How Has Market Volatility Affected Your Real Estate Investments? What Can You Do To Capitalize?

If you’re invested in the stock market, you’ve probably experienced plenty of volatility given the wild swings we’ve seen through the first half of this year. Lucky for you, the fact that you receive these letters means you’re invested in real estate. While real estate investment is by no means immune to volatility, its proven time and time again to be one of the most robust assets available in times of economic instability. So how has this year of volatility affected your real estate investments and how might you be able to capitalize in this rapidly changing market?

How Has Market Volatility Affected Your Real Estate Investments?

You’ll be pleased to know that your portfolio in the Denver Metro Area remains UP 11% for the year (DMAR Market Trends Report – Aug ’22). This is after a month-over-month decline of around 3% from June to July, so the outlook for the remainder of the year is a little murky. My hope is that prices will stabilize and we’ll end the year up around the +10% mark.

The drop that we saw between June and July was solely due to mortgage rates climbing from around 5% to around 6.25% in a short amount of time. This caused a massive shock to the system and a lot of buyers were quick to bow out – or were caught off guard after going under contract – causing many transactions to fail. 

That then left many sellers in a state of panic (supported by overly pessimistic media), quickly dropping prices or getting negotiated down thinking the bottom was about to drop out.

For anyone paying attention, this jolt was of little concern and became a major opportunity. The mortgage market was simply reacting to RUMORS around an upcoming Fed decision and anticipating a hike to the Fed Funds Rate of only 50 basis points (0.5%) instead of 75 basis points (0.75%). This caused mortgage rates to climb at an alarming pace, since the general sentiment was that 50bps would not be enough to level out or reverse rising inflation.

Contrary to popular belief, mortgage rates do not run parallel to the Fed Funds Rate, but instead run parallel to inflation (there are plenty of other factors that move mortgage rates, but this is a good rule of thumb as explained to me by an expert in the field). With that, the mortgage market was simply anticipating a longer, more intense period of inflation due to lackluster action from the Fed. This was quickly dispelled as the fed did in-fact raise the Fed Funds Rate by 75bps and mortgage rates began trending back down almost as quickly as they went up, only now with wild swings almost day-by-day at nearly 0.5% either up or down (translating to about $25,000 in buying power for the average buyer in our market).

The level of volatility that we’ve seen in the mortgage market this year seems to be relatively uncharted territory but to me signals a market that is chomping at the bit to bring rates to a level that supports healthy demand. For buyers that agree with this sentiment – or better yet, cash heavy buyers with little to no need for a mortgage – this market is easy to navigate and full of nothing but opportunity.

To best understand this, it's important to recognize that outside of mortgage rates, all other real estate fundamentals have remained mostly unchanged in our market. Housing supply remains low, new construction has LOST pace due to inflation and jobs and wages continue to rise - leaving mortgage rates as the only factor to stifle demand for the foreseeable future. Now, with inflation looking to level off, mortgage rates should do the same and will be quick to drop as long as indicators show inflation dropping as well.

In the meantime, savvy buyers can work to negotiate mortgage buydown points from sellers (bringing their mortgage to the low 4% level where rates were when buyers were bidding prices upwards at chunks of $50,000-$100,000 at a time) and cash heavy or cash only buyers can negotiate prices and terms that were unheard of 4-5 months ago. At the same time, savvy sellers can build mortgage buydowns points into their price to spur a faster sale without having to rely on large price reductions to find interested buyers.

When you look at the math behind this you can see how this truly becomes a win-win for both parties. Spending around $10,000 on mortgage buydown points would have a similar effect on a buyer’s monthly payment as a $40,000 price reduction. While the price reduction would be great for a buyer and a good place to start negotiations, the mortgage buydown is the perfect rebuttal for a seller and achieves the same desired result for most buyers in the market by lowering the monthly payment to a more palatable number. 

For a lot of agents this negotiation tool is completely foreign but it's quickly catching on as the market works to adapt.

All told (in spite of what we’ve seen in the media), the broader economic conditions that we’ve experienced so far this year have had minimal impact on real estate in our local market. With a shock to the system, buyer sentiment has fallen due to rapidly rising mortgage rates, but this is easily navigated if you can chart the path to the right solutions. Buyer sentiment will likely remain low and keep a large portion of the buyer pool on the sidelines, leaving the market full of opportunity for the keen and well informed. Even then, the market seems to be adapting quickly and mortgage rates look to be on the downward trend which should be enough to keep the market afloat for the rest of this year with a steady return to the crazy levels of growth likely as mortgage rates edge lower into 2023 and 2024.

What Can You Do to Capitalize?

To capitalize in this market you should first understand and outline what your overall goals are surrounding your real estate investments.

For many, the best way to capitalize on the current market is to do almost nothing, but be sure you’re keeping up with the steady rise in rents. According to Apartment List, average rents are trending upwards at 8%-14% across the metro area for the year (on top of the 18% from last year) so try not to fall too far behind the curve even with your favorite tenants.

If you’d like to add to your portfolio, don’t get caught with the rest of the crowd sitting on the sidelines and waiting for the opportunity to come find you. If you’re only buying when everyone else is, you’re probably missing out on the best opportunities. Explore different options for financing and talk with a wealth manager for some direction on creative solutions that can help you properly leverage your current holdings to add more (do NOT overleverage yourself though!). I have some great referrals on that end if you need!

If you’ve been thinking about consolidating or upgrading your rentals, consider utilizing a 1031 tax deferred exchange to move your equity from older or more run-down properties (especially those in the city and county of Denver, if you keep up with my blog) into lower maintenance properties that provide a better cash flow and a LOT less headache. If done right, selling in this market should have no real downside while buying is FULL of upside potential as outlined above.

Please feel free to reach out to me for expert guidance and advice relative to your particular situation. There’s never any cost or obligation until you’ve made the decision to hire me to help you buy or sell AND I get the job done for you!

I’ve helped dozens of clients work through volatile markets and have it down to a science, so if you own too much real estate, or not enough, remember, I can fix that for you!