In general, real estate investment is often seen as one of the steadiest forms of investment because property values almost always increase in the long run. However, this does not mean investors are always guaranteed to make a big profit. Currently, there are a few major red flags happening in the real estate market. Being aware of these issues can help investors avoid mistakes.
Abnormally High Case-Shiller Index
The Case-Shiller Index is a measurement that looks at nationwide home prices. Though it fluctuates some, the Index typically reverts to around 100. When it rises above 200, this is usually not a sustainable level because it indicates that housing prices are rising at a far faster rate than the median income. When this happens, investors can usually predict that there will be a sharp downturn in property values as the real estate market self corrects. Therefore, buying at all during times when the Case-Shiller is above 200 may be risky.
Reduction in Sales
Another potential red flag is a sharp decline in real estate sales. This is currently happening because over two-thirds of the U.S. population are under stay at home orders due to the coronavirus pandemic. This makes it much harder to view properties, interview realtors, and sign paperwork. This decline is a problem for investors because it means almost nothing is currently happening in the real estate market.
A reduction in demand can also cause problems for investors since buyers are less willing to pay premiums. Thanks to the general economic anxiety, buyer interest has dropped sharply. Numbers report that the amount of sellers removing their home from the market due to a lack of buyers has already doubled.
What does this all mean for investors? There are several major red flags happening in the real estate market right now. This does not mean investors should panic or try to get rid of properties and stocks. Ultimately, the real estate market always recovers after downturns, even major ones like the Great Recession. However, right now might not be the right time to put a lot of money into expensive investments, especially if the holding has a concerning balance sheet or poor prospects.
Everyone involved in real estate, specifically those who are new to the industry should air on the side of caution and make sure that they’re completing the necessary research before making any decisions.