Does Investing In Real Estate Make Sense Any More?

The talking heads on TV seem to think an overvalued stock market is racing towards an imminent pullback. It’s a logical assessment.

With equities appearing overbought, gold dropping in value and bonds yielding little to no return, you might be wondering just where the hell to stick your money. Should real estate be on the table? Investors seem to think so.

When you look at the data a few things jump out: Clearly one sector is lagging the economic recovery – housing.

Have American demographics shifted and we’re simply seeing the new “norm” for housing? Is the lag simply a normal American phenomena where the perception of the majority lags the on-going reality of the market?

Is it a little of both with a side of a weakening middle class that is eager to buy, but unable to afford the price tag?

The first key indicator in my opinion is supply. Housing starts, completely non-existent from 2007 – 2012, have still not recovered to a pace that is considered normal and that meets continuous demand.

Prior to 2007 we were overbuilt, adding more than 1M new homes to the available inventory a year. That number dipped to 450,000 during the crash.

While somewhat subjective, most housing pundits believe that 700,000 to 800,000 units is the sweet spot. In other words the “housing correction” was due, but went too far. We were over-supplied by 500,000 or more units and over-corrected for nearly 5 years.

In other words, we are clearly and grossly under-supplied in 2014. When supply fails to meet demand, prices go up. Simple economics. That is signal number one for potential real estate investors; your asset will increase in value once purchased.

Another contributing factor real estate investors should consider is housing affordability and accessibility.

Credit standards have tightened due to the Qualified Mortgage guidelines put in place in 2013. Combine the availability of credit with the fact that housing is wholly unaffordable in many markets and you get a vacuum.

People want to buy, but they simply can’t afford it. In other words, they are renters.

Most are good quality tenants too. They make good money, they pay on time and they take care of your asset – the property.

In addition to the Great Recession pinching wallets and eating home equity from 2007 to 2012 (piling on the affordability issue), employers simply were not hiring. They are now, in some places at least, and the influx of jobs has shifted the geographical makeup of the housing market.

Some markets are simply not recovering. They won’t recover either. The jobs are gone, moved to a new location in a different industry.

Before 2006 the common mantra for investors was to keep it local. Keep it in the neighborhoods you know, in the town you live.

The 2014 reality makes that a fallacious investment strategy. Real estate investors need to think nationally. They need to look at local markets across the country and choose the right one. They need to choose a growth market spurred by 21st century industry and technology.

Another key driver for potential real estate investors is the American debt situation.

In the wake of the financial meltdown, “debt” sounded a lot like a dirty word. And with good reason: too many families were in way over their heads, and millions are still struggling with depreciated property values and unwieldy monthly mortgage payments.

Two gauges from the Fed indicate that payments for debt and other financial obligations are becoming more manageable for American households.

In the first quarter, the household-debt-service ratio, which measures the share that home loans and other required household debt payments make up of disposable income, was 9.9%, down from about 10.1% a year earlier and the lowest result since at least 1980.

And shoppers haven’t been splurging. In the first quarter, Americans’ credit-card balances fell by $24 billion to $659 billion, hitting the lowest tally in more than a decade.

While debt is decreasing, it is still debt and, chances are, if you carry lots of it you do not have the assets needed to purchase a home in 2014.

The days of 100% financing are long gone as are the days of stated income and 50%+ debt to income ratios.

Depending on your perception that is a good thing. Tighter standards mean few bad loans and fewer foreclosures. Good for overall housing value, but not so good for investors looking for a deal.

Ultimately, real estate as a whole appears to be an undervalued asset. However, in the midst of geographical shift in jobs, tighter mortgage underwriting guidelines and demographic uncertainty, real estate is no longer a gimme bet.

Successful real estate investing requires market insight, research and expertise.

Don’t make the mistakes of the great recession. Do your research and invest wisely.

Click here to watch a webinar on real estate investing where I am joined by a CPA, Real Estate Broker and  A Property Manager.

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