Reason for Optimism/ Leverage the buying opportunity
Following the Fed raising rates yesterday, I am send out a note to my investor clients with my quick thoughts on what happened and where I see things going:
On a very basic level, the Fed controls how much money is in our system, and can increase the money supply, causing interest rates to decrease and economic activity to increase, like they did during Covid. They can also do the opposite, decreasing the money supply, causing rates to increase and economic activity to decrease, like they are doing now.
At the end of last year, the Fed predicted that inflation would go away largely on its own and they would not have to do much economic tightening. Fast forward to today and we know that is not true, they have had to take rates almost 3 times as high as they expected they would. Over the last 6 months, the Fed has slammed the breaks on the economy as hard as they ever had in an effort to get inflation under control. The way they slam the breaks, it can take a while for it to show up in the economy. Fed activity generally first affects asset prices, then inflation moves, and then the job market moves.
We have seen asset prices go down, from houses to stocks, we also now have 2 month in a row of core CPI at the Fed's target, and have seen minor softening in the job market. There is a growing feeling among Fed watchers that the Fed is over tightening. Jeremy Siegel is a professor at Wharton, who was right about inflation on the front end, who is now vocally saying that he believes the Fed will have to start cutting rates into the middle of 2023.
If the Fed cuts rates next year, people who have been waiting to "see what happens" or "rates to come down" will likely rush into the market, potentially bringing back the aggressive sellers market. I believe that we have this window where it is possible to buy investment property while sellers are getting desperate and there is little competition. I am not sure when this window will close, but this is an incredible opportunity to buy when everything is on sale, and likely refinance and crank cash on cash returns up as rates fall.
I think any investment strategy has to be sustainable in current conditions, but we could be very close to a bottom, and that is the best time to buy.
If you would like to discuss this more, please let me know.
"sellers are getting desperate and there is little competition"
just curious what markets you are seeing that in
not seeing that in my market
Quote from @Nicholas L.:
"sellers are getting desperate and there is little competition"
just curious what markets you are seeing that in
not seeing that in my market
In Colorado we are seeing people who overpriced their homes and are having to chase the market down. Specifically seeing this with distressed inventory. We closed on our fifth property in the fall almost 100k below where it went Under contract at a couple month prior.
@Nathan Grabau fair, but with a 100K drop - what was sale price? above the median i am assuming... and i bet still way above what the property last sold it before the run-up
Quote from @Nicholas L.:
@Nathan Grabau fair, but with a 100K drop - what was sale price? above the median i am assuming... and i bet still way above what the property last sold it before the run-up
Below the median, sold for about what it would have in 2020.
For me, this points to why RE is a great investment, even at the best buying opportunities, prices are above what most people actually paid for the RE.
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@Nathan Grabau
I don’t think we are anywhere near the close of being at the bottom and coming back up. Real estate does not work like the stock market. We have been on a 7+ year run and to think there is a 3-6 month blip I would have to disagree
I am not saying the world is going g to end and real estate it going to collapse but inflation is still 3x what they want it to be, the fed will continue to increase rates next year and we will see an uptick in defaults with larger supplies coming on the market with fiscal tightening from banks which will put additional downward pressure
Just my 2 cents
Quote from @Chris Seveney:
@Nathan Grabau
I don’t think we are anywhere near the close of being at the bottom and coming back up. Real estate does not work like the stock market. We have been on a 7+ year run and to think there is a 3-6 month blip I would have to disagree
I am not saying the world is going g to end and real estate it going to collapse but inflation is still 3x what they want it to be, the fed will continue to increase rates next year and we will see an uptick in defaults with larger supplies coming on the market with fiscal tightening from banks which will put additional downward pressure
Just my 2 cents
I am not sure where the bottom is. I am able to get distressed inventory at a 15% discount in Colorado. In 2008, the Colorado market only lost about 11% of its value from peak to trough over 3 years. If you are buying right, you are going to be fine. I think we are closer to a bottom than people realize because there is substantially more potentially energy in the market to the upside than to the downside. Builders have slowed down, MBS are at a historic high vs 10 years, if you substitute case shiller for owners equivalent rent; inflation is negative, and there are lots and lots of people who want to buy but are waiting to see what happens. If the 30 year average mortgage gets back to the historic high end of its range(10 year plus 2, or its actually normal range 10 year plus 1.75) that leads to a 5.25-5.5% 30 year, and VA and FHA rate potentially in the 4's. This will defend the lock in effect, but dumb buyers into the market.
And I get the downside risk, but I think it is easy to debunk a greater than 8-10% decrease over the next 2-3 years, which is what it would need to be just to leave people negative post am schedule. If people pay off their mortgage by 5% over the next 3 years, but the market drops 5% in the next three then turns around, they are essentially picking up all the upside exposure with very little downside risk.
OK - i'll bite - what were the specific numbers? you said this is below the median - what was list price and sold price?
i totally agree that RE is a great investment and there are buying opportunities right now!
but every time i dig into a deal like this, i find out that the list price was preposterous, and so of course the sold price was a big reduction. and so of course it might have been a good deal.
not trying to be argumentative - genuinely trying to learn and see what other folks are experiencing in higher cost markets
In Longmont, Colorado 80503 zip code where the median is 750k+
Listed at 599 4/29/2022; under contract 5/6/2022 (assuming over ask because of how fast everything was moving), 33 days later, 6/9 back on market for 585k, 7/28 to 570, 8/8 to 550, 8/23 to 530, then we ended up buying it after closing cost concessions at 514k. It appraised at 540k and the zestimate peaked at 642 in May, so there were actual comps to support the 600k+ price.
If you take the peak zestimate, minus our net sale price, its a 19.9% drop.
Inventory in mostly move in condition is not seeing this happen though, more like a 5-8% drop from the top. The landscaping was also allowed to run rampant all summer in a xeroscaped yard, which can get nasty. It's a $2,500 fix that scares away 85% of buyers.
@Nathan Grabau I agree with your post. In our mid west market we see a lot properties listed for sale and just sitting, sitting, and sitting. These are good median priced starter homes (what even is that anymore) in the path of progress and it's what we target for rentals. The list prices are good for the neighborhood but the available buyers disappeared. More like fell off the face of the earth.
I believe the status quo hasn't changed. NOBODY that owns already is going to give up a sub 4% rate loan. I don't see drastic changes in 2023 with supply and demand.
Quote from @Jaron Walling:
@Nathan Grabau I agree with your post. In our mid west market we see a lot properties listed for sale and just sitting, sitting, and sitting. These are good median priced starter homes (what even is that anymore) in the path of progress and it's what we target for rentals. The list prices are good for the neighborhood but the available buyers disappeared. More like fell off the face of the earth.
I believe the status quo hasn't changed. NOBODY that owns already is going to give up a sub 4% rate loan. I don't see drastic changes in 2023 with supply and demand.
But if you had to say either supply will increase or demand will increase, isn't it easier to argue that we see demand increase more than supply?
Quote from @Nathan Grabau:
Quote from @Jaron Walling:
@Nathan Grabau I agree with your post. In our mid west market we see a lot properties listed for sale and just sitting, sitting, and sitting. These are good median priced starter homes (what even is that anymore) in the path of progress and it's what we target for rentals. The list prices are good for the neighborhood but the available buyers disappeared. More like fell off the face of the earth.
I believe the status quo hasn't changed. NOBODY that owns already is going to give up a sub 4% rate loan. I don't see drastic changes in 2023 with supply and demand.
But if you had to say either supply will increase or demand will increase, isn't it easier to argue that we see demand increase more than supply?
1000% see demand increasing over supply. If the Fed pivot (or plateau) happens demand is going up. If we get stability from the Fed demand is going up. Once core inflation drops to 2-4% (Fed goal) demand is going up. Like others mentioned already I think a buying window has opened, but it won't last forever.
Good points made. We are seeing some asking prices down, but year over year, closed prices still up, just not as much of a rate of increase. More seller incentives such as helping buyers pay down their rate. Buyers can still be rejected if offers are too low, sellers not totally at their mercy but willing to collaborate… which actually is really nice. The extreme sellers market is gone, but to your point will it come back? I’m afraid so, if rates are low again. Inventory issues > interest rates.
