For a good number of real estate professionals, 2012 wasn't a great year. We were still on a downward spiral towards the bottom of the real estate market. This wasn't exciting news for real estate investors looking to make profitable deals investing in real estate. But as we move deeper into 2013, it's becoming abundantly clear that the tide is turning.
In previous years, buyers were getting used to having the upper hand. The market was like a poker game with the buyer being in possession of all the chips. Sellers are now in a position to reclaim not only the chips, but the pot as well. We are moving into a seller's market where the seller, not the buyer, will have the unfair advantage. Opportunity is knocking and it's been a long time since investors were able to capitalize on current and future market conditions.
Simply put, supply and demand are creating conditions that will become very profitable for investors. Pressure is building in the market like it would be doing inside a volcano that's about to erupt. This is a good eruption though for professionals. When the bubble finally burst in 2008, it caused unimaginable havoc within the real estate market. For investors, it's like a bad nightmare that has been permanently engraved into your memory. It's been a number of years since “profit and real estate” went hand in hand for the seller. But that's exactly what is happening right now. Interest rates have been at some of the lowest levels we've ever seen. And while they are still very low, there is an upward trend that's becoming apparent. Unemployment rates have also been dreadful, but they too have been improving. When you take both of these factors into consideration, it's easy to see why demand for housing is on the rise.
Homebuyers (first time and seasoned), as well as real estate investors alike are taking notice of the positive signals. The economy as a whole is also showing definitive signs of improvement. This is generating a great force that will continue to push housing prices higher. Most of the markets nationwide are already seeing prices begin to climb. This trend will only continue and it will become greater with time. In some sporadic markets that are inland and away from the coast, the ratio of homebuyers making their monthly payments to investors who have a considerable stake in the property is much higher. With more payments coming in, there is greater cash flow available which can speed up the rate at which you generate profits and grow your business. But like all good things, this opportunity comes with a clock that's ticking down. When the clock runs out, the window for making some sweet deals will quickly close. Demand will eventually exceed the rate at which mortgages are increasing. This will cause a reduction in cash flow.
The Real Estate Roller Coaster
For people looking in from the outside, the real estate market can seem crazy and unpredictable. Real estate professionals on the other hand know that the market goes through regular cycles. Some of these cycles are painful, while others can be extremely rewarding, not to mention lucrative. The housing market bottomed out three times in recent memory. It occurred in 1975, and once again seven years later in 1982. Fast forward another thirteen years, and you will see it happen again in 1995. Each and every time though, the housing market managed to recover. Even though the housing market struggled in 1975, it recovered and was at its peak in 1979. There was a downturn again in 1982, but we hit another high point in 1989. Just seven years ago in 2006, the housing market climbed to a peak once again. Fluctuations are a regular component of the greater market.
These statistics should drive home the point that nothing lasts forever. There are good, even great times in the housing market. There are also rough patches we need to tread through in order to reach greener pastures. For 2013, things are looking up and the economy should continue to improve. Growth will remain steady and consistent. In 2014, we will probably be entering another temporary recession. But in comparison to what we just went through, it's really nothing to worry about and small potatoes in comparison. Growth should really pick up in 2015, 2016, and 2017. While the opportunities are great right now, they will only get better during these three years. After that, the economy will most likely enter another period of pain in 2018 and 2019. Each of these predictions is based upon the cycles that continue to occur in the housing market.
There are times when all the news coming out of the housing market seems to be bad news. This is a false assumption being induced by the media in order to achieve higher ratings. In reality, over the next several years, there will be great opportunity for real estate professionals who are action takers. Those who sit on the sideline and remain on the fence will miss out. But for those who play full out, the financial gain will be significant or substantial. Time is money and it all comes down to recognizing each of the real estate cycles. It's also important to realize that every seller's market gets replaced by a buyer's market. This makes a great deal of sense when you think about it. If the buyer believes that the seller has the upper hand all the time, they won't be motivated to purchase – at least not until the market shifts in their favor once again. So we need to keep things in perspective. With that being said, by buying when prices are low, you will stand to make a nice profit as things improve and more homebuyers enter the market.
The Impact of Low Interest Rates
Homebuyers are always on the lookout for the best deal in any market. This is the rule rather than the exception. When interest rates are high, new or existing homebuyers will tend to stay put. Consumers who are renting will also tend to continue renting instead of taking out a mortgage on a new home. Once interest rates fall however, homebuyers tend to jump into the market in order to secure those lower rates. Uncertainty is one of the few concerns that can keep people from getting into an attractive housing market. Even if interest rates are low, if unemployment is high, and the overall confidence in the economy is low, you won't see much movement. This is what we saw happen in 2012. But as we continue to progress into 2013, the unemployment rate is falling and interest rates are still very low. This is helping to reduce the uncertainty which is motivating many people to get back into the housing market. Inflation is also a factor to consider. This will all push housing prices and interest rates higher as the economy continues to improve.
The Tremendous Opportunity – Greater Cash Flow for Investors
Real estate wouldn't be complete without graphs and charts to visualize the situation. The graph below from really captures the essence of what we're trying to say. It shows us that in 2005, when the economy was chugging along very well, mortgage payments were also climbing due to housing prices taking a big jump. In comparison to 2007, 2008, 2009, 2010, 2011, and 2012, the housing bubble was getting ready to burst and finally did so. This caused home prices to fall along with mortgage payments. These payments actually dipped below rent payments for an extended period of time. But despite all of the negative conditions in the market, investors took notice of the great opportunity to seize some of the cash flow.
Housing prices will continue to climb as the economy and housing market both continue to improve. As this happens, mortgage payments should also rise at a pretty fast clip. It's expected that they will surpass rent payments once again. This is great news for homebuyers looking to score a great deal. For investors however, this means cash flow will begin to decline. The time is now for real estate professionals to get into the market. Greater cash flow and a housing market that will only appreciate in value are two of the biggest reasons for putting some skin in the game. By investing now instead of later, your chances are much greater for making some very lucrative deals. One of the big influences in the future housing market will be the baby boomers. These are the people who have money in the bank and are very close to retirement. Housing is expected to be a attractive investment for this particular demographic.
Home Prices Will Only Continue to Increase
CoreLogic released an interesting report on February 5th. This report makes it very clear that home prices have been rising, not falling over the past 10 months. As the economy continues to improve, there is no reason to believe that the trend won't continue. If you're wondering if there is a precedent for this, it's the biggest increase from year to year that has occurred since the last housing peak in 2006. Home prices should continue to improve and appreciate by an additional 3% in 2013, with a 2.7% increase in 2014. The trend is our friend right now and as the bigger economy continues to grow, the local economies across the country will as well. This will bring many homeowners back into the real estate market. One of the big concerns that has been keeping people from entering is job security. Even individuals with high paying jobs in growing fields have been concerned about getting laid off. This concern will continue to dwindle as the economy gets better. Enough time has also passed for many former homeowners to have the negative information on their credit report fall off. Foreclosures and bankruptcy had a major impact on a lot of people. With time, these black marks have fallen off and their credit scores have jumped. This makes them more attractive to banks for a mortgage on a new home.
Renting to Become Popular Again
When the economy was really struggling, both the housing and rental markets took it on the chin. The recession forced many individuals to put off their plans for the future. Marriage and having children are two big decisions that got put on the back burner for a number of people. Renting a property goes hand in hand with these two big decisions in life. Instead of finally moving out after completing college, many graduates have found themselves moving back home and living with their parents. The recession has either prevented them from starting a career in their chosen field, or is keeping them from getting a job all together. Things are improving though and as we move beyond the recession, these individuals who have been forced to live with their parents will soon find employment. This will boost the demand for rental properties over the next several years. Life should steadily get back on track for millions of people who have been struggling. This is great news for them and their parents, but even better news for real estate investors and the overall economy.
Consistent Job Growth Beyond the Recession
Looking back at the recessions throughout the course of history, one thing is for certain; after each recession, there is always an upside with the overall economy improving. Companies begin hiring again, the unemployed become employed, and the unemployment rate always falls. This is like a scene from a movie that we've seen many times before. Even if we do re-enter a recession, or even worse a depression, the variables that contributed to it will be much different than they are right now. With each passing year, brand new variables are being entered into the equation. If history happens to repeat itself, which it often does, the result will be different due to the new inputs being plugged into the equation.
How Real Estate Investors Can Work Smart
This is looking to be a very special year for investing in real estate. Our economy is still in recovery mode and we are nowhere near the peak of the market. This is a good thing because it means that investors have plenty of time to enjoy the market while it improves. Once it hits the anticipated peak for this cycle in several years, things will get worse and then get better once again. In the meantime, investors have a tremendous opportunity staring them in the face. Rental payments are still much lower than mortgage payments at this point in time. This is largely due to housing prices that still remain below true market value. But as the economy continues to get better, this will greatly change. That is why this is the ideal time for getting into the market. Cash flow is great and housing prices will only continue to increase. Many people are also getting ready to retire which will drive up the demand for new properties in 2013 and beyond.