6 Reasons Why It Might Be Time To Sell That Investment Property
Predicting the real estate market is like the predicting the weather… you have a lot of facts, historical data and experts giving advice, but sometimes it just rains without any warning. So take my perspective with a grain of salt.
I am voracious consumer of all information real estate. I love the facts, figures and data behind all of it. I like taking into consideration the most minor neighborhood intricacies--like why a house two blocks north sold for $50,000 more than the same house a few blocks south. I also like to look at world events, like #Brexit to understand how that can potentially affect housing values in Austin.
The Austin Housing Market
Austin’s housing market is stronger than ever, demand still consistently outpaces supply. However, if you were around in 2007, you know as well as I, that it can come to a screeching halt within a few days, and there are more factors that contribute to that than just the state of the national economy!
For example, let's take a look at the property around Lake Travis. We were in a 5 year drought and there were experts predicting that the lake might run out of water completely. Activist groups sprung up, water was shipped in to some neighborhoods. The lake levels were the lowest in history and housing prices were bottoming out. Houses were selling for an average of 5% below asking price when the rest of Austin was averaging less than 1% below asking. And then, just a few rainstorms later, the lake was 120% of capacity and we had the complete opposite problem. Coincidentally, homes sales are up 44% and median prices are up almost 25% year-over-year for Lake Travis waterfront homes.
I am singling out real estate investors specifically with this information only because most people need to either buy or sell a home no matter what market we are in. If they get relocated for their job, get a promotion, need to downsize or finally have saved enough to purchase a home--most people just move and deal with the hand they are dealt.
Real estate investors, like myself, depending on their investment strategy, are taking in factors like rental rates, cashflow, ROI, taxes implications etc. And if you are a real estate investor who purchased in 2012 or before, it might be time to sell to get the highest return out of the property.
Why Sell Now?
1. Home prices are still on the rise, but they are not going up as fast as in the past.
- This is the lowest May (2015) over May (2016) growth in median home prices in 6 years, only going up 1.39%.
- The trend so far this year is showing that prices are only going up about 5% overall this year, when they went up double digits the previous 3 years. See chart below.
- We will most likely continue to see modest gains in home prices over the next few years, but the huge upswing has happened already with our market going up 40% over the last 5 years.
2. Housing inventory is still consistently low at 2.4 month’s supply of homes.
- There is literally nothing out there to buy. Multiple offers, record setting prices and favorable terms for the seller are still happening everyday. This is the “high”, when people utter the infamous phrase, “buy low, sell high”.
- The chart below details out how the housing inventory has shifted from a buyer’s market in 2010, to a seller’s market within a 12-14 month period. Seasonally, the housing supply tends to shrink into December and January. A 2 month supply in February this year represents the most extreme seller’s market we have experience in over 10 years.
3. Interest rates are at a 5 year low--30 year is around 3.5%.
- Why are low interest rates great for investors? It means your average homebuyer can afford more home. Coincidentally, you can sell your property for more money. Once interest rates start creeping up again, it will start narrowing the potential buyer field. The rule of thumb we use is that for every point interest rates go up (i.e. from 3.5% to 4.5%), this reduces the buyer’s price range by $25,000.
4. First-time homebuyers, who represent 32% of the homebuying population, are getting squeezed out of the market.
- The average age of first time homebuyers is 41 years old. I could not find any specific data to back up my next opinion, but 41 sounds really old to being buying a first home. Maybe I’m the exception to the rule, but I bought my first home at 25. This says to me that younger people with lower incomes cannot afford to get into our market. They are delaying their entry into our market and thus, narrowing the potential buyer pool. If we continue this way and incomes don’t go up in alignment with inflation at the very least, we will lose ⅓ of the buyers in the market.
5. There are many national and world issues that can have a ripple effect on our housing market.
- There is a very tumultuous election coming up in 4 months. Most economists are predicting that no matter who wins, the housing market will experience some sort of a change.
- We still haven’t seen how Brexit will affect America long term. Right now, it has only been positive. However, the official exit of United Kingdom from the EU has not actually happened yet. And Scotland is now even discussing leaving the UK.
- China, who played a large part in bailing America out when the last housing bubble burst, is now having their own housing bubble.
- Something not being discussed AT ALL is how college student loan debt will affect the housing market. The average college student graduates with close to $38k in debt. With $1.3 trillion in student loan debt spread across 43 million Americans, this could have a major long term effect. There are several interesting articles arguing both sides of the issue here, here, here, here and here.
6. Appraisal reviews
- This is the latest in the Dodd-Frank laws designed to protect consumers in the market. This is something that most Realtors are NOT aware is happening. The short of it is this, if the home loan is being sold on the secondary market and complying with Fannie Mae’s guidelines--which 90% of loans are--then they are subject to review if there is any irregularity in the appraiser’s report. This extra layer of bureaucracy and oversight is slowing down the market AND in the majority of cases I’ve dealt with this, the values are coming back lower after the review.
- This single-handedly might explain why prices aren’t going up nearly as fast they were 12-24 months ago. This can be seen two ways. (1) Good-- to stabilize and pace the growth in the market. (2) Bad-- because it artificially regulates the free market capitalism of the real estate market. Since this is relatively new, the longterm effects will remain to be seen. For further reading on the topic, see the best articles here and here.
In summary, my argument is that we know what market we are in right now. The cyclical and seasonal nature of real estate means we will be experiencing a slow down in the next 3-5 years, possibly sooner. There is no way around it. This market we are in is a great bird in the hand that has produced stellar returns for a lot of homeowners--both owner-occupants and investors. It might possibly be time to cash in on the returns and sell your Austin investment property. Reach out to us below or give us a call at (512) 991-4801 and we'll be happy to help you navigate the waters of the Austin market.