Real estate in 2017

By: J. David Chapman/January 12, 2017

Now that college football is over, people in Oklahoma will get back to work and ponder what 2017 will bring to their business.

I wish I was as optimistic about the real estate market as I was about our state football teams. I also wish I shared in the enthusiasm of the Federal Reserve, which believes the economy is strong and predicts an even brighter 2017. My concern is that I am primarily invested in Oklahoma, whose economic resilience is still based on the price of oil and gas.

Every new year, people ask me about real estate investment. Nationally, home prices bottomed out in 2012 and have increased about 5 percent per year since. This sounds like good news; however, real estate is particularly local and market-to-market comparisons show stark differences in performance. The differences in home-price recovery range from those that saw 30-percent increases to those that are still 25 percent undervalued. The cause of this fluctuation is mainly due to population changes and new job creation.

For the most part, the federal government controls policy that sets, or at least affects, interest rates on money used to purchase real estate. With few exceptions, these decisions are based on national economic performance. We have recently seen increases in interest rates because the Fed seems to be confident that the economy is strengthening, and analysts predict they will continue to increase the cost of borrowing.

The increase in interest rates will have an effect on residential sales. Fewer people will be able to afford the higher payments. Mortgage companies, title companies, surveyors, and appraisers will see fewer orders because of less refinancing activity. Another effect of rising interest rates is that people tend to hold on to property attached to low-interest mortgages, fearing their next purchase would be at a higher interest rate.

On the other hand, this may create an opportunity. This opportunity lies in rental investment. Income of average workers increased right at the inflation rate over the last five years. More importantly, income of the lower 50 percent of workers was significantly eroded by inflation. Over the last 10 years, student debt increased by a trillion dollars. This diminished income and increased student debt of typical homebuyers is significantly affecting their ability to purchase – potentially making them ideal renters.

J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).