2022 wasn't a great year for investing. With a weakend economy in recent months the stock market fell 16% year over year and took several dips into bear market territory. The real estate market didn't do much better. Median home prices reached their highest point in history, then started to decline as home buying slowed and inflation and mortgage rates rose.
Due to high prices, the rising cost of borrowing, strong competition and economic volatility, a lot of real estate investors may have stayed on the sidelines waiting for better opportunities. The good news is that 2023 could be the year real estate investing strengthens once again.
A good year for buyers.
Strong real estate markets are great for established investment property owners since they benefit from rising values and strong demand. But it can be a challenging time for new investors to enter the market or for established investors to acquire new properties. High demand means you're competing with multiple offers that frequently go over your desired purchase price, which means you're paying more for the property.
Price isn't the only thing that affects the profitability of a real estate investment. Market demand, cash flow, and the cost of borrowing are also important factors that directly determine an investment's return. But price is a big piece of the equation. Prices are still positive, but many experts and analysts predict softening demand and a decline in prices in 2023 if interest rates continue to rise.
As we move into the new year we are seeing a decrease in demand and therefore less competition in the marketplace. There's also been an increase in inventory, helping ease the rate of real estate price growth, a trend that will likely continue in the new year. 2023 has all the signs for a slowing of the housing market that may or may not be accompanied by a recession. Meaning it may well turn out to be a great buying opportunity to purchase rental properties at a discount.
Factors to consider.
Prices may become more affordable in the coming year but interest rates will still be an issue. The Federal Reserve has aggressively continued to hike the federal funds rate in 2023. The federal funds rate doesn't directly determine mortgage rates, but it does affect them.
In early December, mortgage rates were around 7% for a 30-year fixed-rate mortgage on an investment property. That rate could climb another two to three percentage points in the coming year if the Fed continues to increase rates in an attempt to slow inflation. Higher interest rates translate into higher monthly mortgage payments, which eats into property cash flow.
As inflation increases rental demand in some areas is also falling. This means investors should be conservative when running their numbers on an investment property in the coming year because the rental rate you negotiate in 2023 could be significantly lower than market rents today.
But these factors should not keep you from investing. The key is to focus on cash flow and risk mitigation as you are considering investment options. Those who purchased a property with the long term in mind have been rewarded handsomely over a 10- to 20-year period, and it's likely 2023 could bring similar opportunities.