Real estate may be one of the most attractive investment opportunities today. With mortgage rates near all-time lows and national real estate values down more than 34 percent since the highs in 2006, it may be a great time to take a look at making a home purchase. In fact, Warren Buffett recently was quoted as saying: “If I had a way of buying a couple hundred thousand single-family homes I would load up on them.”
While there are certainly opportunities in real estate, there are also significant risks, and it is important to be aware of the pros and cons before jumping in.
As with any investment, the first goal is to buy low. While most investors are aware that home prices have plummeted over the past few years, the question is: Are prices beginning to bottom? According to The National Association of Realtors, the affordability index is near an all-time high. This index measures whether or not a typical family could qualify for a mortgage on a typical home, based on current prices and mortgage rates. A typical home is defined as the national median-priced, existing single-family home as calculated by NAR. The typical family is defined as one earning the median family income as reported by the U.S. Bureau of the Census.
You would have to go back to the year 2001 to find the same level of affordability.
Affordability continues to improve because home prices continue to fall. In fact, last month’s S&P/Case-Shiller index, a closely watched gauge of national home prices, declined yet again. However, the velocity of declines seems to be slowing, and that may be a signal that we are nearing the bottom in home prices.
CHEAPER THAN RENT
The Federal Reserve’s efforts to keep interest rates low have certainly been successful. Bankrate.com’s most recent national survey shows that the average 30-year and 15-year mortgage rates are still only 4.02 percent and 3.2 percent respectively. Bottom line — low interest rates mean lower payments for homebuyers.
In fact, when you do the math, buying may be much cheaper than renting. In addition, home ownership in the United States has fallen to nearly 65 percent, which means that demand for rentals may increase, pushing rents even higher.
While the Fed’s monetary policy and economic stimulus have led to low interest rates, this could also lead to higher, longer term inflation if and when our economy improves. While inflation can be devastating to investors, real estate tends to hold up better than bonds or other fixed-income investments over long-term bursts of inflation. If we ever see the global economic recovery that everyone is hoping for, real estate may help offset these affects.
REASONS FOR CAUTION
The unemployment rate is one of the largest contributing factors to the value of real estate, and though the rate recently fell to 8.1 percent, job growth remains sluggish. If Americans are unemployed or underemployed, the real estate market may continue to have trouble bouncing back.
In addition, while many investors are no longer concerned about a double-dip recession, the risk of a further economic slowdown is not out of the question. The economic slowdowns in Europe and Asia, along with domestic stimulus set to expire at the end of the year, could all result in additional drags on our economy, leading to further declines in home values.
Finally, a significant “shadow inventory” — homes that are either in foreclosure and not yet sold or homes that owners are delaying putting on the market until prices improve — continues to loom on the horizon. Real estate values boil down to supply and demand, and the backlog of foreclosed and distressed properties that have not yet reached the market is a concern. When these properties finally work through the system and are listed, prices could decline further.
Despite these concerns, lower prices, mortgage rates that are near record lows, and improving affordability all suggest that the opportunities in real estate are more attractive today than they have been in many years. Still, buyers should assess their personal financial circumstances, time frame, and tolerance for risk before making the decision to jump into the real estate market.
Kurt J. Rossi, MBA, is a Certified Financial Planner Practitioner. He can be reached for questions at (732) 280-7550 or kurt.rossi@Independentwm.com. LPL Financial Member FINRA/SIPC.