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Real Estate Investment at Its Peak: Freddie Mac’s Latest Report Reveals Unmatched Timing
Freddie Mac, a government-backed housing lender, reports that there are currently 30 renter households for every available home on the market. This underscores a key message for real estate investors: now is an ideal time to own income-generating property.
The cause of this imbalance lies in the limited housing inventory. Rental demand has steadily increased since 2006, when there were only 10 renters per available property. However, the 2008 recession led to a slowdown in homebuilding, compounded by stricter lending standards, further limiting the supply of homes.
Landlords Have Greater Leverage in Tenant Selection
With a larger pool of potential tenants, landlords are able to be selective, opting for those with strong credit scores and stable employment. However, landlords considering significant rent hikes should be mindful of ongoing legal scrutiny, such as the Department of Justice’s lawsuit against RealPage, which allegedly facilitated coordinated rent increases among property owners.
Inventory Shortage Drives Up Prices
The current shortage of homes has resulted in rising property prices. Freddie Mac’s recent report highlights the importance of government-backed assistance for first-time homebuyers, with approximately 53% of the 200,000 home purchases financed by Freddie Mac in Q2 of 2024 being made by first-time buyers. However, real estate investors are also vying for these properties, with cash buyers capitalizing on the opportunity to earn rental income and benefit from property appreciation. This competition has made affordability a significant challenge, especially for those without substantial wealth.
Freddie Mac’s report states, “Less affordable housing is acutely felt by those seeking to buy their first homes, especially those without substantial wealth at their disposal.”
Rising Equity Enables Homeowners to Invest or Renovate
While reduced inventory and higher prices may be problematic for some, they have created an opportunity for homeowners with significant equity. As interest rates fall, many are turning to home improvements to increase the value of their properties. Harvard University’s Joint Center for Housing Studies forecasts that annual spending on home renovations will reach $477 billion by 2025, approaching the peak levels seen during periods of lower interest rates.
Decreased Mobility Spurs Innovative Solutions
Homeowners looking to move up the property ladder may find themselves stuck due to high prices. To create more space, many are opting for creative solutions, such as purchasing accessory dwelling units (ADUs) or converting basements, attics, and garages into livable areas. As Susan M. Wachter, a professor at the University of Pennsylvania’s Wharton School, noted, “The starter home for many has become a keeper home, unfortunately.”
Implications for New Real Estate Investors
For those new to real estate investing, the current market presents both challenges and opportunities. Investors should redefine stability, as homeownership may not always be the best route to financial security. While 84% of Americans express a preference for homeownership, real estate investors can benefit from focusing on income-producing properties before buying a personal home.
Conventional home mortgages often carry a heavy interest load, especially in the early years. Instead of focusing on paying off a personal property, it is more advantageous for investors to build cash flow, pay down loans, and benefit from appreciation, depreciation, and tax incentives by investing in rental properties.
Renting while building an investment portfolio allows investors to qualify for more loans and explore creative financing strategies such as BRRRR (Buy, Rehab, Rent, Refinance, Repeat), rent-to-own, subject-to deals, and flips.
Increasing Rent Helps Cover Rising Costs and Boosts Equity
Moderate rent increases help landlords cover rising property maintenance and building expenses. For larger properties, these rent hikes can significantly increase the value of the asset. With a broad tenant pool, landlords can more easily implement these price adjustments.
When Should Investors Consider Purchasing Their Own Home?
At some point, real estate investors may wish to purchase a personal residence. However, many investors make the mistake of purchasing homes that are too expensive. To achieve success, investors should keep their personal expenses low. Utilizing FHA low-down-payment programs and finding a mortgage payment that is comparable to or lower than rental payments can help investors reduce their living costs while reinvesting cash flow into expanding their portfolios or maintaining their rental properties.
Creative strategies, such as moving in with family to save for a down payment or purchasing in more affordable areas, can help make homeownership more attainable without sacrificing investment opportunities.
Final Thoughts
While owning residential rental property has never been more advantageous, buying property is increasingly difficult due to low inventory, high prices, and rising interest rates. As a result, investors must adapt their buying criteria, looking for properties that might not have been on their radar in previous years.
Achieving high cash flow is challenging unless investors are willing to buy in less desirable neighborhoods or invest significant time and effort into improving properties. For some investors, simply breaking even while benefiting from tax advantages, tenant rent paydown, and property appreciation may be a worthwhile goal.
For existing landlords, the current high demand for rental properties presents an opportunity to invest in property improvements and save for future acquisitions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
Real Estate Investment at Its Peak: Freddie Mac’s Latest Report Reveals Unmatched Timing
Has the U.S. Housing Market Finally Begun to Thaw After the Pandemic?
It seems like the housing market might be showing signs of life. According to a recent report from Redfin, pending home sales in early October have seen their largest year-over-year rise since 2021, with a 2% increase in the four weeks ending October 6.
This news is likely to be welcomed by real estate investors who have felt the market has offered limited opportunities over the past few years. However, it’s important to take a cautious approach—one promising statistic doesn’t necessarily indicate a broader trend.
Is the Housing Market Truly Recovering?
Let’s explore the different factors at play.
Interest Rate Reductions: A Critical Factor or a Red Herring?
The Redfin report links the surge in pending sales to the Federal Reserve’s much-anticipated rate cut announcement in mid-September. According to Redfin, this announcement prompted buyers to re-enter the market in late September, despite mortgage rates having already been falling for weeks before the cut.
This psychological boost is crucial. Although buyers were aware of the falling rates beforehand, many seemed to be waiting for a formal signal to act. This could be attributed to a lingering fixation on the ultra-low rates of 3% to 4% that buyers enjoyed before 2022.
Any rate cut announcement serves as a nudge for prospective buyers, making them feel that now might be the right time to purchase, even if mortgage rates had been decreasing already. In an unstable mortgage market, such announcements hold significant influence.
However, mortgage rates are just one piece of the puzzle when analyzing housing market performance. As noted by Investopedia, the real estate market is driven by four primary factors: interest rates, demographics, economic conditions, and government policies.
Demographics: Shaping the Market
During the pandemic, demographic shifts had a profound effect on U.S. real estate, with major population movements like the Sunbelt migration fueling booms in cities such as Phoenix and Austin, which later became unaffordable for many.
Age is another key demographic factor, and the millennial generation’s pent-up demand continues to be a driving force behind the rise in home purchases. Despite the challenges of the past few years, millennials who have longed to become homeowners are now entering the market in greater numbers, as more properties become available.
Rising Inventory: A Sign of Stabilization
A key factor contributing to the market’s stabilization is the growth of housing inventory over the last year. The pandemic had a significant impact on the availability of homes, with sellers hesitant to list properties due to COVID-19 restrictions and, later, higher mortgage rates.
Some homeowners, particularly those upgrading to larger homes, found it financially challenging to sell and take on higher mortgages. Others, however, simply chose to wait for a more favorable market.
Although the latest Realtor.com report shows that inventory remains down by 23.2% compared to pre-pandemic levels, we are seeing an upward trend. For instance, new listings have been rising since last year, with a 5.7% year-over-year increase for the four weeks ending October 6.
As of September 2024, some states have even surpassed their pre-pandemic inventory levels, including Tennessee, Texas, and Idaho, with others, like Washington, close behind.
Vulnerabilities in Certain Regions
However, not all regions are showing positive signs. For example, some areas, particularly those affected by extreme weather, have seen inventory spikes not because of market recovery, but due to homeowners trying to offload damaged properties they can’t afford to repair.
For instance, regions like Florida and North Carolina, hit by hurricanes, have experienced increases in home listings, but these may reflect a response to climate-related challenges rather than market health.
Opportunities for Investors
Investors should be discerning when choosing markets, focusing on regions where inventory is growing due to increased home construction rather than climate-related distress. States like Idaho, Utah, North Carolina, and Texas, which are building new homes, offer potential, though caution is needed in areas prone to natural disasters.
The Midwest and Northeast, meanwhile, still face significant challenges in recovering to normal market conditions. These regions have lower rates of new construction, meaning inventory remains scarce, which could present both opportunities and difficulties for investors.
The Bottom Line
The U.S. housing market is showing signs of recovery, but the situation remains complex and varies by region. Interest rates play an essential role in unlocking the market, but investors should also consider other critical factors, such as homebuilding trends, climate risks, and government policies. While the market is heading in the right direction, it’s crucial to examine regional differences carefully before making investment decisions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“