Thought i would get some pro’s view points on something ive been thinking about… As inflation creeps its ugly head (gas at $5, impacts everything from plastic cup prices, to your every day shopping prices) i would assume that banks will start raising their interest rates (so they can make a profit regardless of inflation)… As interest rates rise, house prices will be negatively impacted as people will eventually be priced out (no affordable monthly payments) of the market …
So, naturally (i would assume) house prices would decline till people could afford them again (supply will need to meet demand)…
If this is the case (if i am mistaken please correct any faulty assumptions) then wouldn’t it stand to reason that house prices will decline more? Same as the case was in the 80’s? Where a loan on a house was 18% and a brand new house was going for 50K?
The only thing that you are missing is that as the dollar loses value fast, everyone scrambles to get their wealth into hard assets that will ride out (and keep up with) inflation. Real estate and precious metals are where people put their funds to shelter them.
As a generalization, if interest rates go up, the price of houses goes down. Home buyers are more interested in the monthly payment than in the total purchase price and they will pay as much as they can afford to make the payments on. As the payments go up, they can only afford to borrow smaller amounts.
However, if there is serious inflation, that changes things. As the dollar buys less, it will take more dollars to buy a house. Also a lot of investors’ money comes back into real estate, and that supports real estate prices.
Now, how about in terms of rent? how does that get affected? im assuming that if the dollar buys less, and houses cost more, then rents will HAVE to go up as well?
Otherwise investment property would turn to crap as houses get more expensive and rents stay the same…
You would be surprised about the rental market prices. You have to consider the incomes of your potential renters in your area as the basis for the “market” rent. If housing prices go up, that just means that the people who can afford to do rentals there will be ones who have owned property there before the housing price run-up. Either that or someone will buy a property at the higher price and just end up losing money each month.
That’s why I couldn’t do rentals where I’m currently stationed. The month before I moved to the area, the largest squadron in the Navy moved to our base. Of course housing prices skyrocketed overnight. This was also before the current housing market problems so everyone thought things would keep going up. So even though home prices were shooting up, rents were still fairly constant. In my area at that time, pretty nice 3bd/2ba/2 car garage homes were going for close to $300K. You could rent houses like that for about $1300-1500. Run the numbers on that and tell me how that works. The prices in our area went up so much so quickly that sellers priced themselves out of the market. They set prices where only very few people coming to the area would be able to afford their homes.
I know quite a few military people who own a couple houses and are renting them out. Many of them are barely getting their mortgage payment paid with the rent. A small portion of those people are “saving” a house in a certain area they want to go back to for retirement. Most of them just don’t seem to know any better and think that if you get the mortgage paid, you’re making money in RE.
One thing to keep in mind regarding buying RE is the REASON for the purchase. An investor wants the property to financially stand on its own and give a profit. A buyer purchasing for a personal residence will think in terms their own personal agenda and how the property will fit them. An investor could not buy a $300k house that only gets $1500/mo. total income ( unless he put a huge down pmt.). He would bleed too much per month to keep it. The money he’d have to put down on that property could be used to purchase multiple cash flowing properties.