Let’s start with the facts.
Home prices shot through the roof because of easy lending standards, artificially low interest rates, mis-priced risk in financial instruments and greed.
The more housing grew, the greater the asset bubble became, allowing people to borrow ever larger sums against their homes in the form of home equity lines of credit (HELOCs), creating out-sized spending for a few years.
Then it all crashed.
Now what have we got?
We’ve got home prices that continue to fall, even after five years of declines. Case/Shiller just released the 20-City Home Price Index. This measure shows that home prices are down another 3.8% from January of 2011 through January 2012. That puts housing prices all the way back to what they were in 2002.
We’ve got record low interest rates. The Fed promised, on January 25, to keep rates low until 2014.
We’ve got very strict lending standards, which have culled many would-be buyers from the marketplace.
Falling incomes, higher unemployment, the inability to sell an existing home and the fact that 25% of all homes with mortgages are underwater has further thinned the would-be buyers list.
So I’m not surprised that people keep asking me if now’s a good time to buy property again.
Everyone asks, “Seriously? How much lower can it go?”
The answer is: in certain areas, property prices could go another 30% lower. Which means, despite what looks like the bottom of this market, and despite the fact that rents are going up, properties can STILL go lower. More importantly, even if real estate is reaching a bottom now, it doesn’t have to go up in the years ahead. It can languish for years.
Something Fundamental Has Changed
Something has changed in the housing game… beyond the numerical aspects of FICO scores, interest rates or debt-to-income ratios. That thing is: buyers’ attitudes and expectations are different.
This turns real estate into a whole new ball game.
Gone are the go-go days of zero down purchases, NINJA Loans (no job, no income, no assets) or Liar Loans (“stated” income, just tell us what you make and how much you are worth).
Gone also are the days of watching your home price move up by 10-20% per year and receiving dozens of offers for “cash-out refi’s” in the mail on a weekly basis.
Think about this for a minute. In the “good old days,” if you bought a $200,000 home for 3% down, you’d have put down $6,000. If the home increased by 15% in the first year to make the house worth $230,000 then your $6,000 investment would become a $30,000 gain. That would be a whopping 400% return in one year!
People investing in the property market today – whether for a place to live or a place to park their cash – have no hope of achieving returns of this magnitude now.
The scramble to get into property didn’t just slow. It practically reversed direction.
Now current home buyers think long and hard about what comes next in the economy and in their own lives. They ask questions like: can we afford it? Can we afford it if our incomes drop by 10%-20%… or if one of us loses our job?
They ask: do we want to be in this town and this location for seven to 10 years, in case the housing market takes a very long time to recover?
These are not the questions of gamblers. These are the questions of average families.
The decision to buy or rent has moved from a consideration of “how much can I make?” to one of “how much downside can I withstand and is it worth it?”
This presents us with the perfect investment opportunity on offer in the property market right now: in rentals.
In these uncertain financial times, the freedom of renting has an attractiveness that, for many, is hard to ignore, even if the cost of renting is moving higher.
For many, particularly young workers who are unsettled in their job prospects, renting makes the most sense.
That’s why in Boom & Bust we chose to invest in this area last summer, building a position in a company that specializes in multi-family housing, which is growing by leaps and bounds in these uncertain times.
The growing number of young workers as well as those who have left home ownership behind for the time being should favor those who are ahead of the rental market curve.
P.S. To get the details of the company we’re using to take advantage of the continued decline in the property market, and the resultant boom in the rentals market, click here.