Are you wondering what are the biggest property risks for investors in 2021 and beyond? You should, because the housing market is hotter than ever. There's an uptick in searches of people wondering when the housing market will crash. However, I think the housing market will likely stay strong for several more years.
The mass media and the real estate industry focus on strong demand, strong job growth, and a dearth of inventory as drivers for higher property prices in 2021 and beyond. That’s fine if you can surgically buy in strong job markets via real estate crowdfunding.
But, that's not always possible, especially in weak or risky markets.
Not All Real Estate Markets Are Created Equal
According to IlliniosPolicy.org, Chicago is the city with the most real estate risk. It's the slowest housing market of major U.S. cities, and 2020 stands to be more of the same.
“Illinois homeowners are subject to the highest overall tax burden in the country, including the second highest property taxes in the nation,” the website wrote.
“They’re also weathering the largest permanent income tax hike in state history. As these costs rise, the value of homeownership in the Land of Lincoln falls relative to other areas, reducing demand for housing.”
Overall, the real estate landscape has grown riskier throughout the country, and several property risks apply to any real estate investor.
Here are the top six risks for property investors in 2019 and beyond.
Biggest Property Risks For Investors In 2021 And Beyond
1) Rent prices are softening, but rebounding slightly.
Given property prices are a function of rental income multiples, a real estate buyer should be looking to buy at similar pricing discounts from peak rental periods.
For instance, research comparable New York property you want to buy today that was sold for in March 2016 and aim to buy at a 14.8% discount to the March 2016 price because that’s how much rent prices are down.
Buying at peak prices when rents have fallen from peak levels means you are paying a higher valuation. This is a dangerous scenario that can’t last forever.
The most expensive rental cities in the U.S.?
2) Mortgages could go up.
The 10-year bond yield was all the way up to 3.2% in 2018 and mortgage rates are following suit. The 10-year yield bottomed in 2020 at 0.51%, and is now around 1.5% in 2021. If the 10-year yield goes up further, mortgage rates might increase too much and cause housing demand to fall.
My last mortgage refinance was a couple of years ago when I locked in a 5/1 Jumbo ARM at 2.5%. This same mortgage is now 2.75% based on the latest rates. Rates are higher today than during the heart of the pandemic. Let's hope mortgage rates stay low for longer.
Check the latest mortgage rates online through Credible. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible from them or your existing bank. Credible allows you to compare multiple real quotes, all in one place for free. When banks compete, you win.
3) Prices are beyond their previous peaks.
While every city is different, if you look at the prices in cities like Dallas or Chicago, you find that the prices are roughly 45% higher than they were in 2006-2007. The biggest property risk might be a precipitous decline in prices.
This price performance is similar to San Francisco’s. Meanwhile, hot cities like Seattle and Portland are only about 20% above previous peaks.
San Francisco is one of the leading indicator cities. Notice how prices have started to decline since January 2018. Places like NYC have been weakening for well over a year.
4) Inventory is creeping back up, but rent prices are steady.
There has been a noticeable construction boom over the past several years and it is finally showing up in the data as a wave of new inventory hits the market. When there’s more inventory, pricing comes under pressure.
Although inventory is still historically low, it’s important to realize the inflection point we’ve experienced in mid-2018. In just several months, the amount of inventory is back to where it was at the end of 2012. If the trend continues, we could quickly get back to 2008-2010 levels.
Also, remember that higher inventory also leads to flattening or lower rent prices. Here’s what’s going on with Seattle and San Francisco rent, for example. These two property markets have been the hottest in the country. But finally, we are seeing a cooling as buyer fatigue sets in.
5) Peak pricing take time to clearly present themselves.
The 1996 housing boom ended in March 2006.
But it wasn’t until the beginning of 2008 that people started to accept that the housing market had already peaked. Until 2008, property investors were still clinging to hope or at least were in denial that prices would no longer be going up.
Once Bear Sterns was sold for nothing to JP Morgan in March 2008, people started to panic.
Then Lehman Brothers went under on September 15, 2008, a full two and a half years after the housing market peaked. And things got even worse, with the S&P 500 finally bottoming out on March 9, 2009.
6) The stock market did great during the pandemic, but now what?
Stocks are valued based on future earnings. Valuations are at all-time highs. Beware.
From policy errors by the Fed, to trade wars, a potential war with Iran, to slowing global growth, companies everywhere will be more cautious on their spending in 2021 and beyond.
Is Real Estate Still A Wise Investment?
It can be, but it may take increased precision as real estate markets continue to grow weaker. After a difficult 2020, I think there is a lot of opportunity to buy coastal city real estate like SF and NYC. Rents are sluggish and affordability is way up.
In addition, look to the heartland as well. Valuations are much cheaper and net rental yields are much higher. There is clearly migration towards the heartland after the pandemic. Working from home has become acceptable now. Therefore, it is only rational for people to move to lower-cost areas of the country.
About half of the U.S. population lives in the blue areas seen below, and the other half of the population lives in the gray areas. Folks in the blue areas underestimated the desire of folks living in the gray areas to want something other than a career politician. With globalization, a lot of people living in the gray areas have not been able to take advantage of the economic boom.
The Bottom Line
The biggest property risk is buying too much property. You don't want to overextend yourself at this point in the cycle. Make sure you follow my 30/30/3 property buying rule.
If you’re looking to buy a primary residence today, make sure you can withstand a 20%+ correction over a
Too much debt is really what will kill you if we ever return to hard times. Buy a house to enjoy life instead of looking to make a profit. I doubt we’ll have a correction as violent as the last one given lending standards became far tighter after the housing crisis. All the same, please buy and borrow responsibly.
The stock market is a forward-looking indicator that is showing strains ahead. Here's a better property investment alternative:
Best Real Estate Crowdfunding Platform
If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, don’t want to tie up your liquidity in physical real estate, and are looking for real estate diversity, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns
Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look.
Personally, I've invested $810,000 in real estate crowdfunding to diversify away from my San Francisco properties. Further, I want to earn income 100% passively now that I'm a dad of two young kids.