Real estate investing has rewarded many investors who bought and held properties for years. These assets provide tax advantages, appreciate with inflation and generate cash flow. When real estate investing goes right, you can accumulate wealth with leverage and high-quality properties. However, these same investments take a hit during a housing market crash. The real estate market enjoyed steady appreciation for over a decade since the Great Recession. Housing prices also soared during the pandemic but have begun to stabilize. Investors thinking about buying rental properties may want to stay on the sidelines before a potential real estate crash.
Dark clouds are forming on the horizon and it is important to know the risks before getting into real estate. These are some of the reasons not to buy a home and wait a little longer before investing in real estate.
The Return of Student Loan Payments
As approximately 43.5 million people pay for federal or private student loans, student loan payments resuming after August and will impact the economy. The extra financial burden can reduce the number of buyers in the real estate market. A declining buyer base gives sellers less control over pricing negotiations and can force a downward movement in housing prices.
The return of student loan payments can also negatively impact people’s credit scores. The temporary student loan pause inflated consumers’ credit scores by giving them one less debt to cover. It became easier to make on-time payments for other expenses.
A Federal Reserve Note from 2022 revealed that almost 60% of borrowers did not make a single payment toward their student debt during the pause. Inflation, as measured by the consumer price index, has been decelerating, but prices still remain elevated from when borrowers paid their student loans in 2020.
While this may sound like a problem that only affects borrowers with student loans, the decrease in consumer spending can impact jobs. If companies do not make as much revenue, they may have to make cuts to protect profits. That outcome can result in fewer buyers and force sellers to lower their prices.
The Federal Reserve Is Not Done with Interest Rate Hikes
The Federal Reserve stole headlines in 2022 each time the central bank announced interest rate hikes. While interest rates haven’t accelerated as much in 2023, they are still going up. The Fed is likely to raise interest rates this month and possibly an additional time in 2023.
The one-year change in the Fed rate is extraordinary. One year ago, the Fed Funds Rate was 1.75%. The current rate now sits at 5.25%. Any additional rate hikes will increase the cost of borrowing money and make real estate properties less desirable. Property prices tend to fall as interest rates go up since mortgages become more expensive. A decline in credit scores due to the resumption of student loan payments can further complicate interest rates.
The interest rate hikes won’t be as dramatic as what consumers experienced in 2022. However, with few things going right for the current real estate market, it’s not a welcoming sign for investors.
The Federal Reserve Might Cut Rates to Near Zero During the Crash
Inflation is getting closer to the Federal Reserve’s 2% target. In June, inflation fell to 3% and has been declining for a year. A lower inflation rate can give the Federal Reserve more flexibility to lower interest rates during a crash.
While this may sound strange, with current narratives implying a higher interest rate, history tends to rhyme. The Federal Reserve lowered its rate from 5.25% to 0% in 2008. The linked article is an ominous trip through time that shows how much history can repeat itself.
During the Great Recession, the Fed cited a poor job market and lackluster economy to lower the borrowing costs for companies and homeowners. The economy can find itself in a similar situation next year and prompt the Fed to take decisive action. While record-high inflation makes this less likely, inflation was a big concern in 2006 and resulted in the 5.25% Fed Funds Rate back then.
If the Federal Reserve lowers interest rates in a similar fashion in 1-2 years, it can present tremendous buying opportunities for investors who save up now. The buyer market looks like it will get smaller.
The real estate market currently looks troubling. Things can get worse in 2024. Savvy investors will build up their reserves and wait for a good opportunity.
