So the news over the last few months has been pretty bad… the sky is falling bad in some cases.
In terms of real estate the rapid increase in mortgage rates is having a dramatic impact on markets, especially for second home/vacation markets.
When you read the articles out there they focus on national housing markets and the potential for a 10% decrease. These articles state they do not see a 2008 level crash due to the housing shortage, but still a softening of prices.
These are all true points but in the end real estate is local and secondary home markets can be affected in different ways. I am not an economist or realtor but I did live through the Great Recession and there are some things showing up quickly that make me concerned… With that said, these things may be good for potential buyers.
To be clear, I cannot predict the future and I don’t want to scare people away from real estate but I do want people to be prepared. Hopefully the fed pulls off a soft landing and we just have a market correction without a major crash.
The Great recession was an extreme situation and worse than any other previous housing correction…
5 things to consider
Rising Mortgage rates will depress purchasing power
The rapid rise in interest rates is decreasing the purchase price for secondary homes. The rate has increased from 3% to 6% in just 60 days. This is going to have an effect on second home purchases. (https://apple.news/A5t1_SIOFTo-1BXANNVmA1Q)
In many second home/vacation markets people can wait to buy. Comparing these markets to national trends will not be helpful… During the Great Recession the prices in Mammoth Lakes dropped 50-60% by 2012 and took longer to recover then the California average of 30%. (Click to read more)
Lower property values are a good thing… (if you are looking to buy)
If you are looking for a long-term purchase, buying when the prices are depressed is a great move. You can actually calculate what your expected equity will be.
Lauren and I did this in 2016 when we purchased our first short term rental. Our purchase price was 500k with a 5.5% rate. An equivalent property sold for 900k before the 2008 crash so we felt confident that over the course of 30 years that this would be a great purchase. Today, the market value is 1.1 million and we have refinanced at a 3.1% rate.
If you have recently purchased things could be tough, but only if you have to sell. Work your listing, keep cash reserves and carry on. Then purchase another property if things really do drop.
Approach real estate in the same way that you manage your retirement account. Add to your portfolio when the market is down just like you do with your retirement account.
High Gas prices impact everything
High gas prices are a drain on everyone. Increased gas prices result in higher costs for work-related travel, groceries, and vacations. As a result, driving destinations are affected and overall travel budgets may be cut by families on the bubble.
Make sure your listing is priced competitively and have great amenities to stay competitive…. and maintain cash reserves.
Remember, this too will pass. Prices have risen rapidly and can go down quickly. It was not that long ago that oil prices dropped into negative territory… Granted it was April 2020… but it did happen.
Inflation is on the news all day, every day and we all feel it. We have just experienced the “largest annual increase in inflation since 1981, 8.6%. https://www.usinflationcalculator.com/inflation/current-inflation-rates/
As physicians, we are better insulated than others but it still has an effect on our patient’s, family members, and community.
The fed is trying to combat this by raising interest rates. However, how high will they need to go to correct inflation?
How long will the effects of this change last? Will we enter another Great Recession or just a “standard” recession and how long will it last? These questions can be frightening.
The main point is that purchasing power may decrease, travel may decrease and the duration of these changes is still unclear. Consider these things when purchasing any real estate, including STRs.
The counter argument is inflation can also be good if you are holding fixed, low interest debt, for example student loans, current mortgages etc but that is another topic.
Know your market
Will guests still visit your STR during a recession? Is your STR located in a strong market that has survived previous recessions? For example, our market in Mammoth remained busy during the Great Recession.
Even in strong markets you will want to look for properties that have a competitive edge. What properties rent the best? Does your market have 500 two bedroom units but only fifty 4 bedroom units? Would you rather compete in a group of 500 or 50 if the vacation market tightens? These are things to consider.
If you believe you have a strong market and a property that stands out, then go for it.
People ran from investing when covid hit and others jumped in. The ones that invested in early 2020 did very well. Timing the market can be tough so focus on knowing your market. Keep an eye on property listing prices, evaluate Airdna data and personally visit your market. Take the time to really know where you plan to invest.
Is another Great Recession looming with a housing crash on the horizon?
Honestly, I can’t predict. There are tons of articles with different viewpoints. The general consensus is that the housing supply remains limited so most do NOT predict a major crash but instead a market “correction”. Only time will tell.
There have been recessions in the past and they are not always “Great Recessions” and real estate investors continue to invest through the ups and downs.
The 2007 investors got slammed but if they were not over leveraged they also bought in 2012 and enjoyed great returns. The key is outlining your goals, maintaining reserves and investing in line with your risk tolerance.
There are opportunities. Don’t get caught up in fear. Underwrite your investments conservatively, avoid over leveraging and maintain reserves…
Practice the Carpe Diem MD lifestyle and seize the day
Carpe Diem MD
Enjoy your Journey to Financial Freedom