Happy Friday! Welcome to The Realty Report, your go-to source for the latest news and insights on the real estate market. Whether you're a first-time homebuyer, an experienced investor, or simply interested in keeping up with the market trends, we've got you covered.

"The wise young man or wage earner of today invests his money in real estate." - Andrew Carnegie

Market Data Update

What’s Going On?

Let’s get to it

• In March, the annualized inflation rate, measured by the Consumer Price Index, decreased to 5% from 6% in February.

• Pending home sales have decreased by 19% compared to the same period last year.

• Rate locks, which allow borrowers to secure a mortgage interest rate, increased by 43% in March compared to February, likely due to declining interest rates. However, rate locks are still down 37% from last year.

• The Mortgage Bankers Association's mortgage credit availability index increased by 0.4% in March, indicating a slight loosening in credit standards. However, the increase is primarily associated with jumbo loans.

• Mortgage applications increased by 5.3% last week compared to the previous week.

• CoreLogic forecasts that home prices will increase by 3.7% from February 2023 to February 2024.

• The FHA approved a 40-year mortgage term for homebuyers in May.

The Breakdown

While the inflation rate is trending downward and mortgage applications are on the rise, the housing market is still facing significant challenges. Let’s take a step back and look at the data holistically. There are two forces at play: Supply and Demand.

On the supply side, inventory is historically low, with the number of new listings on the market continually declining. Many homeowners have a 30-year fixed mortgage rate below 4%, which gives them little incentive to list their houses and buy another home with a higher interest rate. This trend has led to fewer homes on the market, making it challenging for potential homebuyers to find available properties.

On the demand side, pending home sales have decreased by 19% compared to last year. Record high home prices, rising inflation, and mortgage rates have made homes unaffordable for many potential homebuyers, forcing them to rent until housing affordability eases with lower home prices, interest rates, or both. The Federal Housing Administration (FHA) has also proposed a solution to help with home affordability concerns by approving 40-year mortgage terms to help lower monthly payments.

In Economics 101, downward pressure on supply results in higher prices, while downward pressure on demand results in lower prices. However, with both low supply and demand, the impact on home prices is uncertain. The US has a housing shortage, which means that even if there are fewer buyers in the market compared to last year, there are still plenty of people looking to buy. This excess demand could explain why the housing market is still relatively stable with rising mortgage applications despite the higher interest rates.

However, this does not necessarily mean that home prices will continue to rise. National home prices are still lower compared to last year due to various factors, indicating that sellers don’t have the same leverage over buyers as they did before. Homeowners are also disincentivized from listing their homes due to high interest rates. That could imply that people currently listing their homes may have to sell out of necessity, giving homebuyers more power to negotiate. This situation may result in home prices remaining relatively flat throughout the year.

_{Important Note: The above passage is our commentary and opinions about the real estate market, NOT financial advice.} 

Investing Tip Of The Week:

Investing in REITs vs. Physical Properties

Real Estate Investment Trusts (REITs) and buying physical properties are two popular methods of investing in real estate. Both options have their advantages and disadvantages, and it's important to consider them before making any investment decisions.

Investing in REITs provides instant diversification as each REIT owns a portfolio of properties, including commercial buildings, residential houses, or a mix of both. Buying a share of a REIT allows you to spread your risk across multiple properties, reducing your exposure to risk in any single property. Additionally, REITs are professionally managed, so you personally don't need to worry about the day-to-day operations. You simply invest your money and collect your return. Another advantage of REITs is that they provide liquidity. REIT shares are traded on the stock market, which gives you access to easily buy and sell them whenever you want just like other stocks. This makes REITs a more flexible option than physical properties, which are relatively illiquid.

However, investing in REITs also means giving up some control and potential returns. Since REITs are professionally managed, they charge a high maintenance fee, which can eat into your returns. REITs also trade on the stock market, which means their share price can be affected by daily fluctuations in other market conditions. Lastly, investments in REITs do not provide the same tax benefits as physical properties. Rather, your investment is treated like the purchase of a stock that pays a dividend and is subject to tax.

On the flip side, buying physical properties provides more control and the potential for higher returns. You specifically choose the property you want to buy and get to decide how it’s managed. One of the major advantages of buying physical property is access to debt coupled with appreciation. For instance, if you buy a $300K house with a 20% down payment of $60K and the property appreciates by 5%, the house is now worth $315K. The appreciation of $15K on your initial $60K investment is a 25% return! You will not see returns that high by investing in a REIT. Other key advantages of investing in physical properties include recurring monthly cash flow and tax benefits. Basically, you get to earn money and keep it too. Pretty sweet huh?

Obviously, buying physical properties requires a larger amount of upfront capital than necessary to buy REITs. It also takes time and energy to research the housing market and directly manage the properties. Essentially, ownership of properties is an active investment whereas REITs are a passive investment.

Ultimately, the decision between investing in REITs or physical properties comes down to individual goals, preferences, and financial situations. It's important to carefully consider the advantages and disadvantages of both options and heavily educate yourself before you dive in.