The current state of the property investing market
I am asked quite often to be a prognosticator for property investors, as to what the current state of the real estate market will bring in coming months. The most recent government data suggests a continuing slow, growth market place nationwide. But there are pockets of great market valuation increases, while most of the country languishes in an extremely sluggish growth pattern.
The latest consumer figures
Recently released retail sales figures suggest consumers are be very cautious with their disposable income, as retail sales have slowed in the second quarter of this year. What effect does the retail market have on real estate? Simple. The ripple effect of consumers pulling back, and the psychology behind it, are very telling indicators of a severe lack of consumer confidence. When consumers pull back, they are most interested in conserving their disposable income. As such, this displays an overt lack of confidence nation-wide in the general work force holding on to their jobs. And of course, when this lack of confidence is displayed through outward indicators like cut-backs in overall consumer spending, it is easy to become worried about the short-term prospect for the current real estate market.
The psychological effects
When people are worried about keeping their jobs, they postpone their decision to purchase homes. Or, to move up to a larger home for their needs. This delayed need gratification creates another ripple effect through the national economy, as more potential buyers hit the sidelines.
Also taking into account the current state of the tight credit market for home loans, and how difficult it is for the average borrower to secure a home mortgage, the double whammy of current tight credit standards and commensurate difficulty obtaining a home loan, coupled with the latest vote of no-confidence by U.S. consumers in the retail markets, makes the outlook very spotty and problematic for anything approaching a proper rate of return from market valuation appreciation when it comes time to acquire investment property.
Continued rental growth pattern
Rather, property investors need to look towards the prospect of continued growth in rents nationwide, as the effect of more homebuyers sitting on the sidelines creates more demand for rental housing. If the cash flow numbers work out at current rent prices, then you can bet they will look better within the next year as well. Just don’t count on any market appreciation in the process. As long as you plan on holding your property investments for the mid-to-long term, and your properties are cash positive, you should be in very good shape.
The current dangers in flipping
But if you’re more into flipping properties, be very concerned. Unless you’re paying substantially below market value, and fell very strongly that your improvement costs will remain within a tight set of constraints to end up with a property whose cost is still below market value, you should be OK. I would build in a fudge factor of at least 15%. This means after your acquisition and renovation costs are completed, your property should still be able to sell, at a profit, for 15% under current market value. You must take into account the latest retail data, and how it adversely affects the overall real estate market when you crunch your numbers.
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