It looks like the majority of U.S. housing markets have bottomed. So, if you’ve been thinking about buying investment property, this may be the time to make your move.
When the National Association of Homebuilders released its NAHB Index for October last week, it showed a drop of one point in homebuilders’ view of the market, from 19 to 18.
The good news: The index is at double its level from last spring – when it bottomed out at nine – meaning homebuilders see an improving market.
The bad news: The index is based so that a reading of 50 is the “neutral market” view. That means there’s a long way to go.
30-year mortgage rates are still close to their all-time low, currently around 5.1%. But rates probably won’t remain that low for long. Building inflationary pressures and the huge U.S. budget deficit will combine to eventually push interest rates higher.
Even if house prices drop by another 10% in some markets (except in the very worst areas, I wouldn’t expect too see anymore than that), you still may end up saving more on financing costs by buying now than you would by waiting for any further declines.
Housing arithmetic may be complicated at times, but one thing is for sure: 7% of $90,000 is more than 5.1% of $100,000!
The S&P/Case-Shiller composite home price index rose nicely in July, with the 20-city index rising 1.5%, after a 1.3% bump the previous month. That’s a decent indication that the major markets have bottomed out.
In states like Florida, California and Nevada – where prices have dropped over 40% – there are likely to be a large number of foreclosures and vacant properties left over from the housing bubble. Therefore, in those markets, the excess supply will take longer to absorb.
Similarly, even with the government "bailout" of the automobile industry, you should avoid investing in markets like Detroit, even though prices there are lower than they were in 1995. However, in cities like Dallas and Atlanta, where home prices did not rise much during the bubble – and haven’t dropped that much since – investing makes a lot of sense. These markets rest on a firm economic foundation and you can expect to see solid growth.
Any predication beyond 2009 is cloudy. On the one hand, a slow economic recovery should seriously induce investors to buy investment property. And with inflation apparently on the upswing, the price of property can be expected to increase, as well.
On the other hand, if inflation really takes off as many predict it will, the U.S. Federal Reserve may have no choice but to raise interest rates. And since housing is the most interest-rate-sensitive sector of consumer spending, we may see a delay or stall in any housing market recovery along with higher mortgage rates.
If you’ve got the money, buy investment property. You won’t find a better time to invest!