In the movies, falling prices are often followed by, well, falling investors. After all, if a price drops, the product is worth less, the particular market declines, and all is ruin. That is the case in some things, of course, but in something as fluid and non-linear as a real estate market, lower housing prices can actually be a good thing for the real estate investor.
In such an unpredictable marketplace, any outside variant or factor can have a ripple effect. For someone looking to take out a hard money loan to invest in residential real estate, a market with falling prices might seem like a bad time to do it. But this could open up space down the road for the smart investor who understands how long-term trends will play out in the face of falling prices.
Falling Up: Housing Prices Rising More Slowly Than Before
Of course, when we talk about falling, we don’t mean in an absolute sense, but rather that the rate of prices is increasing more slowly than before. In December of 2014, seasonal-adjusted prices rose by just 4.8% over the last year, down from 5.1% year-over-year in August. This follows a trend of nine straight months of slowdown, after nearly two years of double-digit growth.
Some of that growth was to be expected after the market bottomed out at the end of the decade. There was going to be a rebound and then the normal laws of economics and elasticity would again come into play. Regardless, houses are worth less than had been expected a year prior and the real estate market is beginning to see some “speed reduction” signs after the last few years of being on the Autobahn.
Room for Investors to Grow
This doesn’t have to be bad for the residential real estate investor, though. This makes it a good time to jump in and buy houses that might need a rehab, with the anticipation that prices will continue to go up before the next boom. Because there is one key factor that might be artificially declining the average home value and price, and that is a lower cost to build.
Anyone driving over the last few months saw some serious relief at the pump as oil prices plummeted. They’ve rebounded slightly but are still very low. This makes it cheaper to build, as supplies cost less, particularly those shipped across the country or overseas.
Millenials in the Marketplace
There is also the ripple effect we talked about. Less-expensive homes mean that there is more of a chance for previously reluctant people to enter the marketplace. In particular, millennials, that vast group who had been stunted by the recession, are now beginning to make money, settle down, and have families. It is predicted that in the next year they are going to start to make their impact felt on the housing market.
A future post will go more in-depth on how this will affect real estate, but in terms of sheer numbers, they will be looking to buy the existing less-expensive housing and will increase the demand, making the market a boon for those who got in during a period of slow growth. They will also be interested in nice condos and townhouses, particularly in the cash-heavy and crowded San Francisco/Bay Area/Orange County tech corridors. As they start to buy, expect prices to rise in those areas.
Another factor is budget uncertainty, as buyers aren’t sure if they will have the Mortgage Interest Deduction tax credit in upcoming budgets. Once uncertainty hits the market, more people will want to buy rather than risk paying more later. Being in the real estate market at a time when the present seems a safer bet for buyers than the future is a good thing. It is a seller’s market at that point.
So don’t look at lower or slower housing prices and think that it is a poor investment. There are too many factors – normal economic trends, the coming impact of millennials, impossible-to-maintain oil prices – that militate against this being permanent. Now may be the best time for a hard money loan to help you get in or to increase your residential real estate holdings.
Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.