In the first part of this Q2 Economic Update, we discussed the state of the current economy and where it’s going to be in the next 12-18 months. As a quick recap, we are in an intense inflationary time, and money supply is high. Due to stimulus checks and low interest rates, money has been easier to access, and people have used their funds to buy homes. This has pushed up prices in the housing market, which is what we are going to discuss in this blog and corresponding podcast episode.
Are we in a housing bubble?
We’re seeing a housing price bubble, not a housing supply bubble. In the last 10 years, builders have slowed down and, consequentially, the housing supply has diminished. The building rate of houses in the United States hasn’t been this low since the 1930s. So, I do not believe that real estate itself is going to crash. Rather, I believe that property prices are going to slowly go down. Demand for houses will continue to exceed supply which should keep prices competitive.
Some extremely hot housing markets could go down to 25 percent in the next 12-18 months. Before you say, “Billy, that’s a lot!” you must consider this figure in context. In the Great Recession (about 2008-2012), some markets decreased in value by 60 percent. When prices come down, it’s a good time to buy.
Should real estate investors worry about rising interest rates?
When you consider investing in the current housing market, don’t be overly concerned about the interest rate. You need to be more concerned on the return on your investment. Increasing interest rates do not automatically disqualify the possibility of a lucrative real estate investment.
An interest rate simply determines how much you will pay for your money, so a higher interest rate means a higher monthly payment. Here’s some good news for buy and hold real estate investors: rent keeps pace with inflation. So, if you can cash flow a property, it doesn’t matter how high the interest rate is.