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 (as of 4Q2020), and a lot of people still fearful, chances are higher you can get a better deal.
Everyone is spending more time at home now. Therefore, the intrinsic value of a home has gone way up. 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.
The best way that I’ve found to do so is through CrowdStreet, my favorite platform for accredited investors. CrowdStreet focuses on investment opportunities in 18-hour cities. The platform enables you to invest directly with the sponsors as well. It’s free to sign up and explore.
Fundrise is my favorite platform for non-accredited investors. Fundrise offers various diversified eFunds/eREITs, which is an easy way to gain real estate exposure across the country. Historical platform returns have been quite steady, in the 9% – 10% range. When stocks do poorly, Fundrise has historically done well. Fundrise is also free to sign up and explore.
4) 2020 is a presidential election year.
If we know one thing about power-hungry politicians, it’s that in order to stay in power, they will do everything possible to help ensure the economy keeps growing.
The stock market and the real estate market tend to get hyped up over all the promises the presidential candidates promise to get elected. The thing is, regardless of who wins, the stock market and real estate market tend to do well.
5) The devil you know is better than the devil you don’t.
Once the state income and property tax deduction limit of $10,000 was introduced and the mortgage interest deduction limit was lowered from $1,000,000 to $750,000 for 2018, there was a lot of uncertainty regarding how this would affect a homeowner’s tax bill. Now that homeowners have gotten to see what the exact damage is, homeowners and tax experts can now make more calculated homeownership decisions going forward.
In my opinion, the SALT cap limit hasn’t hurt as badly as some people feared due to the doubling of the standard deduction and the decline in mortgage rates. I personally haven’t noticed any difference and even got a small federal tax refund.
6) Rents continue to tick up.
The value of a property is ultimately based on its rental income. Some coastal cities will have lower cap rates due to faster property price appreciation. While heartland cities will have higher cap rates, which offer tremendous value to income-seeking investors.
With the coronavirus pandemic, there is shelter-in-place for millions. However, thanks to stimulus checks, generous unemployment benefits by state, and the Paychecks Protection Program, I’m confident that many Americans will survive the lockdowns and keep paying rent. In some states, you can earn $5,000+ a month in unemployment benefits.
So far, all my tenants have paid on time in 2020 as all still have their jobs and are working from home.
7) The Millennial generation is in its prime buying years.
Millennials are now mostly in their 30s, which means they’ve had 10+ years to save for a downpayment. They’re also at a stage where they are settling down and having children.
There’s probably no bigger catalyst to own a property than children. Your nesting instincts go into overdrive as you strive for stability. Further, there is probably no bigger multi-year catalyst to invest in real estate due to demand coming from millennials.
Millennials today account for almost 40% of homebuyers.
Adult Composition of Home Buyer Households
You can see from the chart below by the National Association of Realtors® Home Buyer and Seller Generational Trends study that married couples dominate the home buyer demographic, followed by single females. No surprise, the single male is way behind the single female when it comes to home buying.
I’ve mentioned this before, but there are now eight males over the age of 25 still living at home with their parents within a six-block area around my house. One of my biggest fears as a dad is raising a son who does not grow up to be an independent man by 25. I cannot be too soft.
Where Millennials Are Buying The Most
Below is another interesting graphic I found that shows where millennials are buying the most homes. They certainly aren’t buying as many homes in California or Washington, Hawaii, Florida, New York, New Jersey, Washington D.C. or Boston.
This buying trend gives me confidence that buying property in non-coastal cities is a good long-term trend. I’ve now got Ogden, Grand Rapids, and Des Moines on the top of my radar when I look at deals on CrowdStreet, my favorite real estate crowdfunding platform for accredited investors.
Just like how stock investors shouldn’t fight the Fed, real estate investors shouldn’t fight multi-decade demographic trends.
Google is spending $13 billion on real estate in Nevada, Ohio, Texas, and Nebraska in 2019 and beyond. Uber signed a 450,000-square-foot lease within The Epic, a mixed-use development in Dallas, Texas. Their office is set to open in 2022. The trend towards the heartland is as clear as day.
8) Wage growth is reaching new highs.
Real median household income finally broke out to new all-time highs in 2017. The latest data is $63,179 at the end of 2018. I’m confident when the 2019 data comes out in 2020, the real median household income will go up further.
9) Hot foreign money has cooled off.
Before 2017, a lot of coastal city buyers had to compete with wealthy foreign money, especially from China. Foreign buyers caused bidding wars and a lot of competition for potential local buyers. The Chinese government has since clamped down on hot money outflow to purchase foreign property. As a result, Chinese buyers of U.S. real estate is down over 50% YoY in 2019.
Now with coronavirus fears in 2020, you know that the wealthy Chinese are trying to do everything they can to diversify away from the Chinese economy.
From a foreign capital competition perspective, the time to buy is when their spigots have been shut off. Eventually, foreign money will come flooding into America again, especially if there is a resolution with the trade war. There have been over two years of pent up demand for U.S. property. When the demand is finally unleashed, it will probably result in all-cash bidding wars once again.
10) V-shaped economic recovery.
During the 2008-2009 financial crisis, the median home price in America declined by ~17% over a 2.5 year period. I do not believe we will go through a downturn of a similar magnitude because lending standards have been so incredibly tight post the 2008-2009 recession. For example, I got rejected for a refinance back in 2014 because my 1099 income was too abysmal. Yet, I had enough in my investment account with the bank who rejected me to pay off my entire mortgage times two!
Since 2009, only people with excellent credit scores have been able to get mortgages. Negative amortizing liar loans have disappeared. It has also become common practice to buy a home with a 20% or greater downpayment again.
With so much home equity that has been accumulated since 2009 by very creditworthy borrowers, most homeowners should be able to weather a financial crisis much easier than in the past.
Since its late-2016 peak, the median sales price in America is already down ~9%. Even if home prices continue to decline and reach the same magnitude as the previous recession, there’s only 8% left to go.
The self-inflicted recession of 2020 to combat the coronavirus means that the recovery should be much quicker since we have the power to open up the economy. This recession is very different from the last one, which took years to unwind over-leverage in the system.
11) Conforming loan limits are going up.
The Federal Housing Finance Agency (FHFA) announced the maximum conforming loan limits for mortgages to be acquired by Fannie Mae and Freddie Mac in 2020. In most of the U.S., the 2020 maximum conforming loan limit for one-unit properties will be $510,400, an increase from $484,350 in 2019.
In high-cost areas, the maximum loan limit for mortgages acquired by Fannie Mae and Freddie Mac will be $765,600. Higher conforming loan limits means homebuyers are able to buy more house at the same conforming loan rate.
Further, higher limits signifies the government recognizes real estate prices have room for upside, as their loan limits follow inflation. Therefore, even the government thinks it’s time to buy real estate during the pandemic.
Real Estate Looks Attractive
I’m thankful to have sold one of my rental property in 2017. Although paying the commission was painful, the peace of mind I received from not having to manage the property as a first-time dad was priceless. Further, the reinvested proceeds have done well so far with no work needed on my part.
With wages up, mortgage rates down, and stocks strong money is flowing into the real estate market. I want to find the real estate seller who was the Dow Jones seller at under 20,000 and the S&P 500 seller at 2,250. It’s time to buy real estate again.
I invest in everything from stocks, bonds, private equity, venture debt, metals & mining, and real estate. I don’t play favorites. I’m mainly interested in maximizing my investments to make the most amount of possible with the least amount of stress as possible.
If you don’t want to take out a loan to buy real estate, that’s understandable. Consider investing in real estate with a real estate crowdfunding platform like Fundrise.
With Fundrise, you can invest in real estate for as little as $500, and you don’t need to leverage up at all. This way, you can easily diversify your real estate exposure and earn income passively. Fundrise is open to all investors.
If you’re an accredited investor, take a look at CrowdStreet a real estate marketplace that primarily focuses on secondary metro markets that are lower cost with higher cap rates and higher growth than the expensive coastal cities.
These cities include Denver, Austin, Memphis, and Charleston. Due to technology and the rise of the freelance economy, I think investing in lower cost growth cities will be a multi-decade trend. CrowdStreet is free to sign up and explore.