The biggest / most important asset you own could be under pressure soon
Real estate is one of the biggest investments of our life. This is one of our best assets, but there will be times when it works really well, as we’ve seen recently, and there will also be difficult times when real estate can be dormant. There will come a time when there will be better places to focus our time and capital.
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FRED ECONOMIC DATA TABLE
This is the national house price index that dates back to the mid-1980s. On average, we all know real estate is a long-term investment and if you hold it long enough it should take some time. the value. The graph shows a great appreciation since the year 2012 and COVID-19 has created a sharp increase in home values, which I think will become the tipping point for the real estate market.
FRED 30-YEAR FIXED-RATE MORTGAGE
The 30-year fixed rate mortgage shows a downward trend here. In fact, based on technical analysis, it looks like it’s building a base and it’s primed and ready to start going up. When people get nervous about certain things, we can see interest rates start to rise.
If we look at the longer term chart for this, we can see the type of price action going on. Notice the similarity between the year 2020 and the years between 2015 and 2018 where there is some basic formation before the price starts to increase.
After a long downtrend in rates, it can resolve into a strong pop and rally. Currently, rates have been falling for a long time. We could see the rates start to go up, and because there is a lot of leverage in the real estate market, when the rates go up even a little, it causes real estate prices to rise sharply.
NATIONAL RENT GROWTH
Normally, people have to renew their mortgage every 3 to 5 years. So, when interest rates rise, so does the cost of ownership of owning real estate. When this happens, landlords need more capital and will need to raise tenants’ rent and / or invest more money in their home when they renew. When financial needs cannot be met, this is when we start to see more and more homes for sale as people downgrade and start deleveraging. Rising rates and more stringent requirements are the first signs of a weakening real estate market.
The graph below shows the rent from May 2020 to July 2021. This shows the rent increases of around 7% to 8% in just one year.
The REPORT ON NARADA REAL ESTATE INVESTMENTS talks about many areas with 20% gains. We are seeing inflation in rents, but also in groceries, electronics, vehicles, travel, etc. Unfortunately, income levels haven’t increased much, making it difficult for most people to afford the increased living expenses.
NUMBER OF HOUSES FOR SALE AT THE NATIONAL LEVEL
It is the number of homes for sale nationwide that has plummeted as of 2020. What this tells us is that there aren’t many homes for sale. As uncertainty increases and home values âârise, people hold onto their biggest and best asset and don’t want to sell.
Since no one wants to sell their house, but the population continues to increase, the law of supply and demand pushes up prices.
WHERE ARE ALL THE HOUSES?
This New York Times report tells us that the number of available housing has fallen sharply in metropolitan areas across the country. You can see it from COVID-19 from March until now; there’s this huge exterior, the norm, a kind of diversion where no one wants to sell their house.
As with any large movement outside of a standard deviation, there will eventually be a return to the average movement type. In 1 to 3 years, I would expect the market to be flooded with homes for sale, because as the economy is weaker, mortgages will be renewed and financing will be very difficult to obtain. As my dad always said, you can’t have good times without hard times – and they will happen!
Additionally, in this report we see that rising house prices are also starting to drive rents up. Since people are not prepared to pay these skyrocketing rents because they cannot afford it, the rents are actually starting to go down.
The divergence in the chart below is a warning sign that house prices continue to rise while rents fall. People are unwilling to pay higher rents, so rising house prices, which require higher rents to cover the mortgage and carrying costs, will eventually stagnate and start to drop. This extra-strong home price appreciation is typical of what we’re seeing just before a major market peak and that’s what the analysis indicates.
The housing market can be inactive and slow for long periods of time. But suddenly, suddenly, massive surges of appreciation. This is what we just experienced last year.
The housing market could be under pressure and give up many gains and become dormant for several years. The sharp surge in house prices as rents fall is a leading indicator that the housing market recovery is over.
If we were to consider real estate as an investment by sector and asset class, real estate is clearly the leader. The top green line is the real estate ETF. It has just continued to climb with a series of breaks and rallies since 2007.
IYR daily chart, IShares US Real Estate ETF
The IShares US Real Estate ETF seeks to track the investment results of an index composed of US real estate stocks.
The type of reversal we see on this chart now typically occurs at short-term market highs. These sharp initial price declines have occurred several times on this chart. Will real estate experience a rapid pullback and pause, or will it last for several months or more, that is the big question right now.
Almost every wealthy or retired person I spoke to when asked what their best investments were and how they acquired most of their wealth, say real estate.
Ever since I was a kid my dad always told me to buy my first home ASAP. Then go out and buy another one, and another, etc. By far, this is one of the easiest ways to mine your money and get paid for owning assets that increase in value.
My first house was a small 1014 mÂ² subdivision house that I bought with my wife. Now we have over 75 tenants (income stream). It’s absolutely amazing the power of real estate and low and almost free money to borrow and take advantage of.
Just make sure you never get overcharged and can cover your shipping costs if the world were to fall apart for 1-2 years. Poorly managed real estate / leverage can ruin you financially, your relationships and your partnerships.
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Chief Market Strategist
For an overview of all of today’s economic events, check out our economic calendar.