I bought my first house in 2009.
At the time, people thought I was crazy. And I couldn’t blame them.
The country was still suffering from the Great Recession… More than 10 million people had lost their homes to foreclosure during the ensuing housing crisis.
I have to admit. When I first got the keys, I was nervous. But in hindsight, the timing couldn’t have been better.
You see, I had three things going for me when I bought the house…
First, I got a deal on a foreclosure. I paid less than half of what the last owner paid in the 2006 housing bubble.
Second, being value-oriented, I calculated that the home was trading for less than its replacement value… Buying a similar tract of land and building a new home would have cost tens of thousands of dollars more.
Third, I was a first-time homebuyer, so I only had to make a minimal down payment…
I put $10,000 down – and got an $8,000 first-time tax credit that year. Adding back my $1,000 rental security deposit, and I only paid a cool $1,000 out-of-pocket for my new home.
I’m not sure it could have worked out better… and today, with the home worth about $400,000, it’s been one of my best-returning assets.
That’s the power of investing during a crisis.
Here’s why I’m telling you this…
Today, another housing crisis is brewing… It’s not a bubble like 2006, as lending standards have been much stronger, and homeowners are nowhere near as leveraged.
But millions of Americans likely have no idea how much it could affect them in the months ahead.
Renters Will Have It Worse as the Housing Market Slows
When I started in financial publishing, one of my mentors said that real estate could make you wealthy…
All you had to do was rent out your current home when moving to a new one rather than sell… Anyone who’s bought and sold a home recently has probably heard the same.
I took that advice to heart. Today, I collect $2,000 per month from renting that home I bought in 2009.
After all the bills get paid, I have a few hundred dollars to invest elsewhere… Double my initial down payment.
Once I’ve paid off the mortgage, it’ll be an even better cash flow source than dividend growth stocks… And I can raise rents to keep up with inflation.
But not everyone is fortunate enough to be in my position… and for many renters and first-time buyers, things are about to get worse.
While housing prices dropped slightly in July, the average cost of a home in the United States is $428,700. That’s up 304% from 2012.
The average U.S. household earns about $67,500 per year. Most experts suggest you pay no more than three times your monthly gross income on housing.
So for most Americans, the dream of a new home is out of reach.
To make matters worse – even though housing prices are down slightly – mortgage rates have surged to 5.74%.
That’s a 78.2% jump in home financing costs since the beginning of the year when rates were 3.22%.
With more interest rate hikes in the next few months, mortgage rates are set to rise even higher – making homes even more unaffordable for most Americans.
Where will they go? The only other place they can. The rental market.
Apartments Are in Demand
The fact of the matter is everyone needs housing. And for most markets right now, supply and demand are imbalanced.
We overbuilt during the housing boom of the early 2000s… And when people like me were buying foreclosures in the late 2000s and early 2010s, homebuilders didn’t see an attractive environment.
So, they didn’t build much for the better part of a decade.
When supply is low, and demand is high… prices rise. And nationally, we’re still millions of units of housing short relative to demand.
The U.S. Census Bureau estimates that we need 1.5 million housing units annually to achieve equilibrium for the market.
From 2007 until 2021, far fewer homes were built than that annually. It’s only just in the past year we’ve started playing catch-up… just as mortgage rates have surged higher.
According to analysts at Bankrate, the pace of new single-family home declined to less than 1 million a year in June… a 2-year low. At the same time, mortgage rates are the highest they’ve been since 2008.
In Palm Beach County, Florida, alone – where I live and the home of Palm Beach Research Group – the University of Florida’s Bureau of Economic and Business Research estimates are that there will be an influx of 150,000 new residents over the next 10 years.
So it’s no surprise rents have risen 22.6% year-over-year. That’s more than double the rate of inflation.
This is part of the New Order of Money that Daily editor Teeka Tiwari has warned us about for months.
To survive and prosper in this New Order, you’ll need to invest in assets that outpace inflation… and a simple way to get exposure to this trend is through a Real Estate Investment Trust (REIT).
Mid-America Apartment Communities (MAA) is a REIT that owns over 102,000 units, with a focus on the Eastern seaboard and rapidly growing Sun Belt states.
MAA yields just under 3% right now, and the company has raised its dividend. It’s likely to keep doing so as long as rents can keep rising.
At a more personal level, if you already own a home and you’re looking to move, consider making your first home a rental property instead of selling.
You can always refinance down the line at a lower interest rate – possibly as soon as next year when the Fed pivots away from its interest rate hike policy.
If you’re a renter, unfortunately, you’ll likely have to sit tight for now. Renewed rents aren’t rising as much as prices are for new renters.
According to data from Realtor.com, renewals are seeing an average bump of $160 per month nationwide… But new rents are jumping $300 per month. So if you can manage it, you’re probably better off waiting until things cool.
In the meantime, consider Mid-America Apartment Communities.
If rental demand continues to remain red-hot, you may see a return big enough to at least put a down payment on a new home.
Good investing,
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Andrew Packer
Analyst, Palm Beach Daily