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2022 wasn’t a fantastic year for investors across the board. The stock market fell 16% year over year, with several dips into bear market territory. Real estate didn’t fare much better. The median home price reached its highest point in history, then came down quickly as home buying shuddered in a high-inflation, high-interest-rate environment.
The high prices, high cost of borrowing, high competition, and tremendous economic volatility mean a lot of real estate investors have stayed on the sidelines over the last few years, waiting for better buying opportunities. The good news is that 2023 could be the year real estate investing explodes once again. Here’s why.
Red-hot real estate markets are great for those who already own investment properties because they benefit from rising values and higher demand. But it’s not the easiest time to acquire new properties. High competition means you’re battling multiple offers that often exceed your desired purchase price. It also means you’re likely paying more for the property.
Price isn’t the only factor that impacts the profitability of a real estate investment. Demand, cash flow, and cost of borrowing are also important factors that directly determine an investment’s return. But the price is a big piece of the equation. Prices are still positive, but many experts and analysts predict a negative trajectory for 2023.
Goldman Sachs is predicting home price growth could stumble to 0% in 2023. Other analysts are more optimistic, saying demand and prices could continue to grow as long as rates don’t keep climbing.
We’re already seeing a notable decrease in demand and, thus, less competition in the marketplace. There’s also been a major uptick in inventory, helping ease the rate of home price growth, a trend that will likely continue in the new year. 2023 has all the signs for a decelerating housing market that may or may not be accompanied by a recession. Meaning it could be a tremendous buying opportunity to purchase rental homes at a discount.
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Prices may be more affordable in the coming year, but rising interest rates will still be an issue. The Federal Reserve has taken a hawkish stance on the continued hike of the federal funds rate in 2023. The federal funds rate doesn’t determine mortgage rates, but it does impact them.
At the start of December, mortgage rates were around 7% for a 30-year fixed-rate mortgage on an investment property. That could easily climb another two to three percentage points in the coming year if the Fed continues to hike rates to cool inflation. Higher interest rates translate into a higher monthly mortgage payment, which eats into the cash flow of the property.
Rental demand is also falling. This means investors should be extra cautious when running their numbers on an investment property in the coming year because the rental rate you secure in 2023 could be a lot lower than market rents today.
But those factors shouldn’t stop you from investing. Rental vacancies and home-buying demand were at one of their lowest points in history during the Great Recession. Yet the years following were among the best times in history to purchase real estate property. We’re still a long way off from seeing a major housing correction as we saw from 2008 to 2012.
The key is to focus on cash flow and risk mitigation as you’re buying. Those who purchased the property with the long term in mind have been rewarded handsomely over a 10- to 20-year period, and it’s likely 2023 could bring similar opportunities.
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