Watch the unemployment rate
The unemployment rate will be one of the most important figures to keep a watchful eye on in the coming year. If it starts ticking upwards because of the effects of no deal being reached by Congress on the proverbial fiscal cliff, then look for overall U.S. rents to continue to increase as homebuyer malaise begins to sink in. So individual rental property owner’s should be able to see increases in their cash flow as the new year progresses. Clearly, residential rental properties will become even more valuable than they were in 2012. So it would behoove the individual property investor to continue to search for and acquire additional rental property in 2013.
If, however, the fiscal cliff is averted, either by tax rate reductions in early January, or some short-term debt reduction package enacted by Congress in the next month or two, then the unemployment rate should continue to tick downwards. And residential rental rates may suffer over the course of next year. This would occur as consumer confidence increases, throwing more renters back into the buying game, especially first time home buyers. With fewer renters, rental rates will start to go down, negatively affecting property investor’s cash flows. On the other hand, housing valuations, by and large, should increase slowly but steadily over 2013. So any currently held investment property should begin to appreciate in the new year under this scenario.
Result of higher taxes on the rich
If taxes do rise next year on upper income workers, and their disposable income is reduced, look for housing values to remain stable throughout the country. The net effect of soaking up disposable income on the “rich” will be minimal for the housing market. It really should have a negligible effect on consumer confidence, and the demand for housing in this country. As mentioned above, it is the unemployment rate that is most important to property investors.
Credit markets and property investing
I fully expect lenders and the overall credit market to remain in stasis over the next year, regardless of Congressional maneuvers with the fiscal cliff. Banks will continue a policy of strict lending guidelines, making only the most credit-worthy recipients of mortgage loans. So the tight credit market will continue into 2013. That said, non-conventional sources, like hard money lenders, will continue to flourish as those investors with less than stellar credit ratings seek to close deals that are cash-positive.
The European debt crisis becomes orderly
The situation with Europe’s money crisis should continue to stabilize in 2013, building on the positive work and financial bolstering and deal-making done by the International Monetary Fund in the last half of 2012. This can only help to further stabilize U.S. credit markets. While some countries like Greece, Italy, Spain and Ireland continue the long road back to financial stability through austerity budgets, high unemployment and Draconian fiscal measures, enough sound restraint has accompanied their efforts to take the strain off of their own fiscal cliff. Proof of this can be seen in the news media, as we no longer hear of the doomsday forecasts, which for the first half of 2012 espoused daily reports of the demise of most of the European Union countries, save for Germany.
Looking at things in reverse, the U.S. fiscal cliff situation appears to have little effect on European nations. I believe Europe is already on the right economic course, with enough corrections over the past year, and the U.S. situation will be resolved very soon, although probably with a short-term political fix. And the resolution will have little impact on foreign markets. Overall, U.S. credit markets should remain unaffected by the European debt crisis, as they work through their mess. Thus, look for further stabilization by banks here in the U.S., and little or no change in mortgage lending policies and standards in 2013.
The fiscal cliff redux
I don’t believe Congress, in all its machinations on the fiscal cliff, will allow the full sequestration cuts to go through. The country would be placed in a very real jeopardy for a new recession if this were to occur, especially if there are major cuts to the defense budget, as well as social programs. If sequestration were to occur, the overall unemployment rate would zoom up in 2013 and beyond. And if that unemployment rate were to go up next year, look to continue acquiring residential rental property, since rent prices will then continue to escalate. And cash flows on rental properties would commensurately increase as well.
Wall Street and property investing
As we know all too well, Wall Street is highly reactive to the smallest of maneuvers that take place in Congress – especially when they involve taxes and spending programs. So I expect a real roller coaster of a ride through the first half of 2013 in the stock market. However, that should not affect home buyers if consumer confedence remains upbeat. And it certainly shouldn’t dissuade you from continuing to search for additional investment properties to add to your long-term portfolio.
Again, look to the unemployment rate as the main directional pointer for how you should invest in 2013. If you see unemployment rise, continue to invest in residential multi-family property. If you see it go down, start switching to single family home acquisition to fix up and rent out or speculatively sell (flipping) in the short-term.
The commercial markets in property investing
Here too, that unemployment figure becomes the major indicator of your actions in the next year. If it ticks upwards due to Congressional inaction on the fiscal cliff resolution, there will be less investment by companies in equipment, inventory and personnel. Therefore, look for higher vacancy rates overall in the office building, retail space and manufacturing (plant and warehouse) markets. As the economy falters in this scenario, look for more company cutbacks and outright dissolutions. That will obviously have a deleterious effect on space demands, especially in the retail and office building arenas. Likewise, hotels (and the travel business in general) will take a hit during any new recession, so you would also want to steer clear of hotel investments if unemployment starts upwards.
However, if the fiscal cliff is averted in the next month, the U.S.will continue to show modest productivity gains over the next year (as was done in 2012), and then you can look for the unemployment rate to continue to slowly decline, just as it has this past year. Then we can expect greater stability in the commercial markets. With this, one can expect small increases in rents for commercial space, be it office, retail or manufacturing. Vacancy rates should also drop with increased productivity. This should make commercial property a good addition to your property portfolio in 2013.
The flipping outlook for property investors
Here too the bell weather unemployment rate will dictate how you approach flipping in the next year. If the rate drops as the fiscal cliff is averted, credit markets will remain stable, and consumer optimism will remain at a slow and steady growth pace. Then it would be an excellent time to get further into flipping properties.
Over the last year we’ve seen small increases nationally in home market valuations, as well as a marked decrease in time on the market averages for homes nation-wide. With the fiscal cliff averted, consumer confidence stays high, unemployment will tick down, so you can then look for a more robust housing market. With this, look for further reductions in days on the market for the average single family home in the U.S. Prices will slowly rebound upwards, and this will make for a much better backdrop for flipping – certainly much better than the last several years have been.
In the event of a recession
My best suggestion for property investors in the unlikely event of a Congressional meltdown and a descent into another recession, is to consider taking the properties you already own, and use the time to properly maintain and upgrade them in a downturned economy. Use the downturn to your advantage, and try to rebuild your weaker, or deferred maintenance properties. You’ll be able to address all necessary repairs, and/or increase their valuation by upgrading the properties. In so doing, you’ll also be able to increase the rents you charge on all your improved units.
Also consider the next year as a good time to try refinancing your investment properties to help increase your overall cash flow on all your collective properties. With rates at all-time historical lows, and with an economic downturn occurring, you’d be able to lock in excellent rates for the long-term on your portfolio of real estate holdings. So in the event of a recession, look to revamp, refinance, increase your rent rolls and build cash flow on existing properties owned in 2013. And hold these properties in the short term until you see signs of a recovery.
The bottom line
I still feel Congress will avert turning the economy into a major downturn though. And so, I strongly believe you’ll want to remain in a steady acquisition mode through next year. Make sure that in either the commercial or the residential rental arena, your cash flows work out to be positive before making any offer on a potential investment property acquisition. You can’t avoid doing the basic homework of research and numbers crunching analysis. Remember to always crunch your numbers properly, and always look for the discreet changes in the economy on a daily basis. If you’re going to play the property investing game, it certainly pays to stay informed. Above all, as noted above several times, watch that ever-changing unemployment rate as your main direction arrow. That figure will point you in the right direction as you go through 2013.
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