By taking a look at past data, trends and historical evidence, we can gain a better understanding of how the market has changed over time. This can help us to predict how it may change in the future.
It’s important for investors to keep an eye on economic things like the interest rate, unemployment rate, and supply and demand of the housing market. Staying up-to-date with indicators and adjusting your strategies as necessary is a great way to stay ahead of the game. As we look towards the future, let’s keep the following in mind:
Your Mindset
When it comes to investing, it’s not unusual to find our decisions swayed by memory bias. That’s when recent events have more of an impact on our analysis than those that happened further back. It can affect our judgement.
When it comes to investing in real estate, it’s important to pay attention to short-term market trends, but not to over-rely on them. It’s wise to consider a broader look at the developments of the last few years so you can make an informed and confident decision.
Investors can gain valuable insight into the value of a potential investment and possible future investment opportunities by taking a closer look at the long-term trends.
The recent economic downturn of 2008 has been fresh in our minds, leaving many investors to focus on that more than long-term, historical data. This is an example of memory bias, where recent events seem to take precedence. The 2008 recession was certainly a rough patch for many, and it had a drastic effect on real estate values in certain parts of the United States. Home values decreased between 15-20% in these areas. It seems that this is in opposition to previous economic downturns, where home prices usually decreased 2-4%. However, the upcoming recession is estimated to be milder and home prices may only decrease by 2%.
Economic downturns don’t need to be seen as intimidating – they may just lead to a period of fluctuation. It’s a natural part of the business cycle.
The U.S. has experienced recessions for nearly 14 decades, accounting for approximately 30% of that period. Fortunately, these occurrences have not occurred in recent years. Since 1945, the average recession has lasted roughly 10 months.
It is wise for investors to avoid allowing bias to lead to the assumption that every recession will be similar to the most recent one.
Interest Rates
When investing in real estate, it’s important to keep an eye on the mortgage rate – it can often have a big impact on how you move forward.
Take recent events into account when making decisions about interest rates, but don’t let them cloud your judgement. Although the current mortgage rates may appear higher than they have been in the last two years, they are actually quite normal when looking at the bigger picture.
Mortgage rates today remain low in comparison to what they have been historically. The average 30-year mortgage rate was about 8.12% in 1991. This rate was even higher in the 70s and 80s, with a peak of over 20% in 1980.
It’s important to keep in mind both the background and how recent events are affecting our current expectations for interest rates.
When considering interest rates, one of the elements to take into account is SOFR. SOFR stands for “Secured Overnight Financing Rate” and is the reference rate that serves as the normal for financial institutions and instruments.
SOFR is used as a benchmark for the cost of borrowing funds. Many commercial mortgage rates are determined by a spread over the SOFR rate, which means that when the SOFR rate fluctuates, so do mortgage rates.
As a real estate investor, it’s a good idea to be familiar with the SOFR forward curve. This tool is invaluable for businesses and investors alike, allowing for predictions of future prices and interest rates.
The SOFR forward curve uses existing and future market information to give you an accurate prediction of what’s to come. By taking a look at different factors such as market trends, economic indicators, and other measurements, this process can give us an idea of how much interest rates might move in the near future. This understanding can then be used to form an expected range of interest rates for the upcoming months or years.
When attempting to comprehend the future market direction, the curve should not be solely relied upon to make predictions. No one or any tool can accurately foresee these matters, however, it can be utilized as part of our data analysis.
As of January 5, 2023, the SOFR forward curve suggests that rates will be at their highest in May of this year, and then start to slowly wane over the next two and a half years, dropping from 4.96% to 3.13% by November 2025. It appears that we have reached a high point in the market, with a forecast of a gradual decrease from this point.
Supply & Demand
According to an analysis conducted by the National Apartment Association in collaboration with the National Multifamily Housing Council, it has been determined that approximately 4.8 million new housing units will be necessary in the next decade and a half in order to meet the demands of the population. The trend of increasing demand is expected to continue, subsequently resulting in rising real estate prices.
Strategizing for Long-Term Success
As interest rates continue to rise and the market remains unpredictable, it can be challenging to make informed decisions regarding real estate investments. Despite the challenges posed by the current climate, it is still possible to capitalize on smart real estate opportunities. Examining situations from a long-term standpoint is of utmost importance. Despite any temporary market changes, there are always chances to capitalize if one knows where to investigate.
For investors, it’s really important to understand how cash flow is affected by fluctuations in the economy. We’ve had recessions in the U.S. since 1908, coming around every 3 out of 10 years. That means that another recession might be on its way soon. When looking at potential investments, don’t forget the importance of positive cash flow. This will give you the freedom to cope with any market changes that come up, while still keeping your finances safe. So, pick investments that will give you a good cash flow.
It is uncertain whether we are currently in a recession. However, recessions are inevitable at some point. With an adequate cash flow and long-term outlook, we can weather any downturns in the market and ultimately achieve success.