Fall Brings Rising Inflation and Falling Home Prices
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The economy is a bit of a Rorschach test – does inflation mean that the market is about to bottom out, or is it a correction after years of rising home prices? It’s the same as the balloon above – is it being inflated or deflated?
The news of inflation is on everyone’s minds right now, across every industry and in every sector. How high prices will get and whether this continued rise will result in a recession is the biggest question. There’s no way to know, but there’s also no reason for panic – not by a long shot.
Most economists are hedging their projections of a crash, or even a fast fall in any of the markets. It seems fairly reasonable to believe that this is not another housing bubble that will burst the way that we saw things fall apart a dozen years ago. What’s important to remember here is that a repeat of the last housing crisis is impossible today because there are different regulatory safeguards in place that won’t let it happen that way again.
Just because a plunge like the 2008 bottoming out won’t happen again, that doesn’t mean that something else unexpected isn’t out of the question. After all, no one could have foreseen the pandemic. Inflation is rising higher and faster than it has in decades, and that is meaningful. Whether this is the correction, or whether there is some other correction coming like a steam train down the tracks towards home buyers, sellers, and investors is the cloud that looms over us.
Unfortunately, the only way that we’ll know for sure is to live through it. Real estate might not be rising in value the way it was a year ago, but it is still rising. The flattening of the curve should be comforting, not intimidating. Most of the factors that pressed on the market to push prices so high are still in play. Things like low inventory and supply issues aren’t going anywhere, and the market will have to continue to account for the real world ramifications of those ongoing problems.
For good or ill, the economy is moving. Where and how fast you think it will go has everything to do with your personal perspective.
Why Foreign Investors Keep Buying U.S. Real Estate
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All over the world, the real estate market is in a state of upheaval. From the roiling chaos of Chinese mega-investment companies going under, driving societal change and protests, to the continued struggle for peace in Ukraine that’s pushing Europe through its biggest military scare since World War II, real estate is increasingly at a breaking point internationally. All of this comes directly after the huge gains during global real estate shortages in the pandemic, and none of it seems to be getting better. With a marked exception – the United States.
Supply chain disruptions continue to play havoc with the worldwide supply of new homes, as well as the ability of older housing units to be retrofitted for current homebuyers. While this is still going on in the United States, in the aftermath of the pandemic, domestic markets are continuing to improve. This despite rising inflation that threatens to push the broader economy towards recession. In fact, inflation in the United States is starting to cool off, even if it’s painful and heart wrenchingly slow.
Recently, a report by AFIRE (Association of Foreign Investors in Real Estate) found that seventy-six percent of foreign investors planned to increase their buy into domestic markets for commercial real estate in the next year. In even better news, eighty-two percent said they planned to increase their long term investments over the next decade in U.S. holdings. On top of that good news, a report by CBRE Group showed that investments into the American real estate market from foreign holders was up sixteen percent in the second quarter of 2022 to a solid $6.5 billion.
These two metrics clearly show the interest that foreign investors have in the domestic real estate market in the United States, but they’re only half of the story. The big question isn’t whether or not outside money is coming into United States real estate, it’s why this money is continuing to flow stateside despite downturns in the world market.
A major driver of this economic reality is the confluence of a high priced domestic market with high interest rates that continue rising as the Federal Reserve works to combat inflation. These two factors combine to mean that potential homeowners in the United States are unable to buy, especially as the market cools and interest rates grow. Because so many Americans are shut out of homeownership, they are forced into renting. Multi-family rental properties are especially attractive to foreign investors, as these are easily managed offshore and thus offer a hands-off option for international investors.
It’s not just housing that’s a hot ticket for international investors, though. Warehouse and industrial space both offer many of the same benefits as multi-family housing, but there’s the additional benefit that commercial real estate has a longer lifespan and lower overall risks. Right now, warehouse and industrial facilities in the U.S. are at a high premium, with different market pressures that are far less volatile than those in the housing market.
Commercial real estate in the U.S. is among the most transparent in the world right now, according to JLL’s Global Real Estate Transparency Index. This is another big boon for potential outside investors who seek stable, comfortable investments.
Particularly in the wake of the pandemic, investors are interested in finding stability. The U.S. real estate market offers the whole package for both housing and commercial real estate buyers who want to come across the border.
How to Winterize a Vacant Home
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With cold weather coming on, homeowners with second homes and investors alike need to consider how to winterize real estate that no one is going to be living in over the next few months. While it’s true that the winter of 2022-2023 is forecast to be mild, nonetheless, there are important steps that all homeowners should take.
Failing to safeguard a vacant home in the winter can result in the need for expensive repairs due to damage from burst pipes or animals getting in to find shelter. No one wants to open up an empty home to find that there are problems lurking for them inside. If the intent is to sell the house, these kinds of repairs can slow down the sale process and even turn buyers off. In the case of a vacation home, repairs can add huge stress to what should be a relaxing time.
- Check your water supply.
This is by far the most important step, and it’s the one that will prevent the biggest headaches for you.
The best solution is to turn off the water. Don’t just turn off the water in the house under the sinks – find the main valve and turn it off. If you’re on well water, be sure that the well pump itself is well insulated as well. If you’re on municipal water, you can ask someone with the municipality to schedule water turn off now, and then water back on in the spring. Make sure you drain all the water from the pipes by running the water till it stops if you do this, otherwise the water in the pipes can still cause them to burst.
The other option is to leave a trickle of water, a steady flow, at the water intake closest to the place that it comes into the house, and then also at the point farthest from where it enters the house.
- Lower your heat
If you’re going to leave your heat on, which is not strictly necessary, make sure you turn it to 60. This will doubly ensure that no pipes freeze if you still have some water on, and it will also keep your heating bills from going through the roof.
- Unplug everything
When you winterize your home, everything should be unplugged. This means appliances, electronics, clocks, and anything else that might be around. This will prevent potential electrical issues, especially as power sometimes flickers on and off in the winter months.
- Throw away all trash & open food.
Take some time to make sure that there’s no trash and no open food anywhere in the home. Double check food containers that are in the pantry that are not in heavy plastic, as they could invite vermin to come into the home for a snack while the house is empty. Anything that could be chewed through easily needs to be gone.
Whether it’s because you’re closing up a vacation home for the winter, a family who’s inherited a home from a loved one who’s passed on, an Airbnb owner in a cold part of the country, or an investor who’s decided to hold off till the spring housing market to sell a vacant home, making sure that the property will be in good condition in the spring is an important step that will save you time and money. As grandma used to say – an ounce of prevention is worth a pound of cure.
Understanding the Impact of Hurricane Ian on Real Estate in the Southeast
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Hurricane Ian devastated large parts of Florida, and it caused havoc across much of the coast of South Carolina and Georgia. One of the hardest hit areas was the West Coast of Florida, where Tampa and Fort Myers are full of residents who suffered from the storm. Lee County in Southwest Florida, is home to Cape Coral and was struck by significant flooding. Osceola County saw major flooding as well, as did communities up and down the Gulf of Mexico.
What’s most striking about the flooding that category 4 hurricane brought to these places is that a high percentage of residents in this area carry hurricane insurance coverage, but not flood insurance. In fact, many homeowners are not aware that flood insurance is generally a separate expense that’s additional to their standard policy. Though some areas like Miami require flood insurance, and though Florida has one of the highest rates of flood insurance in the country, there’s still a huge gap. This lack of coverage is expected to be a major burden on families across the area, who will have to rely on FEMA to support their rebuilding efforts at best, or to potentially have to leave their homes.
Ian’s storm surge rose as high as 12 feet in many parts of the West Coast of Florida. The storm surge brought ocean water far inland, to places that generally would not be in danger of flooding from a storm. This hurricane was so powerful that it almost reached category 5 status, the highest level a hurricane can reach.
Florida implemented hurricane resistant building codes just after the turn of the millennium in 2001, but those codes don’t apply to existing structures – only to new builds. Even though they’ve been in place for two decades, many of the homes in Florida are not built to withstand a storm like this. Winds from Hurricane Ian reached 155 miles per hour.
The fallout from Ian is likely to be long-lasting. There was already a housing crunch in this area of Florida, thanks to a combination of inflation and pandemic-related housing shortages. While the shortage of housing for residents of the booming West Coast of Florida had begun to ease in the last year, those gains are likely to roll backwards with this storm.
Per data from CoreLogic, Inc., it’s projected that 7.2 million homes across Florida will be impacted by flooding from Ian when everything is counted. Those homes are projected to be worth $1.6 trillion, causing a major impact on the Florida real estate market and the overall economy. In a market that’s been tight for quite some time, this event will mean that many people are now without homes altogether. By the same token, investors in Florida are likely to see a significant impact as well.
Rebuilding will take years. Though hurricanes are common in Florida, Ian was one of the strongest that has ever hit the state – only five category 5 hurricanes have made landfall in Florida in the last 125 years. While Ian didn’t quite make it that high, it was close enough to leave a huge impact on the residents of the Sunshine State.
Wild Homes – Sunny Surrounded by the Sea
Image via Zillow Gone Wild
Florida is known for its beautiful homes, but it’s also known for its high population density, especially near the ocean. What if you could go all the way into the ocean? 1 E Sister Rock Island offers just that.
With four bedrooms and three bathrooms, there’s space for bringing friends over by boat for a weekend visit. The kids can lounge by the outdoor pool before jumping into the warm waters of the Gulf of Mexico. The inside of the home is beautifully appointed, with a generous kitchen and warm, spacious bedrooms that have open views of the wide ocean.
Image via Zillow Gone Wild
Located in the Florida Keys, this extraordinary home is separated from the main islands, but is not so far as to be inaccessible from the dock nearby. It’s a quick boat ride from the private dock on the island over to the mainland for supplies or to enjoy the local culture. It might sound tempting to just stay on this island, however; After all, who would want to leave this beautiful place?
Image via Zillow Gone Wild
At just over two thousand square feet, this home is big enough for a family to live in comfortably and without being bothered by the neighbors. There’s a wraparound covered porch to provide shade from the heat, and generous sand bars stretching out from the outer stone ring. This place is perfect for a quiet getaway that’s truly away from everyone and everything.
Included on this private Florida island is a helipad and one bedroom guesthouse with separate bathroom as well as bunk beds for anyone who needs to have some private time on this private island.
Recently, this home was listed on the Florida MLS for just over $11,000,000, however it’s certainly worth far more than that for the kind of peace of mind that comes with having a place that you can truly call your own.
What Repricing Means for Small Real Estate Investors in the U.S.
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There are two ways to look at repricing in investments – either as a rich opportunity or a terrifying liability. For the last two years, real estate has seen an incredible repricing cascade, with prices continuing to go up year over year, month over month, and even day over day. That consistent rise has become so embedded that many investors have been lulled into the feeling that this is just the way the market is. Long time investors, both small and large in scale, know that repricing can go both ways.
With inflation continuing to go higher, prices on real estate have finally started to level off. The normal summer slow down that has for the past two years simply meant a slight decline in the precipitous rise of home prices was significantly more in 2022. The frantic frenzy of homebuying is starting to relax as lenders become more cautious, buyers become more cautious, and investors work to get their footing back.
What’s so different about the most recent real estate repricing is that it is in reaction to the drastic swing up in prices. Prior to this we saw sellers attempt to push negotiations for a higher price even on deals that already seemed to be done. The fascinating thing is not that sellers sometimes attempted to make those close-to-contract deals, but that they were so broadly successful in getting desperate buyers to sign for a higher price or additional gives even after those deals were seemingly set.
Now, repricing is going the other way, and those same hardline, last minute repricing moves that were so prevalent with sellers are starting to be seen with real estate buyers. Many of these reactions are to changes in interest rates that land in the middle of a deal, after negotiations but before the pen has been put to paper. In large investment deals, this is on a highly magnified scale. For example, Innovo Property Group walked away from a deal that it had put a deposit down on for the HBSC tower in Manhattan, giving up $35 million. This is a mega money example, but the same thing is happening for small investors who find themselves butting up against sudden rises in the cost to borrow money.
Multifamily properties are being affected as well, including down to smaller investors. Though investing capital into multi-family pieces continues to be a smart bet, particularly with rent increases that generously cover the cost of higher interest rates. This is especially true with tactics like 1031 exchanges, which avoid capital gains tax by deferring it through a quick sale.
The core of real estate investing is always going to be to buy low and sell high. With repricing opportunities available to buyers who are willing to put themselves out there in a market that has constantly changing interest rates, there’s more opportunity that meets the eye to increase the bottom line on small and medium sized real estate investments.
Preserving the Deal in an Uneven Real Estate Market
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Buying a home for the last couple of years has often involved chasing deals that never seem to materialize, with so many buyers leaping in with offers that seem out of reach for the average family. Now, rising interest rates have homebuyers sometimes struggling to get the keys to a home before the rates shift up again, playing havoc with the loan.
There are some things that homebuyers can do to keep their real estate deal from falling through. Here are strategies for home buyers who don’t want to get caught on the wrong end of today’s uneven real estate market.
- Lock in your interest rate.
Pursue your lender for a locked in pre-approved interest rate before you bid on a home. This is most easily done with things like FHA loans from the government, which are especially formulated for first time buyers. However, there are lenders who will work with buyers to lock in a loan rate, particularly if the homeowner is willing to be flexible on other aspects of the loan, like upfront point payments.
- Check regularly with potential lenders
Buyers who have been pre-approved for a loan are under no obligation to stick with that lender throughout the buying process. It’s a good idea to look around to other lenders every few weeks to find out what the rates are at competitors. This could result in a decision to apply for another loan, or it’s also something buyers can take to their current lender as leverage for negotiating.
- Handle low appraisals with resolve
An unfortunate problem in the real estate industry from the last few years that continues to hold on is the issue of low home appraisals. This happens when a home comes back as appraised for lower than the agreed upon price. The big piece here is not to get in over your head with a too-high mortgage. Try to negotiate with the seller for a lower price, or be ready to walk away from the deal.
- Take advantage of the declining market
Home prices are coming down, and that’s obviously a good thing for buyers. Don’t give up the search for another property because you are under contract. Almost a quarter of buyers have pulled out of a contract deal in 2022, and with good reason. If you find a home that better suits your needs before the contract is inked, it’s better for you to take it than to pay too much for a comparable property.
Staying diligent and continuing to be flexible through your home buying process will help you to respond to market changes quickly.
What does a Million Dollar house in Charlotte look like in late 2022?
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The huge rise of prices for property across the country means that million dollar homes just aren’t what they used to be. Twenty years ago, homes with listing prices of over a million dollars tended to be either incredibly luxurious in more rural areas, or slightly more modest homes in urban areas. Today, a million dollars doesn’t stretch anywhere near as far as it did then, and places like Charlotte, NC are home to housing that often rises to the seven figure mark.
In 2022, Charlotte’s million dollar homes actually look like more modest, upper middle class buildings as opposed to opulent, palatial spaces. Homes listed for a million dollars in the area tend to be around three thousand square feet and have four to five bedrooms. When you consider that this size is well suited for a typical family of four, it offers a stark reminder of how high the housing market has risen.
What is interesting about homes in this price range, not just in Charlotte but across the country, is that they tend to be new construction. This speaks specifically to the supply chain problems that have plagued the United States real estate market for the last three years. New homes are still highly desirable, and they are still hard to come by.
Scarcity in the Charlotte housing market is going to continue to drive housing prices higher, which means that a million dollar homes are going to continue to be more modest than they were just a few years ago. If inflation continues on the same path that it’s been on for the last six months, there’s no question that the million dollar housing market will continue to look more like a frustrating reality and less like a daydream for home buyers across the country. Shrinkflation isn’t going anywhere.
Ask Connect – Fix the foundation or sell the house?
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I’ve owned a rental property for the last five years, and every year my profit margin gets squeezed. I understand that I should be making money on this home, but I can’t in good conscience charge someone the market rate and get the kind of profit that I would net while potentially putting a family in a situation without housing. Clearly, being a landlord is not what I’m cut out for.
On top of these near losses, I recently found out that there are significant issues with the foundation that will cost me a huge amount of money to fix. I recently had a family vacate the property, so now is definitely a good time for me to let it go. My issue is that I’m conflicted about whether to go ahead and put it up for sale as-is or to fix the foundation and then put it on the market.
The structural problems won’t be an easy fix, I know that. I also know that it’s not necessarily important for me to have the house move-in-ready in order to sell it to an investor or a family that wants to take on this issue. I recognize that I’ll have to give up some of the profit in order to sell it without making the repairs, and I’m absolutely ok with that. The house is not safe with the foundation as is, but can I in good conscience just let someone else deal with it?
A man with a shaken foundation.
The first thing to remember here is that you are a person with a strong moral compass. It’s always good to hear about landlords who want to do the right thing for their tenants. On that front, get out of the rental business if you don’t want to be in it.
On the other front, you’re best to have a structural engineer come in and give you a detailed evaluation of what the problem is. With that in hand, you can negotiate with any potential buyers. There’s no reason for you to pursue the repairs if you don’t want to deal with the timeline or the stress of those repairs. You’re right that you won’t get as much money if you don’t do the repairs, but you’ll also save your precious time.