According to Alex Gailey in her article “How Has the Pandemic Impacted U.S. Savings Rates?” for Time, “Americans are saving a greater percentage of their money than ever before.” In fact, “the U.S. personal saving rate...skyrocketed to a record 32.2% in April...according to the U.S. Bureau of Economic Analysis.” Stimulus payments and low spending during 2020 resulted in a significant savings glut. However, with consumers expecting prices to rise, “consumer spending fell 12.6%” during the same time period. Faith in the economy appears to be dipping. The stock market has demonstrated a number of vulnerabilities in recent months -- i.e. Elon Musk’s devaluation of crypto currency. Furthermore, economists and market watchers around the country expect inflation to rise and the market to crash as the Fed refuses to act preemptively. As such, Americans with savings gluts are looking for ways to invest safely -- forgoing risks posed by inflation and stock market volatility. Real estate remains one of the safest investments in the US, with reliable returns from built equity, leverage and rental income. Follow below to learn more about why real estate is the best investment in 2021.
Fed Chair Jerome Powell and Treasury Secretary Janet Yellen remain somewhat at odds as the US reopens and pulls itself out of the recession caused by COVID-19. While Powell is often described as neutral when it comes to monetary policy, Yellen is a staunch dove and a lifelong Keynesian economist. In an April 2021 article for Reuters, Ann Saphir described a recent letter sent by Powell to Senator Rick Scott. In his letter, Powell wrote that he does not intend to “‘seek inflation that substantially exceeds 2 percent, nor...inflation above 2 percent for a prolonged period.’” However, the Fed “has promised to leave borrowing costs unchanged until the economy reaches full employment.”
Critics of Powell argue that artificially low interest rates could push prices for durable goods higher, resulting in skyrocketing inflation and hardship for Americans across the country. Unlike Chair Powell, Secretary Yellen supports raising interest rates in an effort to slow inflation. In a May 2021 article for The New York Times, Alan Rappaport wrote that “Treasury Secretary Janet L. Yellen said higher interest rates might be needed to keep the economy from overheating.”
Unfortunately, investors are beginning to spook, spelling potential disaster for the stock market. Senior Writer for Yahoo! Finance Zack Guzman explains in his article “Stocks could drop 20% when Fed fights inflation: hedge fund founder.” With the introduction of high inflation, Guzman predicts the bull market investors have enjoyed over the last year to transform. Though the market calmed in late 2020, economists predict greater volatility and weaker returns during the final quarters of 2021. Thus, economists and other market watchers anticipate the bubble will burst and the market will take a dive. Guzman writes that while Powell remains insistent that the inflation rate will hover around 2% as the economy recovers, recent reports from the Bureau of Labor Statistics may indicate otherwise.
The April 2021 Consumer Prices Report showed that consumer prices “rose at their fastest annual pace since 2008” in the fourth month of 2021. If prices continue to rise at this speed, the inflation rate would actually ring in around 4.2% rather than the conservative 2%. Other governments have already signaled a shift towards less accommodative economic policies, but the US has thus far refused. Some economists expect this to result in an eventual 10% to 20% correction. While this might not matter if valuations were low but they’re not, they’re at record highs,” explains Satori Fund founder Dan Niles. Niles anticipates investments in giants like Google and Facebook to remain profitable, but for lesser names to suffer unprofitable growth. Niles notes that if the Fed suddenly pulls back,”’you’re going to have to rethink where you’re invested to get a better risk-versus-reward trade.’”
Sean Williams backs up Niles’ prediction in his article “Here's Why You Should Expect a 20% Stock Market Crash in 2021” for NASDAQ Markets. Williams writes that “if history proves accurate, investors shouldn't get too comfortable with 2021's strong start.” He explains that “there have only been five periods in history where the Shiller P/E ratio topped 30 and stayed there during a bull market run.” Two out of five of these periods resulted in major economic downturns -- the Great Depression and the dot-com bubble burst. These produced “some of the biggest pullbacks ever witnessed in equities.” Two other similar events in recent history delivered “declines of 20% and 34%, respectively, in the S&P 500.” As such, Williams writes that “anytime the Shiller P/E ratio crosses above and sustains 30 in a bull market rally, it's eventually resulted in a minimum decline of 20%.” Rising consumer prices and a slower than expected return to full employment could contribute to a crash.
Growing uncertainty and volatility may make stocks an insecure investment in coming months -- particularly for people like retirees who cannot wait long before cashing out. In addition to rising inflation and a slow recovery, recent developments have also spooked investors. While the crypto currency market has remained hot over the last year, comments made by Elon Musk have exposed a key flaw. In a 16 May 2021 article for Forbes, Billy Bambrough wrote that Musk’s very public sell-off of crypto currency resulted in a crash for the emerging market. Bambrough writes that Musk’s self-serving action “helped wipe $300 billion from the market.” Musk’s comments recall behavior from President Trump, who frequently affected the health of the market simply by tweeting.
In her 2019 article “Yes, Trump’s Tweets Move the Stock Market” for Barron’s, Evie Liu wrote that the frequency and content of Trump’s tweets did in fact affect the market. She explained that tweets about policy and his own preferences “can drive the market both up and down,” with the sheer frequency affecting its health. Liu noted that “since 2016, days with more than 35 tweets by Trump have coincided with negative returns for the S&P 500 while stocks have risen on days with fewer than five tweets.” Of course, former President Trump is no longer in office -- nor permitted to use Twitter -- but people with lesser but still considerable power might leverage their public influence to affect the markets in the future.
Though actions by Musk and tweets from Trump may not affect the market for extended periods of time, they might be enough to encourage inexperienced owners to sell at inopportune times. Either way, the power leaders like Musk and Trump have over the market is unnerving. It reminds investors that some stocks are subject to manipulation and many are subject to consumer preference changes.
Unlike investing in stocks, investment in real estate is not subject to comparable ups and downs caused by government, individual or industry interference. In his article “Should You Invest in Real Estate or Stocks?” for The Balance, Joshua Kennon writes that “investing in real estate gives you the benefit of tangible property that can generate income and hedge against inflation.” Real estate is typically hailed as a reliable long-term investment because large swings in value are uncommon. Conversely, “investments in the stock market often experience short-term volatility that can lead to emotional decisions to buy or sell at unwise times.”
Proponents of stock market investment over real estate investment often claim that investing in real estate ties up money for months -- if not years or decades. They argue that cash invested in real estate is not liquid. However, today’s investment in real estate is nothing if not flexible. Real estate investors who purchase homes can leverage their property in multiple ways -- from living in the house themselves to renting it out long-term or listing it on short-term rental platforms. With rental rates increasing after a year of decline around the country, renting out one’s home could bring in significant secondary income for the owner. Follow below for an in-depth look at why real estate remains the best investment and how to benefit most from your real estate investments.
In his article “5 Reasons Why Real Estate Is a Great Investment” for Entrepreneur, James Harris writes that “real estate has a high tangible asset value.” Tangible value refers to investments with real world, actionable value that easily translates into cash or other benefits. Harris explains that “there will always be value in your land, and value in your home.” James Harris notes that “other investments can leave you with little to no tangible asset value such as a stock which can dip to zero, or a new car which decreases in value over time.” However, homes are protected -- even from disaster -- as long as homeowners invest in quality insurance policies. Harris writes that “homeowners insurance will protect your investment in real estate, so be sure to get the best policy available so your asset is protected in the worst-case scenario.”
The second of our five benefits of real estate investing is that owners can create reliable cash flow if they convert their home into a rental property. Rental rates are rising nationwide -- especially in buyer hotspots -- making buying a house a solid investment as a rental or as the owner’s primary home. In her article “Why You Should Rent Your First Home If You Buy A Second” for Rocket Homes, Hanna Kielar explains how renting out a home can help owners cover expenses. Quoting Cedric Stewart, Kielar writes that “‘in a healthy market, you are likely to build equity year-over-year, while having your mortgage covered by a renter.’” If your home is located in a high-value area with intense competition for rentals, you will likely be able to “cover your mortgage payments, taxes, insurance and general maintenance costs” at the very least. Cash flow from passive income related to a rental property could improve your personal finance situation immensely, making your real estate investment property truly a great investment.
In their article “Apartment List National Rent Report” for Apartment List, Chris Salviati, Igor Popov, and Rob Warnock write that data from April 2021 “shows rent rebounds accelerating in markets across the country.” In fact, Apartment List’s national index “increased by 1.9 percent over the past month, the largest monthly increase ever in our estimates, going back to the beginning of 2017.” Throughout noted regions of California like the Bay Area, Orange County, the Inland Empire and Los Angeles County, rents are rising quickly. This makes now a profitable time to transform one’s home or ADU into a rental property. During the COVID-19 pandemic, lease rates fell precipitously. However, the rental market appears to be recovering as people move back into cities, rejoin the labor force and engage with local amenities.
In his article “Inland Empire starts 2021 with nation’s highest rent increases” for the Orange County Register, Jeff Collins writes that “a year-long dive in Los Angeles and Orange county lease rates may be ending as rents turn the corner and vacancies level off.” Quoting VP of Lewis Management Co. Randall Lewis, Collins writes that landlords “‘cannot remember a time when we had this much demand and its impact on rents and vacancies.’” San Francisco is seeing a boom too, writes Larry Rosen in his article “Bay Area rental market is rebounding — but why?” for the San Francisco Examiner. Rosen writes that in San Francisco, “our rents are no longer falling.” In fact, “per national rental website Zumper, they stopped falling in November” and in January of 2021, “they began to rise.” Rental price increases were almost inevitable post-pandemic due to a shortage of apartment construction nationwide over the last five years. Today, rental properties are in high demand and make incredible real estate investments.
In the article “Should you invest in stocks or real estate?” for Market Watch, Riley Adams writes that real estate serves as “a hedge against market volatility.” As such, homeowners can use real estate to hedge against inflation in ways other investments cannot. Adams explains that owning real estate “can serve as a hedge against stock market volatility and inflation, as home values and rent prices tend to appreciate with inflation.” Dan Moscowitz and Chris Stapleton explain in their article “9 Assets for Protection Against Inflation” for Investopedia. Moscowitz writes that “real estate works well with inflation, as inflation rises, so do property values, and so does the amount a landlord can charge for rent, earning higher rental income over time.” Rising rents and appreciation on homes “helps to keep pace with the rise in inflation."
Rogers Healy -- CEO and Founder of Rogers Healy and Associates Real Estate -- elaborates in the article “Invest in real estate, not the stock market” for Housing Wire. Healy writes that “everyone should follow the idea of ‘Don’t wait to buy real estate, buy real estate and wait.’” He writes that real estate is a safe bet due to reliable appreciation. Rogers Healy notes that “prior to 2020, properties typically appreciated at a little under 4% per year,” but this rate has increased in recent months. According to Healy, “even individuals that purchased homes in 2020 have seen an increase in home value after just one year of homeownership.”
Fourth, home ownership has many tax advantages over stock ownership. In their article “Pros and Cons of Investing in Stocks” for The Balance, Kimberly Amadeo and Somer G. Anderson explain the volatility and expense of stock ownership. Amadeo writes that those who invest in stocks only “get an income tax break if [they] lose money on [their] stock loss.” Otherwise, they have to “pay capital gains taxes” if they make money. CNN Money’s “Ultimate guide to retirement” elaborates, noting that “if you sell a stock, you pay 15% (20% for high earners) of any profits you made over the time you held the stock.” If you hold onto a stock for less than one year before selling, you must pay an even higher fee -- “your regular income tax rate.” However, this is not the case with real estate as an investment.
Conversely, tax penalties related to real estate are rare. In his article “Top Tax Advantages of Buying a Home” for Investopedia, Tim Parker writes that “the IRS has provided several tax breaks for owning a home.” Homeowners may take a series of deductions related to real estate, writes Parker. For instance, most can “deduct all home mortgage interest” and “money you pay in property taxes.” Furthermore, homeowners could “be eligible for a mortgage credit if [they] were issued a qualified Mortgage Credit Certificate (MCC) by a state or local governmental unit or agency.”
Additionally, homeowners are highly unlikely to pay capital gains tax on the sale of their home. Jane Meggitt explains in her article “What Is the Capital Gains Tax Rate on the Sale of a Home?” for SF Gate. Meggitt writes that “because of generous federal exemptions, most homeowners will not have to pay capital gains taxes on the sale of their primary home.” If homeowners meet requirements set by the government, “a single homeowner can exclude up to $250,000 of capital gains on the sale, while a married couple can exclude up to $500,000.” However, homeowners should keep in mind that “the exclusion applies only to a person's primary residence, not their vacation property, other second home or rental home.”
Though there are many other advantages to owning a home from an investment perspective, the last on our list is that owning real estate helps build equity and create leverage. Jann Swanson writes in her article “Homeownership is the Top Contributor to Household Wealth” for Mortgage Daily News that “wealth inequality between homeowners and renters is striking.” This is because -- according to the US Census Bureau -- “the biggest determinants of household wealth are owning a home and having a retirement account.” Equity in one’s home is often the largest contributor to one’s net worth and net worth “is an important indicator of economic well-being that provides insights into a household's economic health.”
In his article “Key Reasons to Invest in Real Estate” for Investopedia, Barclay Palmer writes that “as you pay down a property mortgage, you build equity—an asset that's part of your net worth.” As homeowners build equity by paying off their mortgages, they develop “the leverage to buy more properties and increase cash flow and wealth even more.” Palmer explains that leverage is “the use of various financial instruments or borrowed capital (e.g., debt) to increase an investment's potential return.” He notes that “a 20% down payment on a mortgage, for example, gets you 100% of the house you want to buy,” creating leverage. Furthermore, because real estate is considered “a tangible asset and one that can serve as collateral, financing is readily available.”
With housing prices across the country still at record highs, building your custom home from the ground up with a design-build firm like Element Homes is a great option for homeownership. Working with a practiced firm like Element Homes ensures your house is built to code -- capitalizing on any deductions and benefits related to energy efficiency and other tech advancements. The design-build team at Element Homes can help you build an incredible home -- whether you plan to live there yourself or rent it out -- that increases your net worth. Even if the lot you own is situated in a hilly region or one prone to California’s wildfires, Element Homes has the expertise to help you create a tangible asset.
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