Has the housing bubble finally burst? Will we see another market crash? What will interest rates do over the next year and where is our market headed?
These are the questions that everyone is asking and not just the people here on the Outer Banks. The real estate market continues to make national news every day in the mainstream media, and for good reason. The real estate sector has been one of the driving forces of our economy for the last 5 years. So what does the future hold for us? Is there a bubble? We’ll see.
The real estate market is very similar to other markets in that its values are mainly affected by factors such as inflation, interest rates, supply, demand, consumer confidence and media hype. The real estate market has been red hot simply because money has been extremely cheap and easy to come by. People realized very quickly that they could pay double the house for the same monthly payment because they could borrow money cheaper and, in some cases, up to 50% less than their current interest rate. This created a buying frenzy that increased demand for new homes and also provided fuel for the remodeling boom. This demand has driven land and housing costs, as well as material and labor costs, to record highs across the country. The Fed in an attempt to slow down the economy decided to slow down by raising interest rates and will continue to do so until housing and energy costs begin to decline. The strategy is definitely working, as most indicators indicate that the market here is almost 50% off compared to last year and similar reports are coming in from other areas of the country.
Does this mean that the bubble has burst? No. We are entering a new cycle where everyone is selling and floods any market with product conditions and prices change rapidly. The market is simply adjusting to a more moderate rate of appreciation. However, this is a good time to buy if you practice the reverse buying or counter cycle investment strategy rule that tells us to look at what everyone else is doing and to do the exact opposite. In other words, the time to buy is when everyone is selling and the time to sell is when everyone is buying. This may seem obvious and simple, but just take a look at what the market is doing. Sellers are flooding the market at a rate of nearly four to one compared to closed sales. The best deals are always made in the counter cycle mode.
Is there still an opportunity to make money in real estate? Absolutely! More people have gotten rich through real estate than any other investment vehicle in our country.
Real estate has always been a solid investment and if you know how to buy a property and choose the right type of financing to achieve your goals, the opportunities are limitless. Structuring the deals with the right financing is really the key to making money in real estate regardless of interest rates. Let’s say you buy a property that generates income. You can’t really make a bad purchase, just a bad financial decision. No matter what you pay for your property today, it will be worth more in the future. When you take into consideration a five percent appreciation rate and the fact that rental income will pay off your mortgage, you’re ahead of it even before you factor in depreciation. The key is to identify your short and long-term goals, choose the financing vehicle to achieve them.
Where is the market going? The real estate sector will continue to be a very safe and solid investment, especially in areas of high demand and growth. It’s a different market cycle and a different type of investment now than it was last year, but it’s still one of the best you can do. Interest rates will continue to rise for the next 12 to 18 months and real estate markets will continue to cool. The remodeling market will continue to strengthen as the price of land will continue to be very high. New construction will be drastically reduced as home builders will likely stop building specialty homes and developers will have too much inventory on the books to justify new projects. Business development will continue to be strong, especially in the office and small store sector, as developers try to meet the needs of all the new communities that have emerged over the past few years. There seems to be a surplus of properties for sale across the country, creating a defined buyer’s market. Take advantage now and do not stay behind in this one.
