, more young adults may buy the more private single family home vs. renting small apartments that are stacked on top of each other.
After digging into the demand of single family homes from a wide variety of angles, I believe that the prices will continue to rise steadily and there likely won’t be a drop in values anytime soon.
When Should You Invest in Real Estate? Now? Soon?
If you agree with the assessment above, the question now is, “When should you invest in real estate?”
The best time…was about 9 years ago… But since time machines still aren’t a reality, we’ll stop looking backward.
The next best time…is right now since values are likely to keep rising. If you find a deal, snatch it up, rent it out, and then hopefully ride the train of continued home value increases in the future.
And, the worst time appears to be in the distant future. Home values will most likely continue to rise at a rate of 4-6% and rents won’t keep up since they’re more likely to rise at a rate of 3%. Therefore, the longer you wait to buy, the worse your income-to-purchase ratio will be.
So, when should you invest in real estate?
Probably not for a long while, unless you find a screaming deal somehow. If you do, then I say snatch it up. Otherwise, it may be time to look into other opportunities.
Personally, when I started to dig into this question of ‘when should you invest in real estate?’, I wanted my analysis to tell me that it was going to be ‘buy time’ in about 2 years and I’d have the cash ready to buy our next single family rental property.
Unfortunately though, the stats just don’t lead me to that conclusion.
So, if single family rental properties are off the table, what other investments should you be looking into?
Lucky for me (and for you!), I wrote a post recently, titled, “Where to Invest Your Money in 2021“.
Here’s a quick summary of my best investment ideas!
- Pay off consumer debt (it ALWAYS pays a great return!)
- Vacation rental properties
- Commercial Real Estate
Want to know more? Check out the article here!
Were you asking yourself the question, ‘when should you invest in real estate?’ Do you agree with the assessment above? What will you invest in instead?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.