Sitting here at the beginning of 2022 and maybe you’re wondering, what is going on in this economy and how can I keep investing in 2022?
You’re not alone.
The economy has been stirred, shaken, and altered from what we knew just a few years ago. Let’s take a look at how it all applies to the real estate investing world.
Some say this climate is a once-in-a-lifetime opportunity for real estate investors. We don’t subscribe to hyperbolic statements like that, but we are seeing that real estate investing is looking even more attractive to everyday investors like yourself.
However, real estate investing opportunities may be disguised. Let’s take a look at 6 reasons why 2022 is ready for real estate investing and how you can benefit.
1st Reason: Changing Demographics due to Remote Work
More people are working from home, no surprises there. The pandemic proved that employers don’t have to nail workers to a single location. In 2020 PricewaterhouseCoopers found that 24% of executives expect that many or all of their employees will stay in the remote lifestyle as we emerge from the pandemic.
New Migration Patterns
As a result, we’re seeing new migration patterns and an increase in real estate prices in the suburbs. Especially with Gen Z and Millenials, two populations driving demand in the current market.
Moving and hauling companies, like Uhaul, have reported incredible spikes and even delays in their services for out-of-state moves.
Lower housing costs pull populations into new regions, particularly in the south and eastern portions of the United States and out of metro areas. However, the housing stock has yet to keep up. Let’s take a look at that next.
2nd Reason: Low Single-Family Housing Inventory
While some real estate investors see the current lack of inventory as a hurdle for buying more single-family rentals, other investors still see the light here.
Building Not Keeping Up With Housing Supply
First, there simply aren’t enough houses to meet the demand. And signs point to a steady increase in that. In her annual market review, Real Estate News host Kathy Fetke highlighted that building costs are high enough that they don’t make sense for investors. She and her guest, Logan Mohtashami of HousingWire, also point out that builders will steady their supply of work to prevent too much growth too quickly.
Source: https://fred.stlouisfed.org/series/ACTLISCOUUS
Inventory is also stifled because foreclosures remain low. Forbearance is coming to an end and most homeowners are exiting with new loan modifications and a solid plan to keep up with payments. The flood of foreclosures or non-performing notes just never manifested.
3rd Reason: Inflation is High and Real Estate is A Great Hedge Against Inflation
We are in an inflationary market, I’m sure you’ve noticed. Cringe-worthy gas prices at the pump, grocery store, and more. We’re at a 40-yr high for inflation right now. In an inflationary economy, real estate traditionally performs wells.
Real estate thrives in this market because it has little correlation with stocks and bonds. Mortgage rates remain low for the single-family home investor, if they can find any houses that fit their cash flow criteria. Additionally, real estate is highly localized, making it possible to find unique deals in many different markets.
If you can find the deals, real estate can be a great way to grow wealth in an inflationary market.
4th Reason: Real Estate is Not in a Bubble
Debt Service Payments Are Low
“Homeowners on paper and on record have never looked better in the history of the United States of America.” says Mohtashami. He points to this fact to show that we are not in a bubble. Debt service payment as a percentage of disposable income are at all time lows, which means that homeowners are making their mortgage payments just fine.No flood of foreclosures looms on the horizon.
Same with household debt. It’s low.
Source: https://fred.stlouisfed.org/series/MDSP
A long-term investment strategy, like real estate investing, can protect you from short-term fluctuations in the stock market as well. Since housing supply remains low and demand remains high, the market is not looking like it will “pop” anytime soon.
Properties with cash flow and value-add opportunities for long-term upside continue to be quality assets to add to any real estate portfolio.
Higher Credit Scores
One reason for lack of a real estate bubble is that the average American credit scores are much higher than in 2008. There are no exotic loan structures past 2010.
Americans are buying what they can afford at a greater rate than during the last housing bubble in 2008-2010.
5th Reason: Low Interest Rates Could Continue
The low-interest rates of the past few years have helped many investors leverage fewer dollars for a bigger purchase. As we already pointed out, this luckily hasn’t led to a mortgage crisis since these homeowners are not getting over their heads with payments. They’re generally still signing onto a payment structure they can afford.
But will interest rates rise?
This is a tricky topic, so we turn back to Logan Mohtashami of HousingWire who points to the bond market as an indicator for interest rate changes. He believes these two rates could actually go down in the next year, with a prediction in the low end of 2.375% – 2.5% and high end of 3.375% – 3.625%.
Source: https://fred.stlouisfed.org/series/MORTGAGE30US
This expert doesn’t believe mortgage rates will soar. There are some contradictions and differing opinions here, however. A downside of this is also that interest rates can be a driving factor in inflation.
6th Reason: Home Prices Will Continue to Rise (And so will Rent Rates)
The low inventory has more people turning to rentals because they can’t afford to buy. Rental rates are forecasted to continue rising primarily due to the lack of supply and a slow inventory increase.
Bidding wars on a small supply means more renters are not able to buy the homes they want and are resorting to renting. Of course, new construction isn’t helping with stagnating behind this burgeoning demand.
Existing home sales did begin to decrease in late 2021, likely due to supply issues. This may be an indicator that more people are turning to rent.
Others point to the solution to the problem of lack of supply is to just build more affordable homes. (As if it is that simple.)
The supply of affordable, high density housing in America is lower than most other countries, like China. Major American cities won’t likely start throwing up affordable apartments, but these could help alleviate some stress in tertiary markets.
Bottom Line For Real Estate Investing in 2022
It comes down to the idea that there are deals in any market and this one is no exception. Home prices are high, making small single-family and small multi-family homes less desirable. However, the savvy investors are the creative ones, finding opportunities in the markets to experience growth.
Cap rates, especially in traditional multi-family, remain high. But creative options exist with tertiary markets or conversion of other asset classes into affordable housing. Looking into new migration patterns may be the secret to finding these markets. And of course, there are other asset classes to look at as well.
If you’d like to see what opportunities we’re investing in and offering to our group, join our Investor Circle. We’ll schedule a call to learn about your investing goals and help provide you with more options to leverage real estate to grow your freedom and wealth.
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