Federal stimulus dollars have helped keep the price of housing at higher-than-market levels in a couple of ways. First, with interest rates at all time lows, it makes it easier to justify buying a home. It also makes it easier for investors to swoop in and buy up properties like they’re going out of style. Some claim this has helped to inflate housing to “bubble status.” My personal feeling is that this is true. Secondly, with direct stimulus dollars going toward things like “first time housing credits” and other tax-based incentives, the economy has seen value opportunities erode away rather quickly.
For the real estate value investor, the opportunity to make money is always in the buy: when you buy cheaply enough, you increase your month-over-month ROI as well as the chances of selling the property for a good ROI down the road. It is unfortunate for many would-be owner-occupiers and investors that the value of homes in America still seems to be over-inflated. We’re especially seeing this issue here in the Seattle area. Over-inflation does not bode well for investors.
But neither does the potential for a drop in monetary easing by the Fed. When Ben Bernanke quits purchasing $85 Billion in bonds each month the artificial nature of interest rates will begin to ruse. And from what I’ve read, they could rise rather quickly. How could this negatively impact the real estate market? Firstly, it makes the cost of getting your dream home that much more out of your reach as the price of a monthly mortgage will cost you more than it did when rates were near zero.
Secondly, with the inability to get loans at fairly low rates, it will not only have a negative impact on the economy as a whole, but it will also affect the ability for homes to change hands more regularly. Also detrimental is the fact that many large investment groups like Blackstone will be running away from real estate as general market returns rise and people start to run away from nasty interest effecting investments like bonds.
There could be some positive impacts of rising interest rates on real estate. Most of them go to the cash investor. As rates rise, placing more money into down-payments and down-right cash deals will become much more feasible, at least for those who hold and manage cash. Being able to snatch distressed properties when things shift quickly again could have a bigger impact than most thing on investors.
Bottom line. There are always deals where real estate could be potentially snatched for cash on a good deal, but for the most part deals are rare and you end up simply paying for value. But if you really want to make it big and make your IRA investment dollars go far, begin by finding very inexpensive properties you can acquire with IRA funds for simple cash flow purposes and then lather, rinse and repeat.