There has been a growing amount of uncertainty in the real estate market over the last year or so with rising home prices, higher mortgage interest rates and a slower than hoped for economic recovery. While these factors are combining to make a home purchase more difficult for many would-be home buyers they are also creating ideal conditions for small real estate investors.
The Federal Reserve begins tapering back its bond buying program this month by cutting $10 billion in bond purchases which were designed to keep interest rates low. The market adjusted for this months ago causing mortgage interest rates to climb to their current level of 4.5% for a 30-year fixed loan. By all accounts rates won’t stop there because The Fed has said it wants to keep cutting the amount of bond purchases it makes. The big take-away from this is that barring some unforeseen catastrophe in world financial markets, rates will only continue to rise hitting first time home buyers the hardest.
Historically, first time home buyers account for about 40% of all homes purchased. That number is down around 25% according to at least one report.
Interest rates are only one factor making it difficult for young buyers to purchase a home. Also contributing to their struggles is the massive amount of student debt many have incurred just trying to get a degree. The class of 2013 graduated from college with, on average, student loans totaling $35,200 but it is not uncommon for recent graduates to have as much as $100,000 in student debt.
With a cloud of debt like that hanging over their heads before they even have a job it is understandable that buying a house would be the last thing on their mind. Being a renter allows these young, would-be home buyers the flexibility to easily move when a new job opportunity opens. Millennials’ primary focus is not to buy a home, settle down and start a family as their grandparents once did but to get out of debt.
The parents of Generation Y are also less than enchanted with the American Dream these days. There have been more than 4.6 million foreclosures since 2007 and many of those who lost their home during the Great Recession still haven’t got back into the real estate market. For some it is because the foreclosure is still too recent but for many others the feeling of getting burned by a “hot” real estate market is a painful reminder of how home ownership can go wrong. Even if the goal for many in this generation is to one day own a home again, that day is not now.
Big real estate investors appear to feel that their days of buying homes have come and gone too. Since May of this year big investors have been backing out of their single family home buying frenzy. A big reason for this is that the low hanging fruit has been picked over. The big boys have the flexibility to change direction with the wind (or market as the case may be) and when the sweet deals get fewer and farther between they have a tendency to move to where the fruit hangs the lowest.
A smart, small investor who is willing to be patient and do the necessary homework can take advantage of deals the big boys overlooked or weren’t willing to dig for. With so many would-be home owners sitting on the sidelines for the foreseeable future the stars have aligned to make investing in even one single family rental a profitable venture.