There’s an old saying that my friend’s father used to say, “Believe half of what you read and none of what you hear.” If you watch the news each day and/or read the newspaper, you may have heard or read that real estate prices are going to continue to rise. You may have also heard or read that real estate prices are going to decline. So which is it?
Here are a couple of things to keep in mind: First, no one has a crystal ball where they can accurately predict the future. However, it is important to understand where you are in your market cycle so you can adjust your investment strategy accordingly. Second, nothing will prevent you from investing in real estate more than worrying about things you cannot control.
With that said, here’s what I consider the top three factors that CAN affect the value of a real estate in your market:
- Specific economic conditions in your local real estate market like the availability of housing and the corresponding demand (basic supply and demand) are the most important considerations. Your local economy (i.e., jobs and other economic activity) has the biggest impact on the real estate cycle in your market. How do you determine what the market is doing in your investing area? Talk to some active real estate agents and/or brokers that consistently work a given market. They will know the days on market and months supply of inventory. Those are key indicators that can drive values up or down. Also, if you know some good appraisers, they will have similar information, and probably on a broader level.
- The forces behind mortgage financing can play a tremendous role on a macro scale that impacts every market in the country. Most mortgage financing is provided by federally backed loans from Fannie Mae, Freddie Mac, FHA (Federal Housing Administration), or VA (Veterans Administration). These lenders have specific guidelines that change over time and impact a borrower’s qualifications. The stricter the guidelines, the fewer the eligible borrowers. Mortgage lenders who underwrite these products will have the answer here, as they know the requirements as they change.
- Mortgage interest rates play a major role in the real estate market cycle and change, sometimes multiple times, each day. As mortgage rates increase, while housing prices remain flat or increase, mortgage payments will also increase, making it more difficult for someone to qualify for the same priced house as when rates were lower.
I encourage you to talk to your local real estate experts such as your trusted agent/broker and or appraiser. Ask them what the status is of your investing area. Also, talk to an experienced mortgage broker that works with both homeowners and real estate investors. They will typically have multiple lenders they use for underwriting and can give you a snapshot of the latest rates for both the retail side and rental property side. Knowing this information will help you make an informed decision and help answer the question of where values may be headed.
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Mike Hanna is a real estate investor, mentor, author, and public speaker. He has been an active real estate investor since 2002 in both single family and multi-family properties, and has been in the hard money business since 2005.