Back to school
By: J. David Chapman/August 22, 2019
I started yet another school year teaching real estate to intelligent, young college students eager to learn the ins and outs of real estate. My first class this semester is the 8 a.m. Real Estate Investment class. The week before class, I always reflect on where we are in the real estate cycle and what the burning issues are we need to be discussing in class. This semester, I plan to work four significant economic and demographic trends, which I believe are driving the market, into my classroom.
The first is interest rates. It is impossible to predict the actions of the Federal Reserve. The Fed has wound down its unprecedented bond-buying program triggered by the 2008-09 financial crisis. Although mortgage rates have been declining in recent months with the 30-year mortgage around 4.5%, many analysts see mortgage rates rising on average to a high of around 5% in 2019 and remaining at that level. We will be studying what real estate investments are most affected by cost of financing and how to offset this effect.
Secondly, we will look at the effect that 74 million millennials entering prime home-buying age will have on the market. Millennial homeownership rates are below the national average of 64% and could present an opportunity for 10 million home sales. They have the money with a reasonably high household income of $88,200 and the desire to purchase first homes. We will study their purchasing practices as well as rental tendencies.
Third, we will discuss the rise of second-tier cities as high prices have pushed investors and companies out of first-tier cities. Companies and capital leave overvalued first-tier cities, like New York and San Francisco, and look to cities like Austin, Kansas City and Oklahoma City. We will learn the effect of this activity on cap rates and property values in these second-tier markets.
Finally, this semester we will discuss the impact of Opportunity Zone Funds and the new Tax Cuts and Jobs Act of 2017 for investments in real estate in qualified opportunity zones. Real estate investors should consider the provision for deferment, reduction, and complete elimination of capital gains taxes on certain investments. With $6 trillion in unrealized capital gains eligible for qualified opportunity zone investment, this could be huge for aspiring investors and brokers.
J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).