A rental property is basically like a bond. You buy the rental property expecting to collect rent in an effort to get an after tax profit in the future.
How do low interest rates effect housing prices? Just like gravity. When rates are low, it artificially pushes up the price of houses. For an investor, a $200,000 yielding a $8,000 profit at 4% looks attractive when compared to a 2.8% treasury. Thus the investor will bid up the price of housing.
What happens if a 30 year treasury yields 7% (not historically unprecedented)? The treasury is a risk free passive investment whereas being a landlord is an active investment that constantly requires maintenance, finding new tenants, risk of default, etc.
At that point housing has to fall a lot. An investor will always prefer a 7% risk free passive investment yield when compared to a risky active investment.
Additionally, as interest rates rise the economy will slow down, people will lose their jobs, people will double up with friends and family, rents will go unpaid, and demand for rental units will go down.
A proper RE investment (per the 1% rule or better, not available in inflated markets like CA) would generate an after tax profit every year, not just in the future.
Yeah, that $8K profit on a $200K investment is a 4% return, but the investment property is leveraged, preferably 4:1. So if inflation kicks up to 7% (thatās what TIPS and bonds really pay ā inflation), then chances are that property values could be under the same inflationary pressure. And if itās levered 4:1, then a 7% rise in value means 28% ROI, in addition to the 4% cash return.
Usually just a small percentage of people (will lose their job, double up with friends, and even fewer will not pay their rent). Nobody said itās a risk-free investment. The expected returns must justify the risks, obv.
Leverage amplifies investment returns but also amplifies losses. All that means is that in the next downturn youāll have a lot of people mailing in the keys and walking away from their investment(jingle mail) which of course adds to the supply.
If Treasuries hit 7% then yes that will impact how people look at other investments. But we havenāt seen 7% rates in what 20 years? Its not going to jack up 4% in a year or two, and weāll all see it coming more likely.
A 4% return on a rental isnāt really a good return. The average rental nets closer to 6% cash flow not even accounting for appreciation which adds another 2-3%. Of course it varies based on location. If Iām buying houses in Ohio Iām probably looking for 10% return cash flow and not banking on appreciation, and vice versa in SF Iād be just speculating on property appreciation and hoping for 10% equity increases and breaking even on rents.
Yes leverage causes risk. Almost all investments have risk. I doubt a large % of rental investors were foreclosed on during the great recession. Most SFH rentals are buy/hold investments and net cash flow so thereād be no reason to walk away or default.
I think Warren Buffet has said that 7-8% is the new normal for stock appreciation long term. If Treasuries hit 7% wontā they then go on up to 8% or 9% or 10%? Will that cause everyone to dump all their stocks and send the entire world economy into a death spiral? NO.
7% treasuries wonāt cause rental investors to dump and cause the market to crash either.
Individual investors are more likely to be leveraged and own 1-2 properties. Its not really exactly equivalent to just buying a treasury bill with a pile of cash.
Iām sure the big institutional investors will react differently to treasury increases. But theyāll also be smarter about it and hedge for such things. They certainly wonāt just dump all their properties into the market to flood it and cause a crash.
Take a look at stock prices in the 1970ās. High interest rates are like gravity for stock prices. If you can get a high risk free return from bonds then investors will dump their stocks in favor of risk free return, just like they did for real estate.
The report cited the 20% figure as a national statistic in the introduction. It was 20% of foreclosures in the US. The report then went on to talk about NE specific region.
And yes the NE and the Midwest and CA and FL and Seattle are all different. Iāve no doubt that areas with the most overinflated prices had a lot of speculators too.
I donāt readily find figures breaking down the % of foreclosures that were rentals by state or market. But I do find this article specific to Jacksonville FL :
" As noted, the existing literature provides varied estimates of renters aff ected by foreclosure, with these estimates (ranging from 10 percent to 65 percent) largely determined by dynamics in local housing markets. "
Note thats the % of renters impacted, not the % of homes impacted which differs. (mult-units impact more people)
The report I linked also says: "To date, no national publicly accessible data are available on foreclosure filings. "
Iād say itās pretty much a given what the fedās response will be if there were inflation rates even hinting at 7% - they can raise interest rates hugely to tamp it down, like in the 80s. So Iād say high inflation would be correlated with high interest rates.
The inverse relationship isnāt that clear, however. Would the fed raise rates to >6% with interest rates not in danger of breaching 3%?
I find the discussions of useful lives of houses interesting. In the Northeast, there are plenty of houses 100-200 years old. Many of them have real solid construction - stone, brick, etc. Not shitty wood framed. Iād say to build the same thing legally today would be quite pricey in the US (labor).
90ās, really? I love ours, and Iām pretty sure they are new-ish (came with the house) and it never even crossed my mind. Dual pane with excellent insulation, easy to open/close/clean. Wood expands/contracts with temperature and can get destroyed by moisture ā it makes no sense.
Our house was built with true divided-lite wood windows. They were lovely the first year. Until it was time to clean each side of 18 panes per window. Then they had to be painted. Then the painted wood warped and the muntins fell apart. After the first repainting, all of the windows stuck shut but yet remained drafty. We replaced them with energy-saving windows with grilles between the glass. I did the installation myself; average window cost was just over $300 for the most energy-saving models. The winter savings are good, but the summer savings are amazing. The heat does not penetrate the glass.
We had all but one set made in double pane. They are fine. The one triple-pane window set was much heavier than the others, doesnāt seem to be any quieter or warmer than the double panes. The triple- pane sashes are so heavy that they do not stay open without support.
The exterior glass is supposed to have a self-cleaning surface activated by the sun, but either it doesnāt have the coating or the coating doesnāt work. Cleaning a single plane of glass, though, is a pleasure compared to true divided lites.
Other than that, weāve kept most finishes vintage and will decide what, if anything, to change when we sell.
Just today we are having new 16-SEER heat pumps installed. Old ones lasted 35 years, but canāt get reasonable prices on R-22 refrigerant, so itās cost effective to swap them out and cut the HVAC power bill in half.
Agreed. However, past a certain time, it becomes quite hard to fix things without it turning into major hassle. Iām facing this issue right now with my house built in the early 60s. It also has some custom āfeaturesā that make finding replacement part very difficult like the 1/2" cedar siding, BX wiring, and some weird pipe thread that I can not find anywhere. At some point I may have to bite the bullet and do a major updateā¦ not looking forward to it.
Wow, BX. Havenāt seen that stuff since my gang and I were tearing down houses during the Summers while in college. Actually, we werenāt tearing them down, but disassembling them for the cement blocks, joists, rafters, windows, doors, etc.
You must be scared silly to even accidentally bump any of the old plumbing.