One of the major advantages of real estate investing is the ability to leverage the investment through lending. In other words, when you buy a new home, you’re generally only required by a mortgage lender to come up with 5 to 10 percent of the purchase price. This allows you to “lock in” the full value, while only “tying up” 5 to 10 percent of your resources. This is of most advantage to the buyer when three conditions exist:
- Low interest rates on mortgage loans
- Low prices on new home construction
- The prospect of short and long term market growth
We know that interest rates are at all time lows. Freddie Mac (Federal Home Loan Mortgage Corporation) announced in December that mortgage rates have remained in record lows. The 30-year fixed rate averaged 3.91 at the end of the month – a new all-time low. According to Freddie Mac’s chief economist Frank Nothaft, mortgage rates will likely remain very low, at least through mid-2012.
We also know that housing prices in Utah for new construction have either bottomed out already, or will bottom out by mid 2012. According to the Deseret News, home sales in Utah increased for the fifth straight month through October 2011. This and other statistics indicate an increase in demand in the midst of fewer properties coming on the market. So simple supply and demand put upward pressure on local prices.
Bottom line – the three key market conditions appear ideal for making a long-term real estate investment. Whether that investment is better than the stock market depends on your preferences. But it’s important to consider there has already been a significant rebound in the stock market (the S&P is up 81% since the bottom in 2008), while real estate is right on the verge of bounce back. The stage is perfectly set for those who bet on real estate to do much better in the next five years than those who stick with stocks. And remember, you can’t live in your stock market portfolio!