Tom Henderson is a wise, old pro in the note business. He writes an interesting Newsletter, offering his observances about our industry and the economy that affects all of us. I want to quote briefly from his August 2016 Newsletter:
“It should also be noted that the food chain of a healthy housing market is starter homes. As a general rule, starter homes is the catalyst of a healthy housing market. For example, as a young couple purchases an existing home, the existing home owner will generally use the proceeds to purchase a more expensive home. Likewise, the more expensive home owner will also move up and so on.
The current real estate market demonstrates the contradiction of low interest rates vs. lending capital. While money is readily available to those with large down payments and high credit scores purchasing higher priced homes, credit is restricted when it comes to cheaper starter homes and no or little down payment. Without the capital necessary to finance starter homes, the food chain is broken.
With the restriction on the financing of starter homes, rentals have become a very viable investment. As of now, it appears investors, not home owners are filling the vacuum for starter homes.
However, I would be very aware of going deeply in debt to purchase any investment house. Should we go deeper into a credit crunch, an exit strategy will be greatly reduced. Be aware.”
Source: Tom Henderson, Note Professor Newsletter, August 2016, www.HPNotes.com.