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Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
A saw another piece recently on our favorite topic – the housing bubble.
But instead of being for or against it, this one is trying to soften the blow.
The author recounted that a decade ago, the U.S. housing market swelled to a bubble of epic proportions. Too many homes were built, and too many people were willing to pay top dollar for them with the help of faulty mortgage products.
And then when the bubble burst, millions lost their homes and their savings. Home prices dropped for 6 years, finally hitting bottom in 2012. And today, home prices are within 1% of the 2006 bubble peak.
What had happened was…
According to one study, June 2016 marked an astounding 50 consecutive months of annual national home price appreciation. It was a run up that saw prices rise 33% from the bottom in 2012. The same study found that the average national home price in June was $265,000, which is just 1.1% below a record high.
After the history lesson, the author jumped the tracks with his analysis…
He claims that the difference today from a decade ago is that these prices are not being driven by faulty mortgage products that people can't afford. They are being driven by a severe lack of supply of homes for sale, as well as near record low mortgage rates.
He quoted an analyst who wrote that:
"If you look at the percent of the median income required to buy the median household, we're at 21 percent, which is very healthy, and that in the bubble years it was 36 percent. Rates are super low, and that is a big impact on affordability."
Supply and demand
What he’s failing to notice is that the abnormally low interest rates are the chief factor driving demand. And that in turn, is what’s driving the lack of supply.
He then wrote that his main concern is if those rates start to move up.
If? Seriously?
The Fed has kept the bank discount rate near 0 for years. And there are rumblings that they’ll stop after the inauguration. And guess what? They have no place to go but up.
The author correctly points out that an increase in rates – of pretty much any decent amount – would weaken affordability and home prices could move lower. And he weakens his own argument by writing that while lower rates may make homes affordable, a sizable number of potential buyers still can't qualify for those low rates and/or cannot meet the down payment requirements.
He quoted another analysis who called this a “credit box,” because even with the low interest rates, there are a lot of people who can’t qualify because they don't have the credit or the equity.
He then continues not to understand the connection and goes on to state that the other glaring driver of rising home prices is short supply. He states that the “obvious” reason is that homebuilders have yet to return to even historically average levels of production.
He also believes that home equity, while keeping the housing market healthy, is also driving prices higher. He says that homeowners today have considerably more skin in the game — 44% equity — than they did at the peak of the last housing bubble, when they had about 25% or less on average.
He says that that leaves more room for prices to fall and for homeowners to still stay in the black.
He concludes that all of these factors, which he says are unique to today's housing market, continue to put upward pressure on home prices…
Of the nation's 40 largest cities, 14 have already seen home prices cross to new highs. They include Austin, Texas, Boston, Charlotte, North Carolina, Dallas, Denver, Pittsburgh, Portland, Oregon, San Francisco and Seattle, according to Black Knight.
Only St. Louis saw home prices drop annually. There is, apparently, a limit. San Jose, California, which has some of the highest prices in the nation, did fall off its peak, and price gains in San Francisco are shrinking.
Care to share
What do you think about the info from this article I covered in my lesson? Share below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.