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...
Okay – now that the election is over and the new president is in place, let’s look at what the chatterheads think will drive the housing market this year…
I was looking around for some of their prognostications, and I found a piece that I thought was pretty spot on. I was also pleased to see that for the first time in many months, the outlook looks positive across the board.
I didn’t know this, but the article stated that housing can usually be counted on to compose 15% of GDP… but that it hasn’t been pulling its weight for almost a decade.
They argue that it’s because in the wake of the real estate bubble, lending standards have remained tight, while the cautious builders who survived the crisis have been reluctant to dive headfirst into expanding their operations again.
But they agree that there are obvious signs that that the trends are about to change.
Changing Trends
Here are the 5 trends they’re watching in 2017:
1. Rising Rates
In December, the Federal Reserve raised interest rates for only the second time since 2006, and a majority of the members of the Fed's rate-setting board predict there will be 3 more increases in 2017. These decisions will cause mortgage rates to rise, potentially making it more difficult for prospective homebuyers to be able to afford the home of their dreams.
An economist they interviewed, though, stated that this shouldn’t be an issue. Yes they expect mortgage interest rates to increase, but to no higher than 4.3% on a 30-year fixed rate.
2. More Credit
That same economist also believes that while rates may rise, mortgage credit will likely be more widely available due to slightly looser lending standards.
She thinks that the FHA will lower the fees it charges first-time homebuyers, a continuation of a policy begun in the Obama administration, under which it lowered fees in 2015.
In addition, starting in 2017, government-owned mortgage companies will begin backing larger mortgages for the first time in over a decade, making it easier for buyers in expensive markets to get financing.
3. More New Homes
Though the most recent data on new home construction showed that builders pulled back on new projects in November, the overall trend in home construction is clearly positive, with the average annual rate of new groundbreakings going over 1.2 million in 2016, up about 5% from 2015.
Expect this to continue in 2017, as home builders are encouraged by higher wages, looser credit and increased demand from buyers. The good news is, this isn’t a massive overbuilding that would counteract the tight market we’re in right now.
4. The Continued Rise of Medium-Sized Cities
One of the dominant real estate stories lately is that top-tier in-demand cities like New York, Seattle and San Francisco have seen property values rise as workers flock to these locations to take advantage of high-paying jobs.
This trend has put a strain on those cities' real estate markets, because new construction is often unable to keep pace with demand due to geographic constraints or restrictions imposed by local government regulations.
That's why more younger folks are finding themselves attracted to medium-sized cities, which may not have the same professional opportunities as their larger counterparts, but provide housing affordability. Cities like Raleigh, N.C. and Fort Collins, Colorado have seen building permit issuances soar over the past 6 years as they attract younger adults seeking cheap rents and lower asking prices.
5. Foreign Buyers Aren't Going Away
One trend that is helping drive prices beyond the realm of affordability in places like New York and Los Angeles is an influx of foreign buyers of U.S. real estate.
This has only increased of late, fueled in particular by buyers from China who are looking for safe places to store their wealth, away from the slowing economy of their homeland, where repressive financial policies make it difficult to earn decent returns on savings.
Last Note
I was surprised though that they didn’t include Trumponomics in the mix. While not exactly a trend yet, it’s certainly going to have an impact like dropping a boulder in a puddle.
So while the trends above bear watching, so do the new president’s economic policies.
Comments, Questions?
What do you think about these projected trends? 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.