2017 promises to be an interesting year for real estate investors. Will the bulls continue to run rampant driving up prices or are the bears going to finally come out to play? Although real estate is market specific (for example Detroit vs. Denver) there are 3 underlying macro trends to watch that will drive real estate in the coming year. All three of the trends are interlinked in one way or another and will provide the answer if the bull continues or the bear takes the stage.
First, treasuries could have the largest impact (see: CO biz article: think rates will stay low; think again) . Most consumer rates are correlated to the 10-year treasury. The 10-year treasury has been decreasing in value and therefore rates on consumer products have increased drastically. For example mortgage rates on 30 year fixed rates have increased from 3.5 to 4.25%. Why is this important? Assume you lived in Denver where the median home price is now 400k, for a conventional mortgage you typically put down 20%, so in this case your mortgage would be 320k, based on a .75% increase in rates your payments just increased by 200/month. Not only will the mortgage be more expensive, you also would need to have higher income to qualify for the loan. If rates increased to 5%, a borrower is looking at an increase in their payment of 400/month.
Second, Geopolitical risks could impact both incomes and rates (see Bloomberg article). There is considerable global uncertainty both domestically and abroad. Uncertainty is typically not good for businesses as most businesses delay major capital projects and many pull back spending all together to brace for the unknown. This unknown could be tariffs, changing of trade agreements, embargos, etc… none of which give multinational companies the warm and fuzzy feeling. If businesses and/or governments react or overreact to these unknowns this could have serious economic implications for the US and our trading partners around the world. The geopolitical risks will also impact rates. For example if the new Chinese leader needs funds to prop up the Chinese economy, they will likely sell treasuries further decreasing their prices and raising borrowing costs for American consumers. How this plays out will no doubt impact the US economy.
Third, stronger Dollar (see economist article). The dollar has increased 40% since its lows in 2011. Why is this important. A stronger dollar makes imports less expensive (ie: one dollar is able to buy more products built abroad) and US exports more expensive. This strengthening dollar will hurt US manufacturing and any companies that are exporters. It will further make US products more expensive for our foreign trading partners. Furthermore foreign buyers are a large driver of real estate in the US having purchased over 102.6 billion in real estate from April of 15 to March 16 (source CNBC). With a stronger dollar, foreign buyers purchasing power will be eroded ultimately leading to less foreign investment.
Treasuries, geopolitical risks, and a stronger dollar will all weigh on real estate in 2017. Each of these items will undoubtedly impact other variables. How each of these risks play out is the wild card, but there is no question that 2017 will be full of volatility and uncertainty. It remains to be seen if the bulls or bears will win in the upcoming year.
- Mortgage rates rise:bankrate.com
- Think Rates will stay low: Think again: Colorado Biz Magazine
- It is the most volatile year since WW2: Bloomberg News
- Why a strengthening dollar is bad for the world economy: The economist
- Foreign buyers flood US real estate: CNBC
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).