Softening RE Market and My Take

I saw the following article on CNN's web site that talks about how the RE market is starting to slow due to rising interest rates (among other things). I won't deny the market is slowing, and would probably attest it has actually been going down already in some areas of the country. However, there are areas that are also seeing an increase still as well.

I also read a quite interesting opinion from someone on REIClub.com regarding the pending doom-n-gloom in the RE market, and why he feels it may just be a load of bull. You can read his/her response here (scroll down to the first response by "DFWHoldings" and his/her follow-up response two messages down from that one).

This actually got me thinking about strategies to use in a market where interest rates are increasing and, likewise, housing starts/resales are slowing. Most any RE investor will tell you when rates rise, people tend to not buy houses as much (common sense). What this typically means is that people renting houses increases. Simple economics will tell you that since demand is now high for rentals, so too will the lease rates. This is all very well and good if you already own rental properties, but what happens to investors who need to buy some first? Unfortunately, rising interest rates will push a lot of investors out of the market, since they will rely on conventional loans to finance their property. True, but rates (at least for now) will still be a lot lower than with most ahrd money lenders (HML). For retail flippers, this is still good news. But for those wanting to buy and hold in order to catch the high demand for rentals, this could be bad (not will be, but could be).

But think for a moment at the cycle we are going through, provided all this is true. Rental prices are going up, which plays into the buy-and-hold strategy. Interest rates are going up, which can work against the strategy. However, in the last 4-5 years, interest rates were at their one of their lowest periods in history. This created a boom of new homeowners capitalizing on the lower interest rates. True, many jumped on the ARM train, trying to get an even lower rate, but I'm willing to bet most opted for long-term rates at still low values. So we have a population of homeowners who have existing mortgages with low interest rates. We also have increasing rent prices and increasing interest rates. If this doesn't smell like a right time to get in the Sub2 market, nothing does. Let me show this with an example ...

John Doe bought a nice house in 2002 with a 30yr conventional loan at 5.25% interest. He had to put down $15k in order to get the house. It's now 2006 and due to poor management of personal funds, a death in the family, a divorce, or what have you, poor John Doe is in a pickle. He is two months behind on his mortgage payment and sees no way out. He needs to sell NOW - not next month or two or three when the RE agent can get his house sold, but NOW. You come in, bring his mortgage current, give him some "walking" money, and add a nice house to your inventory. Of course, this is a simplistic example, but you get my viewpoint, I hope. You can then try to sell it on the retail market, or put it on the rental market. Of course the old due-on-sale (DOS) problem is ever looming, and with interest rates rising, banks are more entertained to the idea of calling the loans due. That's a chance almost any Sub2 investor takes regardless of the market. Some banks will do it, most won't. If they do, you can then refinance, and hope your monthly CF doesn't take too bad of a hit, or sell the property (which can be hard in a depressed market). These are things to also consider in making your final judgement on an individual piece of property.