Everyone working in real estate, buying real estate, or selling real estate has been commenting on the inventory shortage which has pushed prices upwards. Home prices in March edged up almost 12% higher than they were a year ago. The best advice that can be given is caution, especially for short term investors. I will cover the important aspects of that advice here.

Lack of Inventory
Do not buy a house just because it is the best property you can find. Too many investors are “settling” for properties because of the lack of inventory. This is a big mistake and will contribute to a new bust in the future. If you cannot find the right deal, do not jump into something that you’re not completely sure of.

Interest Rates
The low interest rates that have prevailed over the last 3 years will not last forever and slight increases will have a dramatic effect on prices and purchasing power. With current interest rates in the high 3% range, $1,000 could buy a $220,000+ property. In 2006, when interest rates were in the 6% range, that would only cover a $165,000 house. I foresee interest rates ticking up starting now, in an effort by the Federal Reserve to “slow down” the housing recovery.

Recovery Personal Credit and Increased Values
Buyers who went through a bankruptcy, a foreclosure, or a short sale are now getting back into the market which is putting more pressure on prices as demand increases. Here at FK Capital Fund, we are doing more loans than ever for borrowers who have had these problems in the past. The conventional market will follow and it will further heat up the housing market. Additionally, homeowners who have held out through the last several years with underwater properties are now able to sell their homes for ever-increasing prices.

Investors Have Made a Lot of Money
Part of the problem that led to the Great Depression was that regular non-investors were seeing the massive amounts of profits investors were making in the market. This made them want to participate. They were uninformed which distorted the market further and caused the eventual collapse. This is especially true now with “investors” calling us every day for loans that have never invested in anything before.

There are still quality investments to be made, but they should be made with an extra degree of caution.