Open any browser window to any news outlet of just about any persuasion and the headlines will scream at you: The Bust is Coming! The Next Housing Crisis! Read the coverage associated with these headlines and you’ll learn that the “new” housing crisis is composed of two separate but entwined issues: a lack of affordable housing in many of the country’s most desirable metro areas and buyer certainty that historically low interest rates create the only market environment in which they can possibly purchase a home, regardless of current financial circumstances or their long-term plans for ownership.
About one in every two Americans considering buying a home “spontaneously mentions” low interest rates, according to data released in conjunction with the University of Michigan’s most recent Consumer Sentiment Survey. UM researchers say this figure indicates nearly half of all Americans believe their ability to buy hinges almost entirely on the Federal Reserve keeping interest rates low.
In fact, half of the home-buying population actually tends to view housing prices as largely irrelevant to the timing of their purchase decisions, the UM survey showed. Only 25 percent of Americans said that low housing prices were a good reason to buy a home. It’s a good thing, too, since housing prices, particularly in the existing single-family home sector, continue to head skyward with limited new inventory in most metro areas, meaning that low interest rates are increasingly the linchpin in keeping housing affordable and accessible to families earning median income.
With developers opting more and more frequently to add inventory in the second- and third-home market sectors rather than the “starter home” sector, this trend is likely to continue and even spiral out of control in particularly hot markets like those on the West Coast, where median home prices in some metro areas hover near $1 million.
So how do these issues combine to create the threat of another housing crisis? A lack of inventory accessible to first-time buyers creates an inherently top-heavy market, while buyers making purchases because of external factors, like low interest rates, rather than “internal” fiscal readiness in their checking and savings accounts, create a population of homeowners perpetually poised on the brink of disaster.
According to the MacArthur Foundation’s 2016 “How Housing Matters” survey, more than half of all Americans (53 percent) have struggled at some point in the past three years to pay their mortgage or rent. The real crisis looming is not necessarily another housing bust (although certain regions of the country certainly could experience such in the next two to five years), but that even an incremental increase in unsustainably low interest rates could bring about an abrupt halt to housing growth.
Another looming housing crisis is a potential crisis of affordability across the board. That is where real estate investors in today’s market can, will and should shine.
In markets where starter-home inventory is lacking—or if and when interest rates begin to rise and scare off (or push out) conventional buyers—real estate investors can serve the community in a real and also profitable way by providing creative access to affordable housing.
Creative deal structuring both in purchase and rental terms will play a huge role in sustaining housing growth in the coming years. Also, as always, any market in distress will continue to represent serious opportunity for a well-prepared, well-researched investor.
Cash-flowing, turnkey rental opportunities—particularly in the Midwest and Southeast—represent an ideally flexible, revenue-generating model for both active and passive investors. Investors hoping to participate in particularly tight markets may also leverage lease-options, seller-financing and even subject-to transactions to lower the barrier to entry for both themselves and their buyers.
The strength of independent, entrepreneurial investors will be in the future, as it has always been, the key to housing stability and growth on both national and local levels.
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