How can you profit from this market shift

[Emily And Eric Erickson]

Don’t get stuck on sideline too long – likely will be a 10-15% reduction, not a 50% reduction like 08-09

Reasons why:

• Total market leverage was just 42% of mortgaged homes’ values — the lowest number on record.
  • Wall Street has shifted from debt to equity in real estate and have thousands of homes fully paid for that they will sit on - huge ballast to home prices

• Last 5+ years investors have had to put down 20%+ down payments and have a lot of skin in the game with current portfolio- not willing to walk away from that
  • All of those loans are at 3-5% and only those who truly HAVE to sell will - everyone else will just wait
• Historic lows in mortgage balances overdue, with loans 90 days past due pegged at just 0.5%. That’s a far cry from the 11.36% rate in 2010

• Side of history - Big crashes only happen every 60-90 years – equity charts in US, Britain and even Rome prove this out

Get out of the fear mindset and start looking for opportunities NOW

• Shortage of rentals, still a need for housing - not over built and empty houses like in 2008
• Rental demand being pushed by inflation – more wage hikes push rent prices making great returns possible STILL. Never went away
• How well did you time the last downturn?
  • Most investors didn’t enter back in until 4-5 YEARS. Only the prepared truly took advantage. Those who waited became retail buyers, not investors.

Thinking ahead. What happens to the market once inflation is tamed and interest rates drop from 7% to even just 5%? Buyers will come back. The question is: Did you beat them to the punch or will you get stuck in line?

Current situation: Higher interest are freezing traditional buyers and leaving sellers in a lurch.

Opportunity: Cash buyers are getting the pick of the litter and can actually negotiate with the seller. Hallmarks of a buyer’s market

[Dan H.]

I am the contrarian…  here are some of my rationale:

fed raised rates today by 0.75%.  If they were nearing the end of the rate increases, this increase would not have been 0.75%.  More fed rate increases are likely.

Increased fed rate is likely to result in increased mortgage rates, slowing of economy, raise of unemployment, lowering of GDP.  Some/many of these have not started.  We are in the beginning of what the fed is trying to accomplish. 

op is an RE agent.  his industry benefits by keeping sales volume up. 

The post on down 10%, followed by 3 years of 3% increase and does it made a difference? It makes a big difference as one year difference in purchase time results in infinite more return. In the scenario that you purchase today, in 3 years you have 0% return from appreciation versus nearly 10% (compound) by waiting a year. that is the difference between a poor investment and (if leverage used) a good investment. Note at 90% LTV, the appreciation after 3 years of hold would be approaching 100% return. That is a pretty good return. 0% return is not a good return.

A rate increase from 3% to 7% requires over a 30% price decline for similar P&i at 90% LTV. The rate increase implies most buyers cannot purchase a the same asset as they could have purchased 6 months ago even in the marites that values have fallen 10%.

This post is not intended to imply there are no opportunities in this market. I know of at least 2 methodologies that I think are cannot miss. However for investors with less REI experience, I believe now is the time to be cautious. Virtually every listing on the MLS I expect to decline in value in the short term. Consider why you would purchase an investment (OO is different) that is likely to decline in value in the near term.

This post also does not imply that I expect this decline to match the decline of the Great Recession.  I expect my market will decline 15% to 20% (it is already down ~10%).

Good luck