Mark Twain famously stated: “Buy land, they aren’t making it anymore.” While Mark Twain is great at being quotable, does he actually offer good investment advice? Let’s examine the relevant issues facing the real estate market today, and discuss some of the pros and cons.
Lately, the real estate market has been beset by bad news. Realtor.com reported average mortgage rates for new home buyers are now averaging in the range of 6.5 to 7 percent and climbing. These rates, which make loans more costly and thus harder for people to afford homes, are far higher than the 3 percent rates of just a couple of years ago.
When people can’t afford loans, this drives real estate prices down. If you follow listing prices in your own community, you may have even noticed that prices have fallen. In my own area, 3 bedroom/2 bath homes recently sold for $500,000 or more, but in the last several months I’ve seen nice homes this size for sale for the low $400,000’s. That’s quite a steep drop.
Examining national housing price data from the St. Louis Federal Reserve, one can see the last several years have brought a sharp increase in home prices that has recently begun to reverse into a decline. Shaded areas on the graph show that during periods of recession, the housing market tends to lose value.
Are we then entering a recession? While a recession has not yet been formally declared, the probability that a recession will occur by this time next year has been accelerating. The Federal Reserve Bank of New York currently estimates this probability at 68 percent, up 10 percent from the probability of recession the institution predicted last month.
What then of commercial real estate investing? Could this be a better bet?
This may depend. The commercial market is impacted by the cost of borrowing just as is the residential market, but there are additional factors at work — both factors that make the situation even worse and some that point to opportunities in certain areas.
One major challenge facing office properties these days is that the post pandemic work from home trend has led many businesses to close offices as more employees embrace remote work. National Public Radio senior editor Arezou Rezvani, authored a recent article calling vacant offices a “major threat to the economy” while Fortune columnist Alena Botros sounded an even louder alarm, stating we are on the verge of an “office real estate apocalypse.”
Is the situation as bad as they say? Perhaps or perhaps businesses will ultimately find remote work and physical offices can be complimentary? Ultimately, only time will tell.
Commercial real estate however is not limited to offices. Apartment buildings, while they are residential, are considered commercial properties, and with housing becoming increasingly unaffordable between high home prices and high borrowing costs, more and more Americans may be forced to rent.
If you decide to become a landlord, remember the real estate adage “location, location, location.” For investing purposes look for locations with high rent to home price ratios. The higher the ratio, the faster you can expect to earn your investment back from the rents paid by your tenants. Generally these are cities in the Midwest and the South, although Blythe, California made this list of cities with attractive ratios.
So what does all of this say about Mark Twain’s statement that one should buy land? Although there may be some opportunities in real estate, with all the risks involved, it certainly isn’t as sure of a thing as Mr. Twain seems to imply. Perhaps it’s worth remembering he also stated, “Never let truth get in the way of a good story.”
Eric Eisenhammer
Eric is an Asset Protection Specialist. He is co-founder of Legacy Defender Insurance Solutions and holds licenses in Life and Property & Casualty insurance. Eric earned a bachelor's in Finance from California State University, Northridge and a Master's in Public Policy and Administration from Sacramento State.
