Rates and RE Prices


#1

He makes some good points. Home prices tracked inflation until the early 70’s. Interest rates have been in a downward trend since then and have bottomed. The downward trend in rates won’t continue. He argues that means RE won’t appreciate as much in the future as it has in the past.

I think there are some other variables his thesis is ignoring like supply and demand. We have population growth (some areas are growing faster than others) increasing demand. Some areas freely create supply while other areas go out of their way to hinder new supply. If he’s right, it only makes sense to buy RE where there’s population growth and supply is restricted. Fly over states will be a terrible investment for appreciation going forward.


#2

Stocks aren’t safe in a rising interest rate environment. Kevin lived in Canada the 70s, doesn’t understand the BA. Real estate skyrocketed with rising rates.
If not stocks of RE, Where do you put your money? Gold or bitcoins … lol


#3

There was massive inflation in the 70’s. That’s why they kept raising rates. They were trying to control the inflation. Inflation is good for housing, because replacement costs increase. Also, we can’t really get inflation without wage increases. Wage increases are good for housing too.


#4

Well, let’s differentiate investment buying vs owning for personal consumption. When it comes to personal consumption there is a sense of pride and accomplishment that one can’t and shouldn’t really put a price tag on or can quantify it down to a pro/con chart. To literally own the roof over your head, so that no one can make you move as long as you pay the mortgage, is priceless.


#5

Rising rate is not good or even bad for all the major asset classes except gold and Bitcoin.

When interest rate rises, bond will be bad, stocks won’t be good, RE also won’t be super good after deducting inflation. You can buy gold and even Bitcoin to preserve wealth, but your timing could be wrong and end up with worse results.

I think it’s best to own rentals with positive cash flow and a fixed rate mortgage. You can simply forget about the market. Your fixed rate mortgage is your weapon to attack the rising rate and potentially stagnating real price. Your nominal price can still go up with inflation.


#6

2-4 unit building fits the bill…not too big and hard to manage personally and not too small where positive cash flow may not be achievable.


#7

RE prices will go up in the BA due to supply restrictions. Interest rates be damned. Only a recession will kill the golden goose.


#8

If the 10 year treasury has started a decade long rising rate, we’ll be in big trouble. We are used to the falling rate for the last 35 years. If we are going to have a 35 years of rising rate from 1.5% to 15%, we may get a lot of shocks along the way.

But I suppose that Fed and other central banks will try their best to control inflation. So we may have a peak 10 year rate of 4% and then it stabilizes.


#9

4% won’t hurt BA real estate. May have some effect on the Stock Market


#10

Today wsj houses have a cap rate that’s equal to half of 10 year treasury yield. When 10 year yield rises to 4%, that wsj house may have a cap rate one third of 10 year.

Rent is too low from this point of view.


#11

Maybe but only a few on this forum are investing for cash flow…
Just go hundred miles to Stockton or Sacramento for 5 caps and above


#12

No need to do that; I achieved 5 cap or better with all my east bay investments. Even the Walnut Creek House i bought last year was 5 cap.


#13

Do you include maintenance, management, reserve or vacancy ?


#14

4% to 10yr Treasury leads to 5.75% or 6% fixed rate which is pre-2006/7 level. But core bay area home prices skyrocketed way beyond those peak 2007 level.

For example lowest appreciation, say 1.25M homes in 2007 hiked to 1.4M or 1.5M now. The homes I missed buying during 2007 was around 1.5M, but equal homes sells now at 2M or 2.1M level.

Unless buyers are having more cash down, it is hard to meet 35% DTI qualification.

When stock gets affected, it affects local RE buyers cash reserve as BA is mainly depended on stock cash. Competition gets reduced and prices will come down.


#15

Um…

  1. maintenance: did not take that into account but average is $75 per unit per month. Ok maybe that will drop it by a couple tenths of a percent.

  2. management: none. My labor only. However, HOA dues are already taken into account

  3. reserve: not quite sure what that means…

  4. vacancy: never was anything vacant. Although one condo did burn down and I lost over a year of rent. If you have to include that my overall cap rate should still be above 5 percent.


#16

Rent is directly proportional to inflation.
Effect of inflation on price of house is more complicated.

  • Higher replacement cost
  • Higher mortgage rate
  • Lower demand
    Net net could be up or down :slight_smile:

#17

Reserves cover long term repairs like roofs…usually not included in cap calculations because they can be handled by appreciation. I figure management knocks off .5% if it is 5% a year


#18

I thought the standard definition for,

Cap rate = Rent less expenses, excluding mortgage interest, property management and asset purchases/ enhancements (so exclude accrued roof replacement & remodeling)
(Accrued) Cash flow = Rent less all expenses including accrued expenses (vacancy is an accrued expenses)


#19

Ok yes I think my overall cap rate should still be beyond 5% after those are taken into account. The only real big ticket item within the last 4 years was replacing a sewer lateral which cost me $15k (yes, someone ripped me off). Ok I’ll make a more precise calculation and report back.


#20

I already have a spread sheet for computing cashflow… I think elt1 is not consistent with the definition of cap rates… if details, should be talking about accrued cashflow… Just replace the figures for your house… elt1 keeps talking about roof, remodeling of kitchen is more expensive unless he is using very cheap stuffs that must be replaced after 10 years…

Cashflows for 30 years