Rising gas prices. Rising inflation. Rising interest rates. Slowing economy.
That was the theme from the San Jose Mercury News in their article, Rising prices, cooling economy. In this article they discuss the very real possibility that the Federal Reserve will raise interest rates again in an effort to slow down the economy and keep inflation in check.
By historic measures, the overall unadjusted inflation rate of 3.1 percent remains low. Consider that between 1973 and 1981, the annual rate of inflation ranged from 4.9 percent to 13.3 percent. And today in Silicon Valley, inflation is even lower -- 1.6 percent -- thanks in large part to a quirk in how it's measured.
With the mounting evidence that the economy is slowing lately, it is no wonder that the Federal Reserve may continue to raise interest rates. What effect will that have on the California Real Estate market?
A poor economy makes it difficult to pass on rent increases, so landlords and property owners have been having a difficult go at it over the past few years. On top of that, we have seen extremely low mortgage rates which has created a surge in home ownership, taking away from the potential rental market.
Now California may not be the best state to invest in if you are looking for rental profits, but the equity gains have been so high, that we have seen a mass number of investors flood the market, willing to show a loss on a monthly basis hoping to recoup their losses at a later time when they refinance or sell for profit.
CNN Money had this to say on the subject:
Finding places with those kinds of yields can be difficult. Take California, probably the most bubblicious market in the country.
A condominium renting for $1,200 a month in Southern California sells for $350,000 today, according to veteran California real estate investor Bruce Norris. A $1,200-a-month condo in the Dallas/Fort Worth area can be had for $95,000. To a landlord, that's the difference between an annual return on investment of 4 percent vs. 15 percent.
"The only reason you'd be a California landlord at today's prices is because you're expecting price appreciation," says Norris, who thinks prices in the state are due for a fall. "Monthly cash flow would be almost impossible to achieve without an enormous down payment."
Another tool experienced investors use to measure the profitability of a market is price-to-rent -- that is, the ratio of median home price to annual rent for three-bedroom homes. The bigger the number, the less likely you are to make money as a landlord.
California has a price-to-rent ratio of 25 these days, the highest in the country. Hawaii (23) is second from the top, and Massachusetts (19) is third. Far more inviting to investors are states like Delaware, Missouri, Texas and Vermont, where the price-to-rent ratios are 11 or 12. For more information on median home prices and market rents in your area, visit realtor.org and huduser.org.
Related Sites:
http://money.cnn.com/2004/11/17/real_estate/real_investing_0412/
