Since the ‘Great Recession’ reportedly came to an end years ago, according to a wide variety of metrics the real estate market has healed and even thrived!
Of course bargain basement mortgage rates (thank you Fed) have been a significant catalyst along with foreign money (particularly in New York City) that has been seeking a safe haven.
But even more than that for the rank and file buyer, is the feeling that purchasing real estate is an investment that they can actually afford and that they hope will appreciate over time. For many it’s this appreciation that they hope will serve as one of the financial foundations of their retirement years!
And to clarify the previous statement the word afford means not only in the here and now, but moving forward into the future as well. After all the mortgage payments will be due every month, possibly for thirty years, and the property taxes will keep on coming and likely rise as the years go by.
So given all of that, what are some of the factors that go into that warm and fuzzy feeling we call confident investing?
- One of the most significant would be the idea that our income stream is going to be reliable, steady and possibly even grow over time,
- We need to feel that if #1 does not hold true that we have an adequate backstop that would sustain us until a new #1 is found,
- We need to feel that the property we are seeking to buy will continue to appreciate in value and, failing that, will not depreciate,
- We may need a little push in the form of some outside variable that we feel may be less advantageous a month from now than it is today. That could include something like the threat from the Fed that interest rates, aka mortgage rates, are going to move higher in the near future,
- There also will typically be a financial analysis that looks at the rent versus buy trade-off and whether at this given point in time purchasing makes the most economic sense. This brings us back to #3 meaning that if we feel that home prices are appreciating we won’t want to be left behind so we will push to buy now. On the other hand if home prices are stagnant or even dropping, then there is no urgency to buy right now.
Of course other factors unique to every buyer will come into play but the overriding concern that’s front and center in the minds of the consumer before a search commences is typically going to be a financial one.
The Wealth Effect
In the United States the wealth effect, judging by the crowds at restaurants, the fancy cars on the road and the number of people heading out of town on vacation, is currently alive and well.
But does this surface level conspicuous consumption (that is not occurring in all parts of the country where many are struggling living paycheck to paycheck) actually mask ripples of uncertainty and waning economic confidence bubbling just beneath the surface?
Let’s look at a few examples that may make this true…
The headline employment numbers appear well and good but, digging down just a little bit, they actually show cracks and crevices that point to what could be an uncertain future for many.
The Fed’s continued hemming and hawing over raising rates also adds a great deal of uncertainty to the mix but, if truth be told, the inevitable 1/4 point rate hike will not have that much of a significant affect on mortgage rates. But given the concept of the wealth effect, unfortunately the psychological impact of a change in rates to the upside could be more powerful than any reality.
The fact that corporate earnings have disappointed, that companies are announcing layoffs and that the stock market in the U.S. has shown recent weakness combine to impact the psyche of Americans who may begin to question whether a recession is hiding around the corner.
And finally, forgetting about geopolitics in general, we have China! Is the economy and consumers there, long held out as a driver for global growth, in some kind of death spiral? Has the wealth effect there in the form of falling real estate values and a declining stock market been irreparably damaged? And has the devaluation of the currency there that makes U.S. real estate more expensive for the Chinese to buy going to have a direct effect on the volume of cash buyers of real estate here?
Of course there are no certainties and economic growth along with the proverbial wealth effect could simply be taking a short respite before resuming an upward climb, or….
To be continued!
Article written by Michael Haltman, President of Hallmark Abstract Service in New York.
HAS is a provider of title insurance in New York State for residential and commercial real estate transactions.
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