Be very wary…
Just like a fanciful walk through the twisting, colorful and dizzying amusement park attraction, the House of Mirrors, that bend your shape and leave you rubbing your eyes for better perception, so too is the effect on real estate investors trying to read the current state of the U.S. housing market. My singular property investment advice: be wary of what you see in the current housing recovery.
All factors and new data suggest a rapidly improving housing arena. But, like the House of Mirrors, everything’s bent totally out of proportion and recognition. And, we’re left with the main issue I’ve preached in two previous articles here this year: all investor’s eyes need to remain squarely fixed on the unemployment rate – not how the housing market is doing. For it is that unemployment rate that should dictate how you invest in these current economic times.
Here’s what others are saying…
In an article from this week’s Time magazine (“The Housing Mirage,” by Rana Foroohar, Time, May 20, 2013), she notes that in regards to the present housing market conditions, “prices are up, but the market is far from healthy. We’re missing key elements of a true recovery.” She goes on to ask, “if housing is back, why is the percentage of people who own homes lower now than it was over a decade ago.” Of course, it’s because property investors have been gobbling up most of the foreclosure market over the last few years. And this is especially true with institutional investing firms.
She goes on to note “that a relatively small group or rich investors…is driving the real estate market. That includes private-equity titans like Blackstone (which owns a portfolio of 20,000 rental properties) as well as high-wealth individuals who can pay cash up front for property for themselves or to rent out. “Investors remain the dominant force behind the house-price bounce back,” says Capital Economics property economist Paul Diggle. That’s reflected not only in the lower rate of homeownership but also in the swelling ranks of renters. Not since 2002 have fewer rental properties been empty in the U.S., and rents are rising sharply in many cities.” And that’s a scenario that makes property investments in residential real estate all the more valuable in the coming months, if not years.
Let the unemployment rate be your guide
Ms. Foroohar makes the case that tight credit policies by banks are still placing a stranglehold on mortgage lending nationwide. She then makes a point I had predicted back in my article of January 1st here, entitled “Predictions For 2013.” I had written then: “watch the unemployment rate.” I then went on to offer up these pearly bits of property investment advice:
“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.’
And now, five months into 2013, Ms. Foroohar backs me up. She quotes Jonathan Miller, CEO of a New York based real estate appraisal firm, who said “to have a sustainable and healthy market, all that really matters is employment….You need higher employment and wages to support housing consumption and looser credit. If we see some real economic growth over the next two to three years, then we’ll know the housing recovery is real. Until then, we’re in what I call a precovery.”
The bottom line
She then goes on to bring it all home: “ this precovery has been underwritten by the government at historically unprecedented levels. Every month, the Federal Reserve is purchasing $40 billion worth of mortgage-backed securities. And Freddie Mac and Fannie Mae stand behind the bulk of new mortgages.” Finally, she notes that “it has long been said that you can’t have a sustainable economic recovery in the U.S. until the housing market is back. In truth, it may be the other way around. Until you have more jobs, rising wages and a middle class that can afford to take out a mortgage….you can’t have a real housing recovery.”
Sounding like a broken record
And, as I’ve been saying for months, the housing arena does not indicate nor showcase the deeper, structural problems such as tapped-out consumers pinched by a slowing job market, higher taxes and lower savings. I had also previously written that “if the 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.” I would have to amend that statement slightly, and say, if the unemployment rate remains stagnant, as it has been, or goes up, then look for increased cash flows on your rental properties.
My best property investment advice continues to be taking your existing properties and make sure you continually maintain, if not upgrade, them in a down economy. Especially in this House of Mirrors economy, where rent prices continue to escalate. Continue to make your product more attractive relative to your competition. In this way you’ll be able to maximize cash flow and profits. Also remember the advice I gave in that earlier article on the coming shape of our economy, and how it will affect what you do in your property investing strategy for the coming year. “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.
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