The Ideal Environment For Real Estate Investors Is Here

If you were to ask me to describe the ideal environment for real estate investors and new real estate buyers, right now could be it. After two years of a white-hot real estate market, finally, real estate investors are seeing better deals.

Please know that I'm completely biased for real estate. Roughly half of my net worth and passive investment income comes from real estate. In addition, there's no asset I appreciate more than our primary residence because it shelters my family. And nothing is more important than family.

For those of you who are bearish on real estate, I welcome your point of view!

The Ideal Environment For Existing Real Estate Investors

Here are some new reasons why I think real estate prices will continue to go up this year. These reasons are real-time evolutions of my 2023 housing market predictions. I still forecast a 8% decline in the national median home price, hence the opportunity for buyers.

1) The stock market is no longer making people money

The major U.S. stock market indices all sold off in 2022. Some individual companies have given back all of their gains from the past one or two years. The stock market correction is particularly brutal in the technology sector.

Due to the increased fear of round-tripping a stock investment, more capital will flow towards hard assets like real estate. The desire for capital preservation is going way up.

One of the best things to come out of the pandemic was strong investment gains. But if you give up all your investment gains since 2020, your demeanor will sour.

Bad life + lose money = life sucks. See the 2023 Wall Street S&P 500 forecasts mostly calling for no growth.

However, so far as of 2Q2023, the S&P 500 has rebounded, making stock investors wealthier. As a result, this greater feeling of wealth should translate to an increased desire for property.

2) The stock market has corrected by the ideal amount

In the post, How Does Real Estate Get Impacted By A Decline In Stock Prices, I wrote that a 10% – 15% stock market correction provides for the maximum real estate outperformance versus stocks.

When the stock market is down 10% – 15%, investors are jittery, but not in panic mode yet. As a result, investors still have hope that everything will turn out OK. Money will continue to pour into both stocks and real estate. However, more investors will look towards more safe haven investments.

The reason why real estate outperforms stocks the most when the stock market is down 10% – 15% is not because real estate prices are doing so well. It's mainly because real estate prices haven't fallen as much, if at all.

The stock market up 10% – 15% would also be great for real estate. However, at such performance levels in the stock market, the real estate market is likely underperforming.

The longer stocks stay depressed, the more capital will flow towards real estate. There is a stronger desire to own real assets that generate income and provide utility. If the stock market then rebounds back to all-time highs, real estate investors today will benefit even more.

For example, fund flows into Fundrise, my favorite real estate investing platform continues to be strong. During the 2018 correction and 1Q2020 collapse in stocks, Fundrise funds outperformed. As a result, more investors are investing in private real estate funds for more capital preservation and less volatility.

Below is a historical performance chart of Fundrise versus the Vanguard Total Stock Market ETF and Vanguard Real Estate ETF. As you can see, in 2018, Fundrise outperformed the stock market ETF by over 14%. In 2022, Fundrise also outperformed the S&P 500 by over 25%!

Fundrise returns

3) Higher inflation with continued negative real mortgage rates

It would be one thing if we had high inflation and high mortgage rates. But we have high inflation and still relatively low mortgage rates. In fact, real mortgage rates have turned negative because the rate of inflation has risen faster than the rate of mortgage rate increases.

Let's rewind time to January 2021 when the CPI was at 1.4%. Back then, the average 30-year fixed-rate mortgage was at 2.77%. In other words, the real mortgage interest rate was +1.37% (2.77% – 1.4%).

Historical Consumer Price Index data (CPI)

In June 2022, the average 30-year fixed-rate mortgage was about 5.5%. However, inflation skyrocketed to 9.1%. Therefore, the real mortgage interest rate was negative 3.6%. Mortgage rates hadn't increased as much as inflation.

Latest inflation rate

During times like that when inflation is higher than mortgage rates, the demand to borrow money to buy real estate typically is robust. It’s like getting a free interest rate, because inflation is rising faster than the cost of your debt.

Anybody just focusing on how much mortgage rates have gone up since the bottom is not thinking things all the way through. It's like someone bashing the high cost of living of a city while ignoring high wages.

Any rational person would much rather borrow money with a negative real interest rate than a positive real estate rate. With a negative real interest rate, inflation is paying off your debt for you. Veteran real estate investors lick their chops in during periods of negative real mortgage interest rates.

Inflation finally came down, however. As of November 2023, the average 30-year fixed-rate mortgage was about 7.7%. And the latest inflation print was 3.7. Therefore, the real mortgage interest rate switched directions to positive 4%.

4) Cashed up consumers and corporations

One of the main drivers of real estate demand is income and job growth. It is clear to anybody who has to commute to work or send their children to school that traffic is back to all-time highs.

Strong job and income growth are what is pushing inflation higher, not the other way around. In addition to labor market strength, the U.S. consumer has more cash than ever before.

The combination of higher incomes and strong cash balances means more protection from a downturn. It also means the average consumer can afford larger down payments and higher mortgage payments. The percentage of cash buyers and institutional buyers is going up, not down.

U.S. consumer and U.S. corporates are cashed up and hold a record amount of cash, $19 trillion, a 35% increase since 2019 - real estate investors are hungry to buy

A Better Environment For New Real Estate Investors

Now that we've discussed some new data as to why real estate prices will likely continue higher, let's now focus on why the real estate environment has improved for buyers.

1) Declining real estate prices over the next 12 months.

It is not healthy for real estate to go up double-digits a year, as it did by ~18% in 2021. Getting into a bidding war could mean you overpay for a property literally nobody else is willing to pay for. It's called the “winner's curse.” If you so happen to be at the top of the pyramid and the real estate market softens, you might not be able to recover your investment for years.

In an overheated real estate market, more inspection contingencies are waived to give buyers a chance. If you know what to look for, waiving a home inspection contingency may be OK. However, not every home buyer is a seasoned veteran. If you're a first-time home buyer trying to get into a hot market, you might end up saddled with thousands of dollars in unexpected repairs.

When the Global Financial Crisis hit in 2008, it was the marginal buyer with small down payments and weak financials who first lost their homes. But their losses snowballed into greater losses for even the strongest homeowners. A healthy real estate market means having the most financially sound homeowners across all wealth levels.

As a buyer, you should welcome a more normalized market where you have a greater chance of buying what you want at a reasonable price. If you're looking to upgrade your primary residence, your time is coming. Even if you are cashed up, you don't want to feel like you overpaid.

2) Geopolitical uncertainty is good for real estate investors.

Real estate tends to outperform whenever there are negative geopolitical events such as terrorism, wars, bombings, and other unfortunate events. The more saber-rattling by men with vast resources, the more attractive real estate becomes.

When the January 2022 CPI came in at 7.5% – the highest in 40-years – the 10-year bond yield shot up to 2.05%. However, when news hit of 150,000 Russian troops amassed at the Ukraine border, the stock market sold off and bonds went up, sending the 10-year bond yield back down to about 1.93%. The 10-year bond yield rose due to more hawkish guidance by the Fed, but negative real mortgage rates continued.

Sadly, the worse the geopolitical event, the better it usually is for real estate. Not only will more capital flow towards hard assets, but mortgage rates will also tend to decline, making real estate more affordable.

As a savvy buyer, you can use geopolitical uncertainty as a bargaining tool to get a better deal. You see, most people naturally believe war is bad for all risk assets. In fact, geopolitical events are temporarily bad for stocks. But as you've just read, geopolitical events are a net positive for real estate.

In other words, you may be able to invoke fear into a seller's heart by discussing your concerns about destruction and a bigger war. Unless the seller reads Financial Samurai, they will probably get swayed by your argument to cut their price. You can just point to the sell-off in stocks as proof.

The price cut might not happen before getting into escrow. However, you can certainly mention geopolitical events in your price concession letter. This is where being knowledgeable can save you thousands of dollars compared to the average person who is not versed in contract negotiations.

Frustrated Homebuyers Due To Low Inventory

About every two years, my itch to buy another property grows. Given I bought a “forever home” in mid-2020, the time is coming for me to once again look for a great deal.

It's easy to see what's available thanks to automatic alerts from Zillow and Redfin. Unfortunately, there's not a lot of quality inventory to choose from just yet. It seems like inventory might be structurally lower for years to come as more people hold onto their homes for longer.

Low home inventory

With such little inventory, you must be patient. As a potential homebuyer, use the combination of higher mortgage rates, geopolitical risk, and a weak stock market to your advantage. In the meantime, learn as much as you can about real estate investing as possible.

Although I believe we are currently in the ideal environment for real estate investors, the environment can change in an instant. Pay attention!

Things are looking better in 2023 with mortgage rates declining. In addition, foreign investors are coming back, especially from China. Best to look for deals now before the rebound. If you can get a property for 10% off it’s 2022 high, I’d highly consider buying.

Invest In Real Estate More Surgically

If you're looking for an easy way to invest in real estate, check out Fundrise. Fundrise offers private real estate funds that invest mainly in single-family and multifamily rental properties. The investment minimum is only $10, so it's easy to start small and build a larger position without leverage.

Real estate is my favorite asset class to build wealth during times of uncertainty. People want to own real assets that provide a function, generates income, and will hold its value over time. As tech stocks and growth stocks get crunched, real estate outperforms.

I've personally invested $953,000 in private real estate to diversify and earn more passive income. For most people, investing in a diversified real estate portfolio is the way to go. Private funds are also great because they are much less volatile.

Readers, do you think now is the ideal environment for real estate investors? Or do you think I'm being totally biased and delusional? Do you think as stocks sell off more money will flow towards hard assets? Have you been able to use the fear of war and stock market losses to your advantage when buying real estate?

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63 thoughts on “The Ideal Environment For Real Estate Investors Is Here”

  1. Thanks for the great content! Just for me to understand, when you say “With a negative real interest rate, inflation is paying off your debt for you” you are assuming that either
    (a) wages grow at the same rate of inflation, or
    (b) the house value increases at the same rate of inflation.

    If one of these two scenarios does not materialise, then there is no negative-interest-rate situation. Am I missing something here?

    1. Gennadiy from Belarus

      In NORMAL economic а) + b) will go simultaneously.

      March 2003 – House bought for 180
      mortgage +PMI =1049 + 123 (7,5% APR)

      January 2023 Zillow indicates 400
      mortgage =$1151 (3,5 % APR)

      Meanwhile, apartment rent ,1/3 size

      February 2003 – $460/month
      January 2023- $1250

      In NOT NORMAL economic

      wages grow at the same rate of inflation, but
      the house value DOES NOT
      increases at the same rate of inflation.(government sold all entire stock with stipulation: apartment must be assign to person )

      1 PAYMENT =Real payment
      Last payment = Candy bar

  2. Sam,
    Quick Question (context: recently moved to ALMOST the heartland (where your Fundrise investments are) Huntsville, AL; we are experienced home buyers; recently discovered your site and think your analyses are fascinating):

    Assuming one is willing to deal with tenants, what has been your ‘strictly financial’ returns of
    “owning-and-renting” Vs private REITs (i.e. Fundrise, etc)? do you have an article for this specifically or have you plotted your cold-hard return data over the years for an real comparative analysis?

    thank you kindly, and thank you your advise.

  3. Do you still believe it’s a good time to buy real estate? Here in San Diego, single family homes listed at $2-3M seem to be routinely accepting offers 20% more than list. Price appreciation has accelerated in 2022. Surely there is a price point where elevated cost makes real estate ROI not attractive.

  4. Quick question – In the Bay Area specifically, do you foresee a systemic downturn in prices happening because of the across-the-board drop in tech stock prices? I’m not a tech worker, but one of my colleague’s spouses is, and they were very frustrating having just paid tax on vested stock, and proceeding to watch it drop almost 20% by the time they transferred it into their sales account (they weren’t allowed to sell it on the vesting date). Presumably if this pattern is repeating itself with employees of FB, Lyft, etc., a lot of these folks are going to feel “poorer,” but you probably have a better grasp on this than I do. Would be curious your thoughts.

    1. Should have a negative impact on demand in the short term. But it could also bolster much more capital towards real estate given stockholders have been reminded how ephemeral share prices can be. The problem is the inventory is so low, and almost everybody is still way up from early 2020.

      Do you own or rent? What are your thoughts on what are you planning on doing about housing in the bay area?

    1. Any idea what this is “ Justin Haskins is the director of the Socialism Research Center at The Heartland Institute”?

      Perhaps a housing crash is great for Socialism to make housing more affordable. But if there is a great crash, the middle class and poor will be hurt the most.

      In short, I disagree, and would be happy to make a bet with Justin too.

      What are your thoughts?

  5. I liked your analysis. We recently bought our “forever” home about seven months ago in a desirable neighborhood in Southern California, and if you look at Zillow/Redfin, it’s already appreciated by 17-10% in that short span of time. This is, of course, insane, and unsustainable, but I’m with you that I don’t see a dramatic real estate bubble bursting anytime soon like in 2008-2011.

    Of course there are the doomsayers, but it’s always the same argument: “It feels frothy!” or “What goes up must come down!” In other words, based on intuition or how it “feels,” but usually not too much attention to the fundamentals and to the differences between the current scenario and 2008.

    On the other hand, when you look at those fundamentals (rates, inventory, inflation, the stock market), it seems to concur with your analysis, and that while the current rate of appreciation is unsustainable, that a dramatic bottoming out seems unlikely.

    Also, somebody remarked something about no “baby boomer” event to affect inventory, but I beg to differ–the millennials are the largest living generational cohort in the United States, and they are right in the middle of (first) prime home-buying age. Seems to make sense!

    1. “We recently bought our “forever” home about seven months ago in a desirable neighborhood in Southern California.”

      What did that cost you?

      1. $1.175 MM, and it’s currently (according to Zillow) worth $1.38 MM nine months later, FWIW.

        1. Interesting! I feel like that barely gets you in a desirable neighborhood in NorCal, let alone a forever home in SoCal.

    2. My biggest concern is a massive earthquake… the big one everyone says California is long over due for. we have earthquake insurance, but if entire neighborhoods are destroyed and infrastructure like electric and plumbing need rebuilt, I see a lot of fire sales and lost equity across the board.

  6. Manuel Campbell

    I agree 100% with your analysis. I have only one investment in real estate (RioCan) – outside of my house – and it has done really well since the start of the year (+8%). My only regret is to not have more. But I always say that about all my investments … Except when they go down obviously… :)

    RioCan is also up this year because of the recovery in commercial real estate (retail and offices), which I think will continue with the pandemic ending soon.

    I was wondering if you already considered investing in commercial real estate ? I’ve heard they are less time consuming on maintenance and management. Maybe something that could be interesting in your situation ?

    Also, responding to some comments below on lower inventory in residential real estate and confirming what you said in your article :
    – I think low inventory in the USA are mainly due to underconstruction for about 10-15 years following the housing crash and financial crisis. That is different than Canada where low inventory is mainly due to excessive buying (more people owning 2-3 personal properties + small investors owning multiple individual properties).
    – Extremely low interest rates during the last two years allow a lot of people to live in their house basically for free (except for maintenance, insurance cost, etc.). Personally, I was able to refinance at 1.84% for 5 years – in Canada. But homeowners in the USA had access to refinance at ultra-low rates for 30 years terms. A lot of people will have a strong incentive after the pandemic to keep their house. Hence reducing the total inventory available for buyers.

    I don’t know what will be the impact of rising interest rates on home buyers. My feeling – like you – is that the pace of increase in prices will slow down.

    I would be surprised if there was a decrease in residencial real estate prices, particularly in the US. I think the Canadian real estate market is much more vulnerable. And rates should move up earlier. So, if you are interested to see if house prices move downward, I would say, look at the Canadian real estate market first. The US may follow, but not necessarily since situation in both countries are different. But if housing prices don’t go down in Canada, I think we might be confident they won’t go down in the US.

    Obviously, that’s only my opinion. I could be wrong. Make sure to take your decisions based on your own beliefs and assumptions.

  7. Thank you for this article. I have been trying to purchase my first home for the passed 2 years, and continue to lose out in bidding wars while offering 5% over list in most cases. I am really focused on getting into a house now that my wife is expecting our first child.

    It feels to me like the low inventory and bidding wars have led to homes in my area (Twin Cities) becoming unaffordable for most buyers. I personally am stretching my budget beyond the 20% debt-to-income ratio limit I set for myself.

    I’d love your thoughts on home affordability today. In my area, it is at the same levels as it was pre-financial crisis. See slide 8:

    If buyers are this stretched from an affordability perspective, how much upside could there really be in Real Estate right now?

    1. Hi Jason; Just a quick reply from another reader (non-expert!) – I had the same problem a few years back and I searched far and wide to find a seller who would take a “contract” (Land-Sale-Contract, I think is the official term). You can search and find out about it but the seller becomes the bank. Seller needs to own the house outright, and you both need a RE lawyer to draw up the papers (protect you both) and you’ll pay a higher interest rate with a balloon payment. That said, it gets you in! It’s not easy in a seller’s market but worth trying – worst that can happen is you get a bunch of No’s. I got about 30 of them but then got a Yes. Worked out great. Best of luck!

  8. Thanks for the post. In general, I agree with your macro-economic hypothesis. I’m fortunate to own several multi-family apartment buildings and agree that with inflation here to stay for the next 2-3 years, residential housing is a great hedge against inflation. With leases < 12 months to expiration dates, raising rents to inflationary market prices against a fixed debt is a winning situation.

    The bad news is that if you're looking to invest now, there is so much money trying to chase so little inventory. And so you are going to pay a high premium to find anything that makes financial sense. IMHO, it's a bit risky. Of course, one can model out the increase in rents and appreciation, but I am typically very conservative and I cannot get any investments to fit my comfort range.

    So I am personally doing 2 strategies – 1) Sitting on the sideline with cash and ready to buy once mortgage rates increase to the point where we're seeing a slowdown in transactions and possibly a dip in prices, 2) Investing in REIT and DSTs where I can get stable but lower returns and capital preservation.

  9. Ms. Conviviality

    We have an investment property one mile from downtown and our neighbor was selling his property for $105K. We were interested in buying since the purchase would double our lot size. We took a tour of the place and were shocked that anyone could live in that house. There was no insulation/drywall in 2/3 of house or central heat/air (in hot humid Florida) and a 4×2 foot hole on the subfloor where you could see right down to the dirt. Disclosure indicated there was previous termite damage on the wood structure home but had been treated. One-third of the house was an addition that was not permitted and the asbestos roof leaked (cause of hole on floor) and would need to be replaced. We passed on the purchase. We were once again shocked when the house sold for 23% over asking within a month of being listed. If someone is willing to buy a house like this then the real estate market is still going strong.

    1. I’m seeing the same scenario in Florida, people are buying dumps, razing them and building new houses

  10. Hey Sam- Great article per usual… Wanted to get your take on our current situation: We purchased a home here in Austin back in ’19 and have seen tremendous gains. With that said, we’re in the process of moving down to San Antonio to take advantage of what I’d call a real estate “arbitrage”, as we can literally buy an equivalent type house for half of what we could here in Austin. Though we plan on keeping our present home as a rental, I saw in a previous article of yours that the construction starts here in Austin are nearly off the charts as compared to most other metro areas… This concerns me a bit, but was keen to know your thoughts to the extent this might effect home prices in the Austin metro area. Thanks sir!

    1. I have 10 rentals in Austin area (suburbs, not Austin proper). I saw the same construction data you are referring to. I am not concerned based on the employers moving here. As things get worse in this country i expect the inflow to accelerate. I am holding my residential and expanding my commercial (which hasnt gone insane (yet)).

  11. Great article Sam. Long time reader and commenter here. I’m in Colorado, own 3 rentals, 1 small commercial office building, and traded up to my dream home in Oct 2020. Perfect timing and a 2.5% 30 year fixed indebted to you and your FS site.
    I wouldn’t touch this market with a 10 foot pole. Having spent the last 24 years in insurance (insuring primarily cars and homes) this market feels like 2006 all over again. I know the fundamentals are different regarding lending (it’s not the wild west anymore with fast and loose standards) but the home price escalation reminds me of that time. I’ll sit this craziness out and pick up a couple more investment properties when the bottom falls out again.

      1. No idea at this point to even make a guess at a bottom timeframe.

        There seems to be so much (irrational) exuberance. Real estate tends to lag (atleast it did in 07). I didn’t start buying until 2010, 2011 and 2012 on the last go around.

        For me, I’m comfortable allocating funds to grow my insurance business (online presence in particular), buying as the market trends downward, paying down investment property debt, and building a war chest for the next real estate correction (opportunity).

        1. It’s generally good to reinvest capital into your own business to grow. This is something I haven’t done much of.

          The key will be engineering a soft landing by the Fed. I think they will be very attentive to all markets. Fingers crossed!

          1. Agree with the sentiment here. “Don’t fight the fed.” Fed is talking about selling mortgage backed securities as their primary means of QT. Housing prices will be the first thing the fed looks to rein in since the average American can’t afford a home — a political disaster with 2022 mid-terms coming. With higher rates and QT they can impact the demand side at least short term.

    1. Agreed Jim. 25 years in mortgage banking, own a few rentals and a primary residence dream home picked up late 2018 in NorCal. True, wild west financing products non-existent unlike 2008, however, I’m worried at the present willingness for many to take on substantial sums of debt. I think the test here will be rising rates (you and I both have 2.50% 30yr fixed debt that is now already nearly 4% current market), and if the stock market takes a beating – which I suspect by the end of this year we will get clobbered, we could then see some downside to present day prices. The frenzy will end in the next 12+ months from what I see, so until then hammer the debt, hedge your stock investments, and then go rental house shopping once the market has changed its attitude.

      1. This is similar to my concern. I don’t fully see the appeal of a very low interest rate if home prices are very high and the rate is about to go up. I’d rather have low prices with a higher interest rate that’s on its way down.

      2. Norcalbang, really appreciated your response and insight. Being in the mortgage industry, especially for 25 years, you’ve seen some trends and insights no doubt. I recall in roughly 2005-2008, as I would run replacement cost tools (insurance values) for potential homebuyers and our replacement would be nowhere near what folks were paying for homes. It was obvious that an exuberance to just “buy something” was taking over. Almost like a group think mentality. It just felt artificial. Fast forward 26 months from 07/08 and many, many people were losing or walking away from their homes. We aren’t there yet, but it feels a little frothy.

  12. Your last graph is rather depressing. There wasn’t any type of baby boom in the last 7 years meaning the decline in inventory is secondary to blackrock, etc. If you can’t beat them, join them hence fundrise, etc. However, do worry about those are starting out.

  13. The key part was the last paragraph: “If the S&P 500 starts correcting by more than 20% and stays down for more than three months, I expect the housing market to stall out. In other words, I don’t expect to see any price growth. After a 30% stock market correction for longer than six months, I expect real estate prices to fall by up to 10%.

    How do you forecast, calculate risk or EV on this part so you can act accordingly?

    1. Because real estate prices generally lag the stock market, real estate investors will have an ample heads up on how best to bid.

      If the S&P 500 heads back down to 3,500, there’s not way in heck we should be paying current prices for real estate. 10% off would be very reasonable. The signs will be there, including layoffs, recession headlines, etc.

  14. What if the smart play is neither stocks nor RE? Gold, bitcoin or farmland may be other options, but I don’t know how big demand for these blow up in times of trouble historically.

    1. Pick your safe asset and go with it. Farmland is traditionally less volatile for sure. Gold holds its value. Bitcoin is yet to be proven as a hedge.

      Hard to asset allocate a lot to Bitcoin due to its volatility.

    2. I’m mostly in multifamily RE (66%), upped my physical gold to about 14% of my net worth and am in cash as well as energy/commodity producing stocks (20%). The only sure things are that they cannot significantly raise rates without destroying the debt market and they cannot stop printing. Place your bets accordingly.

  15. Hello;

    Great read. I have an awesome 2 bedroom / 1 bath (originally 3/1) with FLA room almost size of house. It sits on T of canal. Sunsets are magical. On market for 480k. But would it be better to rent.

    I would have to get loan on house for any major repairs.

    Please tell me what you think.

  16. Some real estate markets are so overpriced that regardless of how much money you made in the stock market, especially over the last 1-2 years, you are still overpaying for your property. And the sales price doesn’t include increases in property taxes, HOA fees (if applicable), and homeowners insurance. Oh, and don’t forget the additional tax liability on capital gains for equities held for 1 year or less.

    The sad reality of the extraordinary times in which we live is that the wealth gap continues to widen between the haves and the have-nots. So the good times may continue to roll for the minority, but challenging times are impacting the majority of people in this country and it’s only getting worse by the day.

  17. Sam, can you do a post on how to buy a house in this market without having to sell your current home first? Assuming you need to sell in order to get another down payment. Is that even possible now in this crazy seller’s market?

    1. Best option is to sell and have a 60-90 day post possession agreement with the buyers. You will get the proceeds from your home sale and have 2-3 months to acquire a property without having to put “contingent on the sale of your home” in a contract.

  18. Love the analysis! I’m not sure about calling the real mortgage rate “negative” though – one is the interest rate for a loan that will last *30 years in the future*, and the other is the inflation *right now*… the fact that 30 year mortgages have gone up, but not all that much, is effectively the market saying that future inflation will not be as high as today.

      1. To be comparable to a 30 year mortgage, we need a forward looking expectation of inflation, over the next 30 years. I believe there are inflation indexed treasuries with such long term maturity, similar to this:

        Rightly or wrongly, market participants believe the average inflation over the next 30 years will be lower than today.

  19. Love all of the analysis here. Crazy to see how far the real estate market has climbed, but also provides a good personal offset for any stock pullbacks. While I still haven’t pulled the trigger on investing in another property, I did invest pretty heavily into REITs in our IRAs and will continue to hold our current allocation of around 10%.

  20. Hi Sam, I am wondering what makes you think the inventory will stay low for the future? According to your last chart, it is clear that the inventory took a sharp turn when the pandemic started and never went back up like it used to, so I suspect it will go back up once the pandemic becomes endemic and people feel comfortable moving and doing things again. Obviously moving is directly tied to jobs so if companies are not calling their employees back, they have less incentive to move, but I am already seeing bay area companies mandating their employees to be back by June. Only a handful of companies (like Amazon) have pledged to fully remote workforce with many companies waiting to see and many have asked people to go back and do the hybrid model.
    What makes you think inventory will be “structurally lower for the years to come”?

    1. At least in Florida, inventory will be low as there are more people moving here than they can build homes. I’ve been waiting and waiting for my permits.

    2. Inventory will increase, but it won’t increase enough to meet demand.

      People are owning their homes longer bc a home has intrinsically gotten more valuable with the acceptance of work from home.

      Further, there is an increased multiplier effect were instead of just buying one home per family, families are buying two homes or three homes give given the greater acceptance of real estate as an investment for retirement.

      The average 10 year of homeownership went from about 4 1/2 years before the global financial crisis to know about 11 years. The average tenure is only going to get longer.

      If you disagree, I’d love to know why. Thanks

      1. I understand you talking about multiple homes, but not holding onto a home longer. Even if someone sells their home, they still need another place to live. It’s a 1:1. Why would holding a home longer matter. Also with the deaths during the pandemic, there should be more homes, not less. Seems to me as stated in my other comment this has to do with the C-suite.

        1. If homeowners hold onto their homes for longer, there are less homes for sale. I’m not sure how to explain it better.

          Let’s say it takes 10 years to get a college education instead of four years. People will likely get married later and buy homes later. Duration is important.

  21. I would be interested to see what we should expect to see with cap rates in a low rate + high inflation environment. The first level thought is that rents would increase closer to CPI which out paces home price appreciation which increase cap rates and the net interest margin increases. Is that wrong? Any data to support this?

  22. I definitely like to stay diversified and keep real estate in my portfolio especially when the markets are crappy or super volatile. I’m trying to stay chill about the down market days and enjoy the sunshine.

    1. Sam,

      Great article. I’m curious if you would allocate more of your net worth in this environment to physical property or Fundrise? It seems like Fundrise would continue to have outsized returns if they can capitalize on the current environment with low interest rates while RE values appreciate for the next year due to low supply.

      My goal for 2022 is to increase my RE allocation through Fundrise significantly as I’m heavily weighted towards index funds right now.

      1. I would like to know Sam’s perspective on this question as well. I’m also heavily invested in Index type funds through Wealthfront and Betterment. I have no more appetite for owning individual properties, way too much hands on hassle for me (my rule to live by is I must thorouguly enjoy doing whatever I’m doing at least 80% of my time alive; anything less is leaving way too much on the table, so to speak). I’m banking on long term upward trend of the markets as all it requires is set and forget, holding on during volatility. I keep about 10% of my net worth in cash, which amounts to several years of my family’s living expenses; that of course is way too much cash to hold by conventional wisdom, but it helps me sleep at night without pressure to sell any investments during inevitable downturns while also enabling me to buy the dips when that makes sense.

      2. I’m at my limit for owning physical properties (5 currently). So my additional investments will be in intriguing individual private real estate deals and more allocation towards Fundrise. It’s one of the easiest ways to build rental property exposure without as much volatility.

        I had a video call with Ben Miller, CEO and co-founder of Fundrise a couple weeks ago. He thinks inflation stays elevated for longer. He’s also more conservative than I am, which I like.

        1. Hi Sam — Curious why you have not budgeted property mgmt expense into your investment to increase your directly owned property count?

          You have mentioned time and effort as the reason for your property limit in the past.
          I have some exposure in Crowdstreet, yet feel direct investment is better when the numbers make sense. In this current market, it is difficult to find positive cash flowing properties, regardless of geography, including the heartland. I have made several offers in the past 6 months that have got bid up to where they did not make financial sense…. so like a number of posts above, I will continue to be patient until I can make offers that make sense.

          1. It takes time to manage the manager. And it also costs money. Given I don’t have a job, I can be the property manager. And I feel like I can do a really good job at it.

            Because I am at my limit for any physical rental property, I just invest in private real estate deals now. Ideally, 50-50.

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