Is it the Right Time to Buy Rental/Vacation Properties?
July 19, 2022
Both domestic and international events and concerns that can cause financial markets to be volatile and somewhat unpredictable are making some ask whether this is the time to explore real estate investments, and for good reason. It’s wise to be informed about the risks — and opportunities — that these kinds of markets may carry.
Shifts in supply and demand across regional real estate markets have created conditions somewhat unique in recent memory. These conditions present some typical and atypical risks and opportunities.
Housing Values On the Rise For Now
The housing market is seeing a significant uptick as prices surge to meet increased demand. As prices continue to rise in metropolitan areas especially, many savvy real estate investors are considering property in places like Montana and Wyoming.
Far from the problems that can come with living in concentrated urban areas (and close to amenities like Yellowstone and other beautiful National Parks), these locations are attractive to investors and those considering purchasing a second property.
Many are considering purchasing vacation homes either as investments or for personal use, and platforms like Airbnb have made subletting much more straightforward than before.
While the housing market is seeing an increase right now, Fannie Mae predicts a cooldown in 2023 with prices climbing just 3.2%.
Few Signs of a Housing Market Bubble
Many may hesitate before entering the real estate market for fear of another housing bubble, which led to the global financial crisis of 2008. This is, of course, a reasonable thing to be concerned with, and due diligence would dictate further examination.
There’s good news for those considering the purchase of an investment or second property. There is plenty of evidence to suggest the current housing market is anything but a bubble. Likewise, there are none of the usual indicators of an overvalued and overstressed housing market.
Lowest Home Inventory in Half a Century
Housing supply is low — at its lowest since the late 1990s — which is sure to protect prices. Home inventory supply is, in fact, at its lowest in over 40 years, with a total of only 1.12 million houses available for purchase. This — and not the easy availability of credit — is the dominant force driving housing prices. Home prices rose nearly 19% last year, which is part of an established upward trend.
Average Borrower Credit Rating Is High
Another good indicator is the average credit rating of those seeking mortgages. Credit ratings of borrowers are now higher than 760, in the fair to excellent range, which is a considerable increase. These borrowers are generally much more financially sound, with debt being the lowest percentage use of disposable income at any time since the 1980s.
High Rental Demand
Despite a recent downtick, the demand for rental properties is higher now than in decades. As hotels in many cities were forced to close due to pandemic lockdowns, quarantines, and other restrictions, the use of rent-by-owner platforms skyrocketed. People turned to sources like VRBO and Airbnb to find accommodation.
Another effect of the Covid-19 Pandemic saw Prime Interest rates dropping to nearly zero. The federal reserve has indicated a willingness to continue to increase rates over the course of the year, perhaps providing some incentive for those looking to mortgage a rental or vacation property to do so sooner than later.
Conclusion: Make the Right Move for Your Situation
These factors show a market displaying many hallmarks indicating quality investment opportunities, despite prevailing overall market volatility and uncertainty. Housing supply is low, which will likely increase the already high demand for rental properties.
With mortgage rates likely on the rise, now may be the time to act for those considering the purchase of vacation homes as well. While the timing may be right, a rental or vacation purchase should fit in with a greater wealth management strategy.
First Western Trust believes that each and every investment, real estate holding, trust, or philanthropic endeavor connects and we would be honored to help evaluate a rental or vacation property purchase decision. Ready to learn more? Let’s have a conversation.