Real Estate

This article is from Neal Frankle, CFP

Real estate is interesting. What seems to be happening in many real estate markets is that rents are falling while property prices continue to rise.
 
To me, that signals speculation. Part of what is fueling this speculation is that a hand full of banks are making very risky loans.
 
Some irresponsible lenders are offering loans up $3 million with only 10% down. To add fuel to the fire, they are making loans without giving much weight to borrowers’ other debts or their FICO credit scores. It’s reminiscent of the mid-2000’s isn’t it? This bad lending practice isn’t nearly as wide-spread as it was back then but it’s still dangerous.
 
So, in my opinion, real estate could be vulnerable. This is especially true in places where real estate prices are high, such as in the North East and California. And those expensive properties became automatically more expensive when the income tax law changed making it difficult to fully deduct the state, local, income and property taxes.
 
That’s why I think property prices could decline – especially if interest rates climb.  
 
How far could real estate prices drop? This is impossible to predict. If interest rates go up quickly, home prices could take a bigger hit. If rates only go up modestly, prices may not drop but stay stable. Also, the government could come in and clamp down on the wild lenders I spoke about earlier. That would be a good thing.
 
You know me – I don’t make predictions and I’m not predicting a real estate melt down. But I do suggest you use caution right now. If you are buying property that you can afford and you are buying it as a long-term investment, that could be fine. But if you planning to sell property in the near-term, you might consider doing so sooner rather than later.