Dave Meyer, VP of Data Analytics at Bigger Pockets, published a report “The State of Real Estate Investing” outlining the factors that lead to the unprecedented rise in housing prices.
Enter Inflation, stage left
The pandemic-induced shutdown coupled with a flood of stimulus money and low interest rates led to an increased demand in a stunted housing market. This resulted in a whopping 46% increase in the median-priced home. For the house flipper, participating in the market was made even more challenging with supply chain disruptions, rising labor costs, and institutional buyers. Betting on the continued rise in house prices finally played out when the Fed increased the Federal Fund Rate more than 10 times in an effort to control the resulting inflation. The FFR sets the rate banks can borrow from one another. The FFR affects mortgage rates which went from practically zero at the beginning of the pandemic to over 7%.
We are due for a market correction
Prospective home buyers are now stepping back from the buying frenzy. Even iBuyers are getting out of the market. Depending on what part of the country you’re in, your region may experience a significant correction opening up opportunities for the real estate investor. And this brings us to the crux of Dave Meyer’s report: how can you participate in this economy and make money in real estate in 2023?
Investing in an uncertain market
As we shift away from a sellers market, below are a few of Dave’s strategies for the seasoned investor.
1. Buy Deep – Talk with realtors, read the business section of your local paper, and try to determine the percent decline in housing prices for the foreseeable future. Use that % to adjust your 70% rule downward when making your offer – if there is going to be a 5% decline in housing value, incorporate that in your total offer. Sellers have been spoiled and may walk away but depending on their circumstances they will eventually have to face reality.
2. Invest in “Hybrid Cities” – As a rule, avoid markets that saw intense price increases, they are due for a reckoning (think Austin Texas). Also, avoid markets that are aging and shrinking (Detroit MI). Dave recommends cities that had solid growth and reasonable price increases (Madison WI).
3. Short-term-rental risk – Investing in STRs has exploded. But citizens are compelling their city government to rein in and/or put restrictions on these. Coupled with an anticipated recession, demand is waning. Look for buying opportunities.
Read the full report here.