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After price weakness since 2017, real estate looks to be a buy again in 2020 and beyond. Affordability is up with mortgage rates down.
Capital Thinking · Issue #823 · View online
A golden opportunity to buy real estate during the pandemic is upon us. With mortgage rates falling to all-time lows, the S&P 500 at all-time highs, and a lot of people still fearful, chances are higher you can get a better real estate deal.
A Golden Opportunity To Buy Real Estate Is Upon Us
Everyone is spending more time at home now. Therefore, the intrinsic value of a home has gone way up.
People are looking to buy larger homes with more amenities. Demand for remodeling is through the roof! Yet, given mortgage rates have collapsed, affordability is up.
With the mass media hyping up the demographic shift away from big cities to small cities, it’s time for savvy investor to go the other way and focus on big city real estate again.That said, secondary cities, also called 18-hour cities are also very attractive given lower valuations, higher net rental yields, and less overall density.
Let me explain in more detail why I believe now is the time to buy real estate in again for 2021 and beyond.
Why It’s Time To Buy Property Again
1) Prices already softened across the country.
According to the Federal Reserve Economic Data (FRED), the median sales price of houses sold in the United States began softening in 2017. Therefore, we’ve already had some pricing deflation let out of the system.
If we look what happened after the previous peak in late 2006, we saw the median sales price go from $255,000 down to $210,000 (-17%) over the course of 2.5 years. Some time in 2H2009, home prices bottomed.
Home prices gradually ticked higher from late 2009 until 2012, before exploding ~55% higher from $220,000 to $340,000 in 2H2017.
The median sales price has since fallen from $340,000 to roughly $310,000 in 4Q2019, a 9% decline. With prices down and mortgage rates down, affordability is up.
2) Mortgage rates have collapsed.
Mortgage rates have declined by over 1% across various mortgage types since their highs in 2018. The average mortgage rate for a 30-year fixed is now below 3%, which is unheard of.
In 2019, I refinanced to a no-cost, 7/1 ARM at 2.625%, which is going to save me over $1,000 a month in cash flow until 2027. In 2020, I got preapproved for a 7/1 ARM jumbo mortgage for only 2.125% with no fees.
If you’re looking to refinance or get a new mortgage, I recommend checking out Credible. They are a premier lending marketplace that allows you to compare multiple real mortgage quotes from various qualified lenders. It’s free to get a real quote.
3) The stock market is at an all-time high.
The S&P 500 closed 2019 up an incredible 31%. In 2020, the S&P 500 and the NASDAQ have rebounded to all-time highs after a tough March 2020. As a result, stocks investors are extremely wealthy, especially tech investors.
So much wealth has been created in the stock market that it is inevitable some of that wealth will move to real estate, which lagged in 2019.
The tradition of turning “funny money” into real assets will continue, especially now. We all want to feel a sense of normalcy. And owning a home or a larger and nicer home helps.
At the same time, we’re also looking to invest for a profit. Given real estate prices moves more slowly than stocks, I’m looking to diversify into 18-hour cities across the heartland of America.
Financial Samurai
Photo credit: Francesca Tosolini on Unsplash