Crash. Bang. Gurgle.
If your real estate property could act out its past, this is probably what it would sound like, right? Everyone is still a little shaken from the financial crisis that started in 2007-2008, but should you be scared in 2016?
A Crash In Stocks
Casey Research regularly reports on stocks and commodities. Recently, it reported that a major money manager, Jeremy Grantham, is predicting a stock market crash in 2016, which is a followup to the crash in 2008.
This is unusual because Grantham isn’t an economist. He’s a fund manager managing $118 billion in assets. He stands to lose money if the market crashes and investors back out of his fund.
Governments have become more indebted owing to their response to the 2008 crisis – they took on toxic debts with the hope that they could grow the money supply in such a way so as to ease the market back into growth mode.
It hasn’t happened yet.
Low interest rates continue to make real estate investing attractive. But, while we have had low interest rates in the past, Casey Research notes that rates have never been at or near 0 percent for this long. And, the market is primed to compensate investors for their willingness to go into debt.
Demographics Are Shifting
Two groups of people – “baby boomers” and the next large population, “Millennials,” will have the biggest impact on real estate through their very different lifestyle choices.
Boomers were all about homeownership. To this end, they sought out the type of “plant roots” lifestyle that we’ve come to associate with “The American Dream.”
But, Millennials aren’t baby boomers. A good percentage of them are perma-renters. And, while the demand is shifting in some markets, younger generations simply don’t see the need for, and don’t have the cash for, a home purchase.
The economy hasn’t fully recovered yet, Millennials don’t have short memories – they still remember their parents taking a bath on their home – and wages are stagnant.
This all adds up to a cash savings problem. And, without savings, there’s no money for a down payment. And without a down payment, there’s no way Millennials could ever buy a home, even if they wanted one.
Which doesn’t seem to the case. Homes that Millennials can afford to buy aren’t as nice as apartments they can rent. In some cities, like Houston, The Atlantic is reporting that the median home price is $162,784, while the median cost to rent an apartment is $1,550. But those houses aren’t quite as nice as the apartment.
In other cities, like New York, the problem is price – but not the usual pricing problems you’d expect.
For just over $400,000, an individual or family can buy a studio or one bedroom apartment.
Larger spaces are significantly more expensive, but Millennials can’t afford those. The affordable homes lie outside the city, which incurs extra costs because it means multi-vehicle daily commutes. This, in turn, means the cost of a home is intimately tied to the maintenance cost of vehicles.
And, vehicle maintenance grows with mileage.
All this means that rental properties in major cities are a hot commodity, because it allows millennials to have more home without committing to a large mortgage and crushing debt.
There’s A Growing Gap Between The Rich And The Poor
It’s the same story, different decade. There’s been an income gap between the rich and the poor for decades. But, how does it affect real estate investing? On the commercial end of things, it drives new opportunities to serve a growing diverse market using discounted rents. At the same time, real estate investors can still serve the time-tested high-rent areas.
And, businesses tend to pay rents on time over the long-term because they need to in order to survive and maintain profits. Larger businesses are more stable, which means that rents are more predictable.
On the residential side, there has been a shift from homeownership to renting, and a decline in local small business ownership. This is an excellent opportunity for real estate investors to grab their share of the market.