Wharton Business School graduate, and former Goldman Sachs associate Stephan Whitwell discusses why he has faith in the Austin real estate market. I had the opportunity to watch Stephan present this information a few weeks ago, and couldn’t help but pass his perspective on to you.
With the national media howling horror stories of stock market crashes, major layoffs, and credit-crunch crisis, its easy to believe that we should all get back under the covers and stay there until 2010, the earliest predicted date that this could all blow over. Instead, Stephan Whitwell, former Wharton School whiz-kid, i-banker, and current financial analyst, real estate developer, and e-blogger believes that we all may be blind to the opportunities that lay sleeping in our laps, this very moment. Whitwell’s optimism lies rooted in the fact that the current opportunities may be very different than the ones we’ve been accustomed to in the last several years, and its to our benefit to realize those and play on them while everyone else is still busy hiding under the covers. Whitwell points out 9 reasons to buy real estate now, and not 12 months from now.
Reason #1: Inflation—Rising prices haven’t escaped anyone’s attention over the last several months (steel prices are up 50% since last year, jet fuel is up 70%, and Allegheny Energy is seeking a 29% rate increase), and it is for this reason that Whitwell believes that now is the perfect time to buy. As the nation experiences inflation, the nominal value of real estate will go up. Homeowners that financed their home purchases with fixed-rate debt benefit even more, since they have an asset that is going up, and a liability that is fixed
Reason #2: Interest rates—Low from a historical perspective (the 70s saw interest rates at nearly 20%), the mid 5-6% levels we see today are lower than they have been for most of the last three decades. Working to keep our banks out of crisis over the last several years has left the Federal Reserve unable to raise, but it is inevitable that the rates will increase, and will increase substantially. Not sure what an interest rate may mean for you? Take for example a $300,000 loan on a fixed-rate 30 year mortgage. At today’s average rate of 6%, you’ll pay $347,516 in interest over the life of the loan, with a $1798 monthly payment. If that rate changes to 7%, you’ll be paying $1995 monthly, and over $418,000 just in interest. Choosing to purchase now, versus 12 months from now could literally save you hundreds of thousands of dollars in the long run.
Reason #3: Austin pricing & stability —Comparatively, Austin prices are still low compared to other major cities. Whitwell quotes that because we did not see the dramatic price increases that other cities did, our prices don’t have to drop to stay competitive. This will further drive investors to the safe haven of Austin, where job growth is steady, and prices are stable. costs for major corporations, thus lowering their earnings, generally resulting in lower stock prices. Academic statistical studies of expected stock market returns range from 2.93% per annum to 5.20% per annum on the high side (Mark Dotozour, Chief Economist at the Texas A&M Real Estate Center, Fall 2008), and with returns this low, it is fair to expect the enthusiasm level for stock investors to wane. Today, 69% of investors believe that real estate is a better investment than stocks (Dotzour, Texas A&M Real Estate Center).
Reason #4: Government incentives—Hoping to spur home buying activity, the government is currently offering several incentives to get people moving—literally. With limits increased to $275,000, and little equity required upfront, FHA loans are more enticing than ever before. A new tax credit rewards anyone who has not owned a primary residence in the last three years making less than $75,000 annually with a $7,500 credit, further enticing buyers to get off the sidelines. With some of the benefits expiring next year, timing is key to take advantage of these things.
Reason #5: Unless it “floats or flies” – Owning beats renting—Owning includes the benefits of taking advantage of the tax benefits of depreciation and interest expense, increasing your equity by repaying your loan every month, and increasing your equity by buying in a city where demand and prices continue to increase. Additionally, homeowners benefit from rising prices due to inflation.
Reason #6: Sick stocks, broken bonds— As interest rates increase, the price of bonds will decrease, according to Whitwell. Additionally, Whitwell quotes that stocks tend to underperform when interest rates increase because it increases the funding
Reason #7: Pension Funds—Pension funds have long term obligations they need to fund, and thus they look for long term assets. Pension funds have been increasing their allocation to real estate for the better part of the last ten years, with real estate now being a significant portion of their portfolio, yet still not as big as stocks and bonds, so there is a lot of room for real estate to grow within their asset mix. Pension funds have the distinct ability (and sometimes obligation) to invest with all cash, eliminating the need for a loan. Whitwell believes that at the very least, pension funds will continue to be a positive influence on real estate.
Reason #8: Presidential Election—Despite the theatrics in the presidential election, America has lot riding on the current election. Regardless of which candidate wins the election, it is expected that there will be a significant benefit to the election coming to a close—with the energy currently going into campaigns being re-directed into policy and governing.
Reason #9: Location, location, location— Because of the efforts of groups like Opportunity Austin Austin has achieved worldwide recognition within the last five years. With Austin’s young, educated demographics, migration, and immigration, we have a recipe for great growth in Austin. It isn’t a surprise to anyone that Austin’s beautiful weather, rolling terrain, and 300+ days a year of sunshine are bringing empty nesters to Austin with a vengeance.
While we know that every reason listed above won’t work for every person—they do give us a reason to get off the sidelines and realize opportunity when the media dictates to us that there is none. If nothing else, it reminds us that the old adage “opportunity lies in crisis” could not be more true today, in Austin, Texas. – Lindsay Taylor
