I've been Watching This Tree. This picture was taken last fall and I am waiting for a repeat performance this year. It's been 15 years and I never cease to be amazed at the beauty that surrounds me here. This is but one example. This picture was taken at sunrise before sunlight floods the back yard. I can't claim to have done many good works in my 72 years on this planet, so I guess all this is truly a gift, for which I have done nothing to deserve. Just don't tell me it is a random occurrence.
Understanding Real Estate. One thing we may not often consider about real estate. Property values are inextricably linked to interest rates. Some of you might think you know the reason for this but maybe there are other reasons that aren't so obvious. When it comes to personal residences almost everyone gets a mortgage to buy the house. Lower interest rates usually mean more people can afford to buy. This increases demand and causes prices to rise. That's simple. But what about the buyer who pays cash and intends to rent the property out for a monthly income? The value of the income stream received is higher in a low interest rate environment. This is part of what's going on right now. Suppose you have $200,000 to invest and you are in need of income to help cover your monthly expenses. If you can rent the property for $12,000 a year after expenses for the next 10 years, you will receive total income accumulation of $120,000. If you buy a 10-year government bond at the current rate of 2.61% you will receive less than half that or a total accumulation of only $52,200. Give the huge difference in return, you might even be willing to pay an extra $20,000 for the real estate.
What if the property produces no rental Income? Do lower interest rates increase the value of real estate that produces no rental income such as raw land. Consider a case of a $100,000 lot that you might want to buy and hold for resale in two years. In the current environment, you can choose to buy a risk free 2 year treasury bond instead but your yield will be only 0.4%. This means that you will lose out on $800 in interest waiting for the market to improve. Perhaps you might be willing to pay an extra %5,000 for that land.
Wait A Minute! Here we have the lowest interest rates of the past 50 years and we all know property values have been going down not up. So how can low interest rates favor higher real estate values. Nothing is simple. I never said that interest rates were the only factors that affect property values. There are other factors at play right now. Probably the biggest factor is the relatively low rates and low qualification standards of the past 10 years. This pushed property values to unrealistic levels as people rushed out to buy properties at values they couldn't afford. Builders rushed to produce more inventory. When it became obvious that home owners couldn't make the payments they promised on contracts they signed, an additional source of inventory became available: foreclosed properties. This made it unprofitable for builders to build new homes and large numbers of construction workers, mortgage originators, and title company employees lost their jobs. Employees in related industries such as lumber, furniture, and concrete also lost jobs. This offset the benefits offered by low interest rates.
Is There An Opportunity Here. I believe there is. If you have a diversified investment portfolio and you can buy a property at a reduced price with a substantial down payment and a low interest mortgage, the rental market is strong and you can receive a decent cash flow while you wait for prices to recover. Now is probably a good time to divert some of your other investments into real estate. This isn't a strategy for a low income employee with twenty grand in the bank and little else but it is a good use of funds for stable investors with an adequate liquidity reserve.
Not a Good Week Health Wise. This morning I tipped the scales at 167, same as last week. I can also see that my blood sugar levels, although acceptable in the morning get much higher during the day and I will not be able to continue at these levels without taking more insulin, a situation I have wanted to avoid. The bottom line is that I made little or no progress. I can not let this discourage me from reaching toward my goal. I will work harder next week. There is a plaque on the wall in Betty's office that says, "Let us run with endurance the race that God has set before us." Hebrew 12:1. I'll remember that as I go through next week.
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