This article is not meant to be negative, rather inform readers of reality and encourage investors to be excited about the tremendous opportunities in the next 3-5 years. Are we at bottom? No one can predict that but there are a lot of factors that impact home values that will keep them down, even lower home values more in many areas. Here I will talk about Interest Rates, the effect on property values and advice for investors.
Everyone keeps talking about the 2nd wave of foreclosures and you can count on it because it is coming. That will surely create a huge supply of distressed real estate and will push down home values. Unemployment, the economy and all of the people under water and delinquent on their homes will further cripple real estate markets. Nobody seems to mention Interest Rates though. They have been low for a really long time and you can also count on higher interest rates in the future and more crippling of home values.
Lower interest rates puts more borrowing power in the hands of consumers, consumers spend more, the economy grows and inflation is created naturally. If the economy grows too fast then demand outweighs supply and inflation occurs. The Fed will raise interest rates to avoid too much inflation. Here is what affect it will have on real estate.
1. Payments increase – Higher interest rates equate to higher mortgage payments
2. Cash Flow decreases – Higher debt service equates to lower net income
3. Property values decrease – Lower operating income will lower commercial property values, higher payments will also limit how much buyers can pay for residential homes.
4. Returns decrease – Higher payments, lower operations and cash flow, lower property values all lead to lower returns.
So what is an investor to do? Be opportunistic! All signs lead to an incredible buying opportunity for the next 3-5 years. Expect lower short term returns, have longer term strategies and avoid unneeded risks. Make sure you have plenty of equity and tremendous cash flow so you have multiple exit strategies. The next 3-5 years is going to be incredible for savvy investors.