Do any of the red-hot markets look scary to you today? As investors we have to keep our crystal balls shiny because projecting into the future is required. What trends and events will affect our investment, both local and national. Which sources of data are reliable. And what metrics should we be tracking.
Markets like Phoenix, Las Vegas, and Tampa have clearly been red-hot but may be poised for changes. Zillow says some of these cities saw the biggest shares of price cuts for single family homes over the last three months, and days on market, a key indicator of buyers’ willingness to pay what sellers are asking, is increasing faster in these markets than others. Redfin says some hot housing markets like Seattle are seeing active listings doubling, more houses on the market than any time since 2009.
But as we know, the multifamily market does not mirror the single family market. In fact, if a person can’t buy in a market, they will have to rent or move to another city. However, underlying causes of these trends do tend to impact both single and multifamily in similar ways. Look at 2008, how the abundance of sub-prime mortgages led to owners not paying their mortgage, moving out, and foreclosing. There wasn’t a sudden demand for apartment rentals. There was job loss, and renters felt it hard. They moved in with friends and family and home foreclosures were joined by rental vacancies.
In recent years the underlying trends of a strong economy, limitations on development, trillions of new dollars showering us drove both housing prices and rental demand.
Housing shortage? Are there really that many people moving to these areas that there will continue to be a high demand for houses and rentals? Some don’t agree. Data suggests a much higher number of people today own two or more houses. Are they renting the others out? That is most likely the case. When there’s a downturn there might be a rush to sell them, and then a glut.
Rates coming down? Maybe not. Factors that drove rates higher still exist. Listen to 10 economists provide 10 different opinions and you get a better perspective that this may be a longer term problem, and that there is an uncomfortable chance that rates may continue to rise.
For any market we’re thinking about investing in, we have to keep these trends in mind. We have to read what the economists and demographers are writing, and we have to make informed decisions. If your market starts showing these early indicators of trouble, it could be a long term trend so stay out of its way, or it may have a number of much stronger trends that will ensure your success.
But don’t take forever studying it! Be decisive, take action or decide to wait and keep your powder dry, but don’t let lethargy take over.