Thursday, January 31, 2008

late night thoughts about real estate

Yesterday's rate cute got me thinking about where the real estate market is headed. The cut, the second big cut in 2 weeks, leaves the rate at 3%, down significantly from the 5.25% it had long been at. This seems like such a small amount, 2.25%, but there's a reason business folks are always talking about it - it has a big effect.

We've already seen mortgage rates drop significantly. This of course lets people buy more house and changes the calculus on any investment properties. A mortgage payment on 5.3% is much lower than a mortgage payment on 6.3%. Now consider that that entire difference goes straight to the bottom line. A $50 per month profit on a rental might increase to $200, for instance.

Overall, the real estate market will still fall more. My summer 2005 prediction that prices would be flat 5 years later now looks like it was optimistic and still is. There is still a big unwinding that needs to happen from the bubble that took prices far out of line with fundamentals. Lower interest rates are unlikely to change that.

But don't generalize the overall trends in the market to mean every house. What these lower interest rates mean is that it is easier to turn a profit on a rental. You can lock these rates (and they might go lower still) in for up to 30 years. If you can find something that is a profitable rental (when I say profitable I mean you can rent it out for sufficiently more than your mortgage payment), you're looking at predictable, stable, and growing cashflow over a very long time period. If it meets the criteria by a wide enough margin (a margin of safety, if you will), you can make a confident bet even taking into account all of the risks in the market.

That said, it's still so hard to find something that makes sense because in general so few properties cash flow and the people who own them don't want to sell them! But if you look carefully, a fearful market is a good thing, and these lower interest rates will only help. Now will someone please do something about Texas property taxes so we can expand out of Arizona....?

2 Comments:

Blogger Jon said...

What's the deal with TX property taxes, crazy high?

8:06 PM  
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