Investing in American real estate and, in particular, in rental housing has always been considered a guarantee of stability and constant income. But what if suddenly there is an economic crisis, again — a question that worries many. And we’re here to figure it out. In this article, we talk about why 2008 won’t repeat itself and how income generating real estate works.
Will there be a crisis?
We often forget that the US real estate market is not the same as it was in 2008. And to predict the future, you need to learn from the past. It is impossible to build reliable hypotheses if we want to understand the future of the US real estate market, and we take the 2008 subprime crisis as a starting point.
Then it all started with the abbreviation ARM (Adjustable-Rate Mortgage). Before 2008, mortgages at these rates, even without a down payment, were available to applicants with low or very low credit profiles and irregular incomes.
This is no longer the case in our time. The mass practice of risky mortgage loans is a thing of the past. In particular, the notorious ARM has been reformatted and is now used on completely different conditions:
- There are restrictions on the increase in interest rates over time
- The applicant must provide evidence of their financial solvency even with a possible high interest rate
- Full documentation required
- Advance payment required
- Mortgage is not possible with a credit rating below 620
During the real estate bubble, before the 2008 subprime crisis, mortgages at the best rates were offered to applicants with a credit score of 620-640. Today, the average rating of those who receive a loan at this rate is 751.
How is US real estate reacting to economic downturns?
Let’s take a look at what happened to US house prices and transaction volumes during ‘standard’ economic downturns.
Strange as it may sound, a recession does not necessarily imply a negative real estate market. In fact, it usually has the opposite effect.
- Only twice, in 1990 and 2008, did US home prices fall
- In 1990 — less than 1%
- In 2008, the economic crisis itself was due to the collapse of the real estate market
The real estate market is a sector of necessities, and whether it rises or falls, people will always need a place to live. And since it is a basic need, it becomes a deterrent to price volatility.
In the US, rents are independent of home prices, and the 2008-2009 figures confirm this.
If we analyze trends in the real estate and rental markets during the 2008 recession, the biggest decline in home prices, we find that rents did not follow the general trend. Income generating real estate exists outside of time frames because people rent at all times.
High demand versus low supply
Like all other markets, the real estate and rental markets are also based on supply and demand.
In theory:
Low demand and high supply = lower prices
And vice versa:
High demand and low supply = rising prices
What is the current situation in these two US markets and what can we expect soon? To answer this question, it is best to start by looking back at the real estate boom before the 2008 crisis.
What happened before 2008?
- An incredibly high level of availability of housing for sale — high supply characterized the peak of the market before 2008
- Despite the affordable supply, during the real estate bubble, there was a rapid increase in prices
- People bought a second or third home to capitalize on the real estate boom by simply taking on another mortgage
- High supply and high demand — rising prices and abnormal situation
The post-crisis wave of housing deprivations has led to an even greater increase in supply, which, along with a simultaneous reduction in demand, has led to a rapid price adjustment.
What is happening now?
The cost of renting a home in the United States in 2022 increased by 7.4%, while from January to March, the growth rate was very active, amounting to 17% from January to March. Then, from April to December, rent gradually became cheaper. As a result, the average rate for rental housing in the US in 2022 averaged $2,000 per month.
Already in 2020, there was a huge shortage of new housing, with the cumulative shortfall reaching over 5 million.
Between 2012 and 2013, up to 500,000 new homes were built. However, rising demand and other circumstances have caused this number to drop to less than 5 million. Although the number of homes under construction began to increase in 2021, today the number of new buildings is still 5.24 million less than the number of households.
So why are real estate sales falling?
Now we are seeing a steady slowdown in the resale of existing real estate — people are not buying houses, but new housing is not being built either. At the same time, income generating real estate is still working and bringing money to the owners. The United States is characterized by a chronic lack of supply in the housing market.
After the recession, the sharp decline in mortgage rates allowed homeowners to keep their existing loans. This quickly changed them to new interest rates as they were adjustable rate loans — instead of the owners moving house and taking on a new mortgage.
Construction of new housing is falling and this is due to the following factors:
- Decreased interest in risk among developers and banks
- Lack of trained specialists
- Rising costs
- Tight control over credit policy
Conclusion
Today, under any economic scenario, investment in long-term rentals in the US is up against financial fluctuations. They can stabilize well-being and provide a steady income.
In conditions of instability, diversifying part of the investment portfolio into reliable investments becomes a strategic choice. If this choice is made in favor of investing in real assets capable of generating an annual net return of 6% to 11% from day one, this will really help turn the tide.
Long-term rentals in the US can provide a steady income. And this is no coincidence: for some types of real estate, more than 80% of residents are tenants, and these people will always need a roof over their heads.
American real estate is still attractive, and necessary – despite the forecasts, it remains an income generating real estate. A house or apartment is an investment in your future, stability and income. Sign up for a consultation at LBC Mortgage to understand mortgage financing and purchase real estate that will provide you with income!
