The Vail Valley Real Estate market has made some impressive gains over the past few years, leading some to speculate that we could be due for a market correction. If that’s true, should prospective real estate investors be waiting for prices to come down?
First of all, the exact timing of any correction is impossible to know. Whenever it happens, though, it is unlikely to reach the extremes of 2009-10 – a historic event beyond anything tracked in the past 100 plus years.
For some perspective, here’s the Home Price Index since 1976:
Also, while prices may come down, interest rates are currently ticking up – and we don’t anticipate those falling any time soon. We are still much closer to historic lows than the historic average:
Source: Freddy Mac
While a return to 16+ percent (!!!) rates is unlikely in the near future, the more modest increases we are already seeing can be expected to continue as we move further away from the same economic shockwave that crashed the housing market.
What This Means For Real Estate Investors
For real estate investors, gains come from long-term ownership while a tenant (short- or long- term) covers the monthly costs and provides positive cash flow at a desired Return On Investment (ROI). If this is your scenario over an extended period of time, it will be a win for you almost regardless of the initial purchase price or interest rate. But as a rule of thumb, your interest rate is more important to your cash flow – and ultimately your ROI – than your purchase price.
For example, if you are considering a $500,000 purchase with 20 percent down and an interest rate of 4.25 percent, your monthly payment would be $2,251 per month.
Now let’s assume for the sake of this exercise that interest rates rise 1 percent, while home prices come down by 10 percent, bringing your purchase price to $450,000. Financed with 20 percent down at 5.25 percent, your monthly payment would be $2,271 per month.
That 1 percent interest rate increase will cost you $20 per month more than the 10 percent higher purchase price financed at the lower rate.
Disclaimer: The above analysis is based on our team’s 30+ years real estate experience. We don’t have a crystal ball to tell us the future and, as with any financial vehicle, past performance is no guarantee of future results.
If you would like to know more about investing in Real Estate, our team has the experience and expertise to help! Contact us today to get started.