If you want to hate on the housing market recovery, there are certainly plenty of items to dwell on.
Ads for house-flipping seminars have returned to AM radio and late-night cable TV in many markets — and so have Better Business Bureau complaints. So-called “liar loans” or “Alt-A mortgages” that played a big role in the housing crash are increasing in popularity. And, of course, there are the fears that a low-interest-rate environment has already prompted everyone to refinance and has artificially created demand for housing thanks to cheap access to mortgages.
But while plenty of pundits are sounding the alarm bells — including MarketWatch contributor Michael Brush a few months back — I think the hysteria over another housing crisis is a lot of hogwash.
Particularly if you’re an investor, there has never been a better time in history to get into real estate.
The scars from the Great Recession are real, and many can’t shake the fear and financial pain caused by the housing crisis. I get that. But recency bias also caused many small-time investors to dump stocks at the very bottom of the market, and caused many to miss out on the 200% gains in the recovery.
If you think we are in the middle of another housing bubble and that real-estate investing is only a sucker’s game, you may simply be letting the past color your perceptions despite continued signs of strength.
And considering the investment potential — particularly in the rental market — you may want to take another look.
This is a healthy market, not a bubble
For starters, let’s talk about the real estate environment. Generally, it’s quite good.
By any measure prices continue to rise. Median home prices shot past pre-recession levels to new all-time highs. National home prices were up 5.7% in June, according to CoreLogic — an even faster rate of appreciation than the 5.3% rate in May and the 5.4% rate in April. New home sales have powered to a seven-year high on strong demand.
Critics will warn that rising prices and rising demand can indicate a bubble the same way they did in 2005. But when you dig deeper, the housing market is much healthier than during the previous run-up. In fact, Realtor.com has created a “bubble index” to show how different conditions are from 10 years ago, using metrics like the prevalence of house-flipping, price-to-income ratios and the share of buyers using mortgage financing. Even in high-growth markets like San Francisco, we aren’t seeing behavior that mirrors the frenzy of the mid-aughts.
Housing starts mirror that change in behavior, with recent “highs” north of 1.2 million still roughly half the bubble-era peak of nearly 2.3 million monthly starts. If this was a bubble, we would see a supply glut instead of a lack of inventory actually acting as a headwind to sales.
Another important data point: Foreclosures are at the lowest level since at least 2000, so it’s not like people are burying themselves in big debts they can’t pay just to buy a home.
Lastly, consider how many markets like Las Vegas or major Florida metros like Miami, Tampa and Orlando have real estate values that still are below pre-crash levels despite the broad improvement nationwide. This proves that areas that were ground zero for irrational exuberance have not gone back to their old ways, but have in fact been right-sized … and are staying there.
Whether it’s stricter lending standards, a shift in attitudes among borrowers or simply the nation getting wiser about the risks of real estate, we’re hardly seeing irresponsible buying in 2016.
What we are seeing is a healthy housing market that continues to steadily and organically appreciate.
Innovation is lowering the barriers to entry
The interesting thing is that while there doesn’t appear to be speculation in the current marketplace, it probably is easier than ever before to speculate on real estate if you’re a small-time investor.
I recently talked at length with Dennis Cisterna, chief revenue officer at Investability Real Estate Inc. Investability is an online real-estate marketplace that helps knock down barriers of researching and investing in real estate with tools like cash flow calculators that allow you to input estimated vacancy rates and rental incomes from potential properties.
“In the past, you might buy a local property and own it forever and pass it on to your kid as a kind of annuity investment. Even though (the real-estate market) is highly fragmented … you’ve seen a number of platforms stand up and become a marketplace for properties,” Cisterna said.
“Historically people invest within a 10-mile radius around their own home,” he said. “But in 2016, people want to invest in markets outside their own neighborhood. Because if you want to buy a rental property and live in Southern California right now you’re going to spend over $400,000 and possibly not even have any positive cash flow in year one.”
Investability isn’t alone, either, with other tech companies and websites including Fundrise and RealtyShares going one step further to allow people with less money to ride this trend. RealtyShares has a $5,000 minimum investment, while those with as little as $1,000 can join Fundrise.
You’ll be charged a fee, of course. Fundrise’s fine print notes that a rash of fees will likely add up to more than 4% annually. These fees make this kind of real estate crowdfunding less interesting to me than direct plays on properties without the middleman. But anyone who has watched financial innovation from discount brokerages to exchange-traded funds knows that we are living in an age when investment fees only go down over time, so these companies certainly are worth watching.
Another less sexy innovation in real-estate investing is the simple evolution of lending.
“The financing options available to investors have expanded dramatically,” Cisterna said. “Instead of an investor being totally tied to their personal income … (lenders) underwrite the loan based on the income of the property based on a traditional commercial real-estate loan.”
Some people will always see all leverage as risky, and point to easier lending as the cause of the previous housing crash. But financial innovation so mom-and-pop investors don’t have to take a typical mortgage out from Fannie and Freddie to buy a rental is simply reducing friction in the market by properly assessing risk — not lowering lending standards the way so-called liar loans did.
Throw in the ease of researching properties around the U.S. thanks to digital MLS listings, cheap online background checks online for prospective tenants and the ability to get rent checks direct-deposited electronically, and there are far fewer headaches to landlords than in years past.
This is an answer to those seeking alternatives
If you think all this analysis of the market and praise for innovation adds up to a shaky investment thesis, then it’s worth considering the alternatives out there.
You think there’s no risk in stocks? Or satisfying returns in bonds?
As I wrote a few weeks ago, investors need to lower their expectations for returns from both developed equity and the bond markets. Yes, a rental property isn’t exactly a conventional income investment … but 10-year Treasurys yield less than 1.6% annually and investment-grade corporates aren’t much better. And sure, house flipping is risky and isn’t for everyone, but the same is true for small-cap biotech stocks and emerging-market equities.
Nobody should put all their savings into one or two properties, but in a diversified portfolio, there is a very good argument for real-estate investments in 2016. And based on recent data, the “smart money” and institutional investors certainly seem to be buying that argument.
A recent report by risk management firm Willis Towers Watson PLC found that total global alternative assets under management has hit $6.2 trillion — led, unsurprisingly, by real estate, which makes up about a third of that total.
“The shift away from equities and bonds into alternatives has gained momentum, among most institutional investors around the world, as these strategies have helped to manage risk through diversity,” said Luba Nikulina, global head of manager research at Willis Towers Watson. This interest is particularly strong among those with “secure income strategies where investors are searching for both yield and diversity as an alternative to traditional hedging with government debt securities.”
I am agnostic about all asset classes, and think everything from gold to small-cap biotechs to TIPS can play a role in your portfolio when used properly and with an eye toward diversification.
And given that so many traditional asset classes are facing headwinds, it’s worth taking a serious look at real estate both as a way to find new opportunities and to hedge your bets in a challenging market.
Source: Market Watch by Jeff Reeves