Like any investment class, prices are cyclical. However, the underlying fundamentals of the housing market suggest a price drop remains years away. Currently, demand remains elevated, and housing starts are approximately 50 percent of the peak in the middle of the last decade. Many of the new homes coming out of the ground are Class A apartments in urban core submarkets.
You can rest assured that the housing market is acting on normal market forces, whereas the stock market is moving largely on speculation and emotional trading rather than underlying corporate earnings. This unsteady volatility of the market strengthens how important it is for investors to diversify away from the stock market into other more stable asset classes like real estate.
As HomeUnion’s director of research, I expect home prices to climb next year, albeit at a slower pace than this year. Additionally, appreciation is anticipated to double the rate of appreciation. Freddie Mac, in its September Outlook report, called for home prices to climb 4.7 percent in 2017. That forecast is more aggressive than ours, but reaffirms that capital tied up in real estate investments will support appreciation and rental returns for investors.
With home prices set to stay stable for the next couple of years, investors may find themselves asking…
“Should I wait for prices to retreat?”
Since prices are based on current supply and demand fundamentals, avoiding investment homes means avoiding opportunity.
In today’s low interest rate environment and with uncertainty in other investment classes, single-family homes can be a great diversification opportunity. Even during recessions, single-family homes have continued to perform, particularly during low-supply conditions. People will continue to rent homes, and rents typically perform better than equities during recessions. As we’ve seen, since 2008, national rents have drastically increased, which provides solid income for those taking the opportunity to invest in real estate.
Meet the Expert
Steve Hovland is director of research for HomeUnion, a remote real estate investment and management firm. He has over a decade of experience researching investment real estate trends and economics, and recently won HousingWire’s 2016 Rising Stars award.