Time to Flip? What a Cooling Real Estate Market Could Mean

Posted by Michael Miller on May 14, 2019

The trend of rising home prices we’ve seen the past few years may be starting to slow. However, home prices aren’t dropping—they just aren’t rising as fast as they have in recent history.

Home prices rose by 4.7 percent year-over-year in December, the slowest growth rate since August 2012, according to a report from CoreLogic, a global property information, analytics, and data-enabled solutions provider. Annual average price growth for all of 2018 stood at 5.18 percent, expected to slow to 3.4 percent this year.

Does this mean we are heading toward a buyer’s market, making it smart to flip those investment properties now? At first glance, that might seem to be your best move, but careful analysis of the current rental market could cause you to reconsider.

Single-Family Rentals: A Growing Market

The single-family rental (SFR) market continues to outpace both multi-dwelling units (MDUs) and single home sales. In California, for instance, between 2005 and 2015 the number of owner-occupied homes dropped by 64,000, while SFRs grew by 450,000.

In markets like Phoenix, Boston, and Fort Worth, SFRs are growing faster than MDUs. More households—36.6 percent —are renting their homes than at any time in the past 50 years, according to a Pew Research Center analysis of U.S. Census Bureau data.

If these statistics alone aren’t enough to make you think twice before flipping that house, consider this: 91 of the largest cities in the U.S. saw average rent prices rise in 2018.

Make Way for Market Adjustments That Could Make It Easier to Buy

The rising interest rates are not having as much of an effect on the real estate market as some might have expected. Typically, as interest rates rise borrowing will slow. Higher interest rates make it harder for people to afford the home they want and make people less willing to engage in a bidding war for their dream property.

But in cities where properties are overvalued, such as San Jose and San Francisco, the rising interest rates will only help slow—not eliminate—the bidding wars. When homes are selling in as little as three weeks for more than the asking price, a price drop should not be considered as a negative; it is simply a market correction.

With price increases starting to slow and interest rates rising, it remains a good time to scoop up properties to buy and hold. You might consider doing a cash-out refi on your SFR and using the money to buy another rental property. The rental market is not cooling any time soon, and even if house prices continue to drop, SFRs may continue to be a hot commodity for years to come.

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