For most people, there are two reasons real estate investing can be so attractive.
You can be as active as you’d like, buying and managing properties or renovating and selling them in a flip for profits. Or you can take the passive approach, letting others manage affairs while you enjoy the income in the form of dividends, for instance, as an investor in shares of real estate investment trusts (REITs).
Regardless of how you choose to invest in real estate, you have to pay attention to what’s happening in the big world around us. Change is always afoot, and when we’re talking about a long-term commitment, it’s particularly important to watch the trends and then make your best interpretation of how they’ll affect your current and future investments.
Here are a few thoughts on some of those megatrends and why it might be a good time to keep a “megawatch” on them.
Watch rates with interest
As the chart above shows, it took a long time for interest rates to get as low as they did in late 2021 before they began their rapid rise this year. How fast and how high they go now will make a big difference in the real estate market, especially housing but certainly for commercial real estate as well.
For example, a monthly payment of $1,073 on a 30-year note at 2.99% rises to $1,184 at 3.99%, and we’re already there. Watch this figure closely. The effects will be profound, both on your personal investments and the markets you’re watching. When it’s more expensive to borrow, it’s more expensive to build and expand and manufacture, and all those costs get passed on to the end user.
From the investor perspective, that can make providers of essentials such as groceries and gas — and the real estate they occupy — look more attractive and stable. Look at businesses that held up well during the pandemic collapse for possible winners here, beginning with companies like Realty Income and Kroger.
Keep an eye on affordability, wages, employment, and foreclosures
The National Association of Home Builders (NAHB) recently calculated that every $1,000 jump in home prices pushes about 150,000 households out of the market. Other reports say that about 60% of renters can’t afford to buy a home in their own city.
Meanwhile, employment levels and wages are rising but, for the latter, not as fast as inflation in many places. Altogether, it’s a good idea to keep an eye on affordability in the areas you’re considering investing. One clue that it might be an issue is if you see foreclosures on the rise. Predictions of a return to a foreclosure crisis during the pandemic never materialized, but that doesn’t mean it’s not something to keep watching. Things can always change.
Watching for a bubble
House prices continue to rise at a breakneck pace even as sales levels begin to show some signs of slowing down. This can’t go on forever, of course, and some Fed economists have just released a report that speaks to how fundamentals have become disconnected from price hikes, i.e., a bubble.
While the consensus continues that the fundamentals now are much different from the Great Recession housing collapse, that may just mean the deflation in prices and sales will be more gradual. The best investing advice here might be to avoid paying too much in overheated markets.
Easy to say, right? For guidance, keep an eye on such studies as the Buying vs. Renting Housing Index regularly updated by a group of economists based at Florida Atlantic University.
Speaking of renting, rents are on the rise, too, especially in the hottest markets. The big operators make great sense as an investment since they have the scale and savvy, presumably, to operate profitably in this environment. Considerations here include AvalonBay Communities and Equity Residential.
A shortage of housing nationally should help prevent a dramatic bursting of the bubble, but where the demand goes bears watching.
Remember: location, location, location
With apologies to Horace Greeley, instead of “go West,” it might be time to “go Midwest” for those thinking of getting ahead of the megatrends. While people and the businesses they work for and own are migrating in great numbers to the Sun Belt, less-expensive areas — many of them in the central U.S. — may soon emerge as the next hotspots.
Remember, growing numbers of people can live pretty much anywhere and do their jobs remotely. That’s only going to become even truer as broadband access quietly and inexorably pushes further into rural areas. Already, small and midsize cities across the heartland offer a much lower cost of living, and the schools, housing options, and other amenities make one think they won’t be overlooked much longer. Investors might want to get ahead of that curve now.
By the way, Equity Residential’s chief executive officer already sees trouble ahead and has sold off a lot of the company’s Sun Belt apartments because of what he sees as a coming supply glut. That’s strategic thinking in action. And as an individual investor, buying shares in companies like that give you liquidity and transparency not easily accessible through other investment channels.
Follow the supply chain
It’s not just people moving inland — companies are, too. The supply chain disruptions caused by the pandemic helped accelerate that trend. One good example of a market where that’s happening is in Columbus, Ohio. There, Intel just announced a $20 billion chip-plant project in the far exurbs that will have a strong ripple effect in all kinds of real estate for miles around.
Move fast to take advantage of those big splashes but keep an eye out for others. Local brokers are a great source for that info if you have the wherewithal to get involved directly. And there are a number of industrial REITs that are responding to that opportunity as well.
There will always be an aging population
It’s old news that the boomer generation is aging and in growing need of medical care and senior-living options. The next big generation after that, the millennials, is not far behind, of course. Investing options are plentiful here, including long-term success stories like hospital owner Medical Properties Trust and senior housing giant Welltower.
Is a (sea) changing world the ultimate megatrend?
Miami is wrestling with the idea of building a 20-foot seawall. A major South Carolina hospital has decided to move off the vulnerable peninsula in Charleston Harbor. Tropical systems batter our coasts with growing intensity. Water shortages threaten the fast-growing Southwest. Wildfires grow worse every year in a growing list of states.
You get the picture. If you think these are all a growing reality, these are megatrends you need to follow. They can help inform where you want to live, not to mention invest. For instance, maybe a small town near the Great Lakes and still close to major transportation infrastructure might be the ticket.
That’s just one example of beginning with the big picture. Let what you see from that 30,000-foot view help you focus on exactly what you want to do down here on the ground.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.