Real Estate Values Are Adjusting From Hyper-Values: Be Patient and Remain Focused
Last week, Fortune Magazine’s Lance Lambert wrote an article focusing on select areas in the United States that are vulnerable to 20%-25% home price declines. Citing Moody’s Analytics chief economist Mark Zandi, Lance zeroed in on the reality versus the media hype.
This kind of analysis is imperative because it puts the headlines into perspective. We need to look at the current housing market in light of what has happened in the past 2.5 years and look at what’s happening on a market-by-market basis.
The housing boom during the pandemic, fueled by more people working from home, remote learning, low-interest rates, high rental rates, and a large number of investors, caused the highest surge in home sales in 14 years. Now that interest rates are near 7% for a 30-year mortgage, real estate values are adjusting from the hyper-values we saw during the boom.
With the dramatic increase in interest rates, many Americans are unable to afford homes at the current price points - their debt-to-income ratio is simply too high. This is causing a decrease in home sales across the nation.
Facts, Not Feelings
It’s easy to see dramatic headlines and think the world is crashing down. In fact, people are paid a lot of money to create this fear and panic in people. It’s always important to take a step back and analyze what’s really going on.
Fact 1: In the housing boom during the pandemic, the “hot” markets in the U.S. experienced an astonishing 43% jump in home prices.
These “overvalued” markets, including Phoenix, Austin, Boise, Denver, and many other cities, saw an insanely large jump in home prices. Fortune Magazine offers a fantastic interactive map where you can look at markets relevant to you.
Fact 2: Those “overvalued” housing markets are now forecasted to drop between 10% to 15%.
What goes up, must come down, as they say. It’s no surprise that the markets that saw the most significant jump, would see the biggest drop. With interest rates more than 3% higher than they were during the housing boom, today’s buyers are not able to afford mortgage payments at the elevated prices.
The numbers are more moderate, though still visible, in non-overvalued markets. Values in these markets rose an estimated 20% to 25% and the predicted market drop is 5% to 10%.
Fact 3: That still leaves a healthy 23% to 28% of appreciation/equity on the table.
Some simple math would show us that homeowners and investors are not doomed. A U.S. real estate price correction or adjustment still leaves homeowners with equity and appreciation in their homes.
The housing market correction is sparking debate on whether or not this is another U.S. housing bubble. And while the current housing market has hit two out of the three criteria for a bubble - a huge increase in housing demand and a spike in property prices relative to incomes - we have not seen the final piece: a housing bust. It appears, rather, we’re seeing an adjustment from hyper-values.
Fact 4: The current headlines don’t determine your financial future, be patient.
Whether you’re thinking about your own home or your investment homes, or both, when reading these types of articles, it’s important to remain patient. A well-balanced portfolio with multiple investment streams can help protect you from volatility in the markets.
An Unknown Factor Remaining
The unknown factor is whether we slip into a recession and if so, to what degree. Thus far, the tight employment market has kept this in check.
In addition, we are just beginning to see the effects of a rebalancing supply chain. Consumers were anxious to spend after the COVID-19 vaccine became widely available, but supply chain issues stifled sales. Fortunately, many of the issues are straightening out and we may finally see a dip in the price of goods.
It’s also important to keep in mind the extent to which global oil prices have fueled much of the inflation in the past year. The number of industries, directly and indirectly, using petroleum and petrol-derived products is deeply embedded in our economy. Additionally, a resolution to the war in Ukraine will also be a catalyst for reversing oil prices.
Stay The Course With Income Producing-Assets
The next 12-18 months will bear out whether this is just a market adjustment. In the meantime, be patient and remain focused on income-producing assets.
A combination of growth assets and income-producing assets is key for a well-balanced financial portfolio. While growth assets focus on increasing your capital, income-producing assets help you produce a steady stream of revenue.
Income-producing assets include real estate (buying and flipping or buying and creating rental income), farmland, private equity, peer-to-peer lending, equipment leasing, and more. While these types of assets often require a higher initial investment than growth assets and have complex compliance requirements, they can produce consistent cash flow.
Invest In Income-Producing Assets With A Self-Directed IRA
A self-directed IRA is similar to a regular IRA in that you can experience the same tax advantages. An SD-IRA is offered as both a traditional and Roth IRA with the same maximum contribution limits. In 2022, the limit is $6,000, or $7,000 if you're over the age of 50.
When investing in creative income-producing assets, you’ll want an expert on your team handling the paperwork. Not just to save you time and energy, but to ensure you’re staying compliant with IRS regulations and avoid prohibited transactions.
Remain Focused With Chicago Trust Administration Services
At Chicago Trust Administration Services, we love to help people secure their financial future, regardless of what’s happening in the markets. We are custodians of self-directed IRAs and can help you make simple, quick, and compliant income-producing investments.
We love looking at new trends and seeing them as opportunities. Whether it’s investing in medical equipment leasing or foreclosed homes, we can help our clients achieve their goals through SD-IRA investing. To see how we can help you, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.