Key Factors to Keep Your Eye On

First, it’s the challenge of borrowing money, a.k.a. qualifying for a mortgage. The standards for qualifying are stricter than they’ve been for many years, and only those with top credit scores are able to qualify for the lowest rates. Interest rates would be the next key factor going forward. Real estate interest rates are important, not just because of the debt service one pays. They’re also critical because all value in real estate is determined by capitalization rates. If interest rates increase, cap rates increase. This would be devastating to values. Many analysts think the risk of rising interest rates far outweighs any reward present in today’s market. Unless an owner can qualify for a very reasonable, fixed longer-term rate, it may be difficult to charge enough rent to service the debt and the operating costs of the rental unit. Sure enough, operating expenses are the next key factor to focus on. We’ve already witnessed expenses increase for every product type, in all areas. That’s how inflation will continue to have a major impact on the value of real estate. In fact it already has, and if inflation suddenly increases it will impact wages, cost of materials and other operating expenses.

Next, be aware of the kind of prospective renters that are out there looking for a place to live. There are more extremes appearing. There are some extremely qualified people who have lost their homes due to the “upside down” valuation implosion on their homes. There are also a growing number of unemployed and under-employed people who are having to lower their standard of living while at the same time having to move to less expensive rental housing. Many new apartment complexes are in the process of being built. I’m told anecdotally that rarely have many areas seen as many apartment units planned as are now on the drawing board. In Denver for instance, there are at least 14,000 units planned or under construction. This will all be financed through Fannie Mae, Freddie Mae, or HUD. In addition, the rents that are needed for these new multifamily units are high and going higher. This is due to the increasing construction costs.

Reports from around the country are telling us that the housing market under $250,000 is active and apparently stabilizing. However, the more expensive “jumbo loan” home market is deteriorating steadily. As you know, the GSEs (Government Sponsored Enterprise) and HUD doesn’t finance homes over $417,000 in most of the country. That’s why if a home buyer requires a loan over that amount, it’s very likely that they’ll have to come up with the money themselves for 20-25% of the price of the house. So, a borrower looking to finance a home with a price of $500,000 will likely have to write a check for at least $100,000 to get the loan. In this day and age of volatility and negative savings, there aren’t many borrowers who can do that. As a result, the jumbo markets are severely impacted.

The Bottom Line

Efforts are under way by lenders and the GSEs to organize rental programs for single-family homes becoming available due to foreclosures. Once available, a rental home has far more appeal to a resident than an apartment. This is especially true for prospective renters who formerly were home owners.  That’s why the houses usually rent faster than apartments in many areas of the country.  This is an anomaly we should watch carefully. When one considers this reality and the other risk factors confronting real estate, investors are seeing that building new apartments could be a risky proposition in these times. We are most likely at least another year away from the bottom of this housing price slump. The price of houses in your area may not drop much further, but their recovery may be at least 5 to 10 years away. Rents are not going up in all areas, but operating expenses are. Know what the trends are in your areas of operation and know them accurately.

Property managers need to streamline the application and screening process of filling vacancies. Finding good renters in this economy is becoming a numbers game. The better you know the condition of the housing market in your area, and the more potential renters you can reach and process, the more you’ll succeed.

Related Posts:

1. Top Reasons To Be Optimistic About Real Estate Market In 2012
2. Let Your Owners Know You’re a Source for Real Estate News
3. Rentals are the Newest Hope in the Real Estate Market