The Real Estate Market Outlook

Lately, the question I have been asked most frequently is my opinion on the real estate market.

Here's a snippet of the thoughts I shared in the Invested Equity passive investor newsletter last week:

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Every market provides opportunity.

From 2008 to 2021, falling mortgage rates fueled one of the biggest real estate booms in history. The pandemic then presented real estate investors with record sales prices and rent growth.

What opportunities await real estate investors over the next 12 to 24 months?

I believe there will be more and better buying opportunities than we've seen in the past two years. Transaction volume have fallen significantly, but there is growing upward pressure on cap rates.

As rate caps expire on floating debt and loan terms come due, many operators will find it difficult to refinance at today's mortgage rates without bringing additional capital to meet DSCR ratios.

Banks, having learned from taking back assets too quickly in 2008, should be more willing to work with borrowers on performing assets.

There are several factors that play into this situation:

• Interest rates: If rates fall as quickly as they rose, it will positively impact operators' ability to refinance. This is unlikely, though, due to the Fed's commitment to fighting inflation.
• Banks: How willing (and for how long) will banks work with borrowers under technical default?
• Sales Price: How long will operators hold out for lower cap rates to return?
• Investors: How will operators raise capital to meet the returns their investors require? How will investors react to capital calls?

Overall, the long-term outlook for housing appears strong:

• New housing construction is a decade behind household formations, exacerbating the chronic housing shortage. It's now estimated that the US is 6.5 million homes short.
• Rising mortgage rates have pushed the premium of owning a home (verses renting) to a 17 year high.
• Population and job growth and migration trends favor Texas, Florida, and other sunbelt states

Of course, if the US goes into a recession, it will change certain market fundamentals. That is when having the right operating team, in the right submarket, and the right asset becomes critically important to achieving long-term projections.

Originally Posted On InvestedX.