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Joseph is CEO of TenantCloud and Rentler, property management solutions that help landlords maximize revenue from rental properties.
Home prices continue to increase at once-unthinkable rates as more demand for housing continues after the 2020 lockdowns. People are starting to move around the world and across the country.
The move has sparked the “Great Resignation,” impacting today’s real estate economy and making once-small sleepy towns boom again. Sitting in traffic and an office cell all day is now being replaced by coffee at the lake and a Zoom call from the park bench.
Such a migration to the country should bring about less demand in the cities and more in the country. But not in this market.
As a country, we are made up of people and we all need a place to live. As the population grows, we need to be building new homes at a ratio to match the population growth. The ratio of annual population growth to new housing units built was near 2:1 in 2006. That is to say that we built one new house for every two new people in the population. The ratio was as high as 5:1 in 2008, but the slowdown in the building caught up to us by 2012 and we started to build again.
A combination of stunted population growth and an increase in home construction has lowered the ratio to the lowest it has been in the 21st century—being currently at one new home to every 1.6 people added to the population. One additional thing putting pressure on home supply is the modern family structure—it’s changed. Single adults living alone are the fastest-growing family type in the country. Alarmingly, that means even more adults looking for homes in an already saturated market.
If you are an investor, this means real estate has a shortage and demand is high. If you are thinking of selling or buying real estate, it may be worth considering how those supply differences might impact your investment. Selling now will probably leave you with a windfall of cash, but then you have to find something to do with that cash—and if it’s to buy another rental, then you’ll most likely end up in a bidding war.
Not only do you risk losing that battle, but interest rates are now rising quickly, and your current rental loan may be a much cheaper interest rate than what you can get now.
The Federal Open Market Committee, or the Fed, has recently raised its base interest target by a quarter of a percentage. In addition, Fannie Mae predicts prices will increase another 7.4% in 2022.
Higher interest rates can be a turn-off for potential home buyers, but higher prices have not deterred them yet. Since 2020, homeowner equity has increased by over $4 trillion and stands at more than $25 trillion. In comparison, it was just over $14 trillion at the peak of 2005 and $8.2 trillion at its lowest in 2012.
So, with all this equity in real estate, it does stand to question if one should sell now and pay off their mortgage and then run off with the cash. This might seem like a good strategy if you were sitting at a blackjack table in Las Vegas, but in the real estate industry during a time of inflation? Again, it may not be the best time to leave.
Inflation set records in the first quarter of 2022 and with supply issues continuing, consumers may have no choice but to pay more for what they want. Fuel prices are now setting new records, which is built into all pricing as it is used to produce, ship and deliver nearly all goods and services.
A savvy investor might see this as an opportunity. Leveraging an existing real estate portfolio to buy new rentals provides an opportunity to expand and lock in long-term interest rates on an asset that is short in supply and quickly growing in value.
In 2021 alone, home prices rose by nearly $50,000 for the average home in the U.S., which is more than the average annual salary of a U.S. citizen. If values are increasing faster than wages in a single year, then it should be obvious that you want that growth on your side. Especially if you were able to lock in a longer-term interest rate.
If you were one of the millions who luckily refinanced or bought a home on a fixed mortgage during the record low-interest-rate period, you probably aren’t looking to sell anytime soon. Two things that are helping pay off mortgages are fixed interest rates and inflation, so long as you don’t sell. Of course, that fact will only make even fewer homes available for sale.
Selling your house now and paying off your fixed mortgage would probably be a mistake. Inflation would be working against you instead of working for you in paying down your mortgage. The cash net proceeds would only come with agent fees before you realize you want to park the money in something that will grow with inflation: real estate.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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