This is when it’s time to buy! This is when it’s time to buy!! This is when it’s time to buy!!! Not when the economy is at a bang, but when it is at a whimper.
In part two of my three part series poetically titled “To Buy or not to Buy, that is the Question”, I will explain the logic behind my reasoning that this may be the best time in our lifetime to invest in real estate. Part one argued that it was NOT time to buy, whereas part two argues that now is the time to buy:
When I graduated with my bachelors degree in 2008 it seemed like I entered the workforce at the worst possible time. I could not get a good job, my friends could not get good jobs, the economy was failing, and the real estate market was subsequently plummeting at a historic scale. I watched Little Rock, Arkansas change from a market where someone could often sell a house within 30 days to a market with homes not being able to sell for years and foreclosures were in most neighborhoods.
At the same time, I saw the real estate agent profession change dramatically. Through the years I watched nearly half of my professional peers leave the industry looking for consistent and better pay. Reacting to the change in marketplace, I founded Rental Realty in January 2011 to manage rent houses (many of which could not be sold and thus were forced to rent). The market has since stabilized, and returned with some great opportunities for the people willing to act soon and be part of the early wave of people returning to the market. I once considered the market crash as a disaster, but now I see the opportunity it has created, and I want to pass my knowledge on to you.
There are many factors to why I believe this may be the best time in our lifetime to invest in residential real estate. I could write a book just on this subject. But for this article, I am going to simplify my reasoning into two main components: financing and value.
Interest rates are the lowest they have been in our lifetime. The federal government has been virtually giving away money to banks for the past few years in efforts to try to stimulate the economy. In fact, I would say it is a safe assumption that interest rates cannot get significantly lower than they are now (technically, they could–but it would be historically unprecedented, and is beyond the scope of this article series). Below is a chart showing interest rates for the past 100 years:
I’m about keeping it simple and this is the message I want you to take away from this chart: Interest rates have never been this low in the lifetime of you, me, our parents, or their parents.
Thus, you ask, “How can I capitalize on today’s low interest rates?” Thank you for asking that! ***THERE IS NO OTHER VEHICLE AVAILABLE TO THE GENERAL PUBLIC TO CARRY MONEY FORWARD AT TODAY’S INTEREST RATES WHICH IS MORE OBTAINABLE THAN A RESIDENTIAL MORTGAGE*** I could literally (literally) pull someone working at near-minimum wage and get them financed for a $50,000 mortgage at today’s interest rates fixed for up to 30 years if they responsibly pay their bills.
SIDEBAR———–I am so nerdy, that writing that last sentence got my heart racing…I expect that not many people understand and fully appreciate the value of that ability. I can (and have on several occasions) at times made people more money through buying a house than they make in an entire year.——–
Interest rates are low. Mortgages are available. Get it? Got it? Good.
Explaining the value of a house is a little bit more difficult than explaining the concept of low interest rates. I cannot show a simple picture and accurately explain why a home has value. I will, however, continue to use simple, foundational concepts to help explain the reason I believe there is value in houses right now.
In ECON 101, we are taught a concept called elasticity. Houses are inelastic because no matter what the cost of having a shelter is, humans will pay it. Shelter is one of the top priorities for people. Therefore, as long as there are people, there will be a need for housing.
Appreciation is the concept that an object’s value or cost goes up over time. Think of it like buying a coke from a vending machine. When I was a boy, cokes were 25 cents. Then 50 cents. Then a dollar. Now $1.50. Over time houses appreciate, just like a coke. Here is our 100 year chart again, this time showing the average price of a home:
Lastly, I will discuss discounts.The chart above is a good example of the concept of appreciation over time. Because it is a compounding curve, it hides its dirty little secret; that at times home prices have decreased. Examine the years 1905, 1930, 1945, and 1989. You can only see a small decrease but at the time it looked and felt just like the sharp decrease you see at the end of our chart. Fifty years from now, our seemingly terrible recession will resemble on this chart more of the Great Depression (see 1930) and we will hardly notice it. If you think buying today is not buying at a discount, then perhaps you are not seeing the forest for the trees.
After reading this, I hope you learned that houses are 1) an inelastic market with steady demand, 2) appreciate over time, and 3) are currently discounted due to the recent recession. You are probably also thinking I may be a lunatic for writing two articles that have opposite arguments- But don’t worry, I’ll tie it all together in part three: The Solution.