As we embark into 2019 I enter my 35th year in the industry. Not saying I have seen everything but I have seen enough to know what is around the corner for Real Estate and Interest Rates. History seems to have a way of repeating itself over and over especially with Real Estate and market trends. So as you read this you will see references to the past as that is how the future is formed and it has worked consistently for the last 100 years now as we have become a society of growth and invention. But over time we as humans seem to follow the same trends and patterns in Real Estate and the Stock and Bond markets are no exception and we call this the “Business Cycle”.
The Business Cycle is a repeating cycle of booms and busts or good markets and slow markets. In Real Estate and the Stock markets you can really see how this plays out with increasing home prices and lowering home prices and the Stock market going up then sagging back down over the business cycle. The business cycle in Real Estate starts with investors entering the market picking up good deals (as they perceive it to be be) usually after a bust in Real Estate prices. Once investors have taken a good hold in fixing and flipping or creating rental portfolios you start to see the first-time buyers enter the market. When the first-time home buyers are buying and home prices begin to rise again you will see the move-up buyers enter the market creating more inventory. Eventually, over time the supply from the move-up buyers and the new home builders cools the prices from rising as the supply of housing catches up with the demand for housing. When the supply or quality homes for sale becomes greater than the demand you then get a cooling down of the Prices of homes. You will also see new home builders entering the market when the demand for homes is the highest and the supply is the lowest creating a greater supply of housing. This is the Real Estate Cycle that has existed since the beginning of private land ownership.
This is important to know as if you can pin point where we are in this cycle you can formulate a plan to buy or sell Real Estate. As far as interest rates are concerned the cycle is about the same but a little lagged compared to the Real Estate cycle. This is simple economics, as well, when the demand for money is the highest (generally the peak of the Real Estate Market) is when the Federal Reserve starts to see inflationary numbers such as lower unemployment, and rising consumer prices. You see housing drives the US economy as most products and services are designed for your home and when there is a high demand for these goods and services you will see prices start to rise. That will trigger the Federal Reserve to raise interest rates to combat the possibility of inflation and the devaluation of the dollar. I know this is a whole bunch of economic principles here, but this is how the business cycle works. I could go into specific details as I hold a degree in economics, but this would bore you and I want to inform you so you can be ahead of others that are not smart enough to read anymore.
As you see interest rates start to rise you will see almost an instant slow down in the demand for housing and goods and services as people can no longer afford to purchase the high-priced homes with high interest rates. This, in turn, slows the whole economy down. The Federal Reserve (the Fed) can’t possibly know how much interest rates should rise to slow the economy down to an acceptable inflation rate of 3-4%. The Fed will generally raise rates too high initially and slow the economy down too much then rates sag back down until the economy is stimulated again then they raise them to get to the right inflationary numbers. Since it is not an exact science we see volatility and this is where I believe we are at in the business cycle currently. The Fed has not landed on the right interest rate combination yet and thus we are seeing volatility in interest rates and coincidentally the Stock Markets as well. The Stock markets knows this cycle and reacts to it, as well, that is why we have seen record swings in the Stock markets in the last several months.
So, we know where we are in the “Business Cycle” and we have seen the higher rates and the Real Estate Market slowdown in the 4th quarter of 2018. Does this mean we are in for a bust? I don’t think a bust is in order, but I do see a slow down and a leveling off in Real Estate prices and in some cases a decrease in perceived values. Coincidently, this cycle has worked over a pretty consistent 10 year cycle with the slow down starting in the 8th year of each decade and going though the 9th year and slowly picking up with investors coming in on the 10th year. For example 2008-2010 was slow for Real Estate as was 1998-2000 and 1988-1990 and so on, history repeats itself. I am not saying that you should not buy Real Estate during these times I am simply pointing out the business cycle in Real Estate so you can be informed. There are always deals out there and with the right Realtor and Lender partner like MAE Capital Real Estate and Loan you can profit. With our experience you can make a plan to own Real Estate and not worry about the business cycle as interest rates are still low compared to history and there are some really good deals out there to purchase. So, beat the investors to the punch and get in the game with your first home or your 20th home, we are here for you. In our site you can look at properties currently listed on the MLS and get pre-approved all from your chair at home or work. Give us a call and let our experience help you plan your future at 916-672-6130.
The Real Estate Market is still Hot in California but not as hot as it was so why? Rising interest rates has a lot to do with the lag or slight slow-down in the market as well as a few other factors. When evaluating Economics and economic trends you have to look at more than just the numbers and statistics, you should be looking around and talking with people in the industry to hear first hand what is happening. To fully understand what is going with Real Estate Economics there are many factors to take into consideration such as people and their tastes or appetite to purchase Real Estate which can't be found in published statistics. In California we have about as many different Real Estate Markets as we have climate zones. So to throw a blanket over the entire State’s Real Estate Markets would be doing everyone reading this a disservice. So for the interest of time I will cover the macro economics of Real Estate in California (or for those that follow Bernie Sanders Macro is a broad overview of the Real Estate Markets in the state). I know economics is not a class taught in High schools in California so I will try to break the theories down to a level that everyone should understand.
First let’s start with the obvious change since the beginning of the year in the world of Real Estate and that is the fact that interest rates have gone up. Interest have gone up from an average of 3.5% a year ago to 4.5% this year. This may not seem like a lot but when you equate it to qualifying for a home loan it can be significant. An example would be a couple that makes $100,000 annual income with about $800 a month in car payments and revolving debt. These folks would have been able to qualify for a $464,000 home loan last year at 3.5% and this year making the same income they will only qualify for a $411,000 home loan. The difference in buying power is $53,000. So as you can see their buying power was diminished by higher interest rates.
The next factor we have seen is that prices of home have gone up by 10-20% over the last year depending on the area in California you look at. What this means is that if you were looking at houses last year in the $400,000 range those same houses are selling today for an average of $480,000 at a 20% increase and to $440,000 with a 10% increase. So if your income has not gone up as fast as home prices you just lost buying power. Some Home buyers are feeling this coupled with higher interest rates and many have decided to stay put where they are at. Potential move-up buyers may re-evaluate his or her ability to better their current living situation with these factors and may chose to stay put. With rising prices and interest rates some first-time home buyers may have "priced out of the market" and not have the ability to purchase a home. If you live in a market like Southern California or the San Francisco Bay area these percentage increases will hurt even more people with the higher home costs in these areas.
Supply of housing is also a huge factor in how fast Real Estate will increase in value. For example, in Southern California or the SF Bay Area there is only so much land available to build new housing on. With a limited supply of housing and a large demand for the housing that exists the prices are soaring and in those markets like Southern California and the Bay Area many people have been held out of the ability to buy or even live in those areas. So we have seen, and continue to see, people and businesses migrating to the central Valley to places like Sacramento, Fresno, Bakersfield, and the desert areas of Southern California. This migration has caused home prices to increase in those areas to record highs as well. Construction of new homes in those areas have increased dramatically and continue to do so as long as people and businesses need a place to be. As we see the creation of more jobs in California we will continue see the demand for those homes to house the workers. This could also be the demise of California’s housing boom as more and more employers are tired of the business environment in California and are choosing to leave this state. With more taxes and regulations put on businesses in California we are also seeing a record migration of businesses leaving the state. Although this is regulating the demand for housing to an extent currently there will become a time in the not so distant future that the business cycle will slow and the California Real Estate Market may be the first to feel a down-turn.
Which brings up the fact that there is a current migration out the state of people, especially retired folks due to it’s high cost of living. People are realizing that they can’t retire in this state and are looking to other states that have lower taxes and a lower cost of living to retire. If this migration out the state continues when the Real Estate market corrects California could feel the pains worse than other places around the country. However, as long as there are good paying jobs in California there will be people to fill them, but as soon as that changes so goes the Real Estate Markets.
Going back to rising interest rates and what effects that has on the economy we will see business slowing their expansion for the simple fact that the money to expand is costing more. This is the whole point of the Federal Reserve raising interest rates in the first place, to slow a hot economy and keep inflation down. In California we are experiencing that slowing effect now in some industries. The Real Estate Finance or the Mortgage Business has slowed dramatically with the rise of interest rates cutting out those that may have wanted to refinance to lower their mortgage payment. Although there is the home purchase business that is still good Mortgage companies depend on the demand for money to keep going as people need to mortgage their homes for other reasons that purchasing them, such as bill consolidation, College, home improvement and the rising interest rates have slowed those areas so the financial industry has also slowed.
Other factors that are slowing the demand are seasonal with vacations in full swing people are looking for fun not buying or selling Real Estate. The weather could have an effect on Real Estate Sales as the hotter the weather becomes the less people want to go out and look at houses. This time of year traditionally we have seen the vacation/weather slow-down to around mid-august to September then it starts to pick up as children start back to school and people have more free time to think about moving. At MAE Capital Real Estate and Loan we know these cycles as we have seen them occur for over 30 years of being in the business. We are here to help you buy and sell Real Estate as well as Finance it whether it be a cash-out refinance to pay for college or home improvement or to finance that first home or even that 20th investment property we have done it all and are doing it every day and look forward to working with you. Call us today at 916-672-6130 and we can help you with all your questions.
It is the time of year where we wrap up the prior year and look forward to the next year. This year’s wrap up is about the same as the last several years with Real Estate in California and the Sacramento Area enjoying steady increases. We have already gone past the highs in the Real Estate Market before the bust in 2008, which is a good thing, however, does that signify a coming change or correction to Real Estate Values? Or are we going to keep with a steady rising Real Estate Market? Residential Real Estate has been the cornerstone of the recovery over the last 5 years, with commercial Real Estate staying constant unless you happen to be around new growth areas such as around the Golden One Arena in Sacramento or other special developments projects. In addition, the Stock Market has been hitting record highs and that could send capital away from bonds thus raising interest rates and possibly creating inflation in the short term. There are a lot of things to consider when evaluating the economy and the future of Real Estate in 2017.
With the new regime change in Washington D.C. we could see some radicle changes that will affect the Real Estate Industry, but don’t expect to see the results of any changes right away. Even with the most rapid and radicle changes it will take time to implement and for the Real Estate markets to adjust and adapt. So, although it is my belief that we will some positive changes in the Real Estate Industry with regards to de-regulation these changes will take time to see any real changes. It is too early to speculate on the changes that will come out of our Government, but my belief is that less Government intervention will ultimately be good for the American economy. There are a lot of things the new leaders in Washing DC will have to address and in what order they want to attack them in may have consequences to all Markets. The Government will have to make major changes to the Obamanation of a Health Care system that has been imposed on the American people as a first priority, as middle class America cannot afford the current health care system nor can small to medium sized companies. That will have to be fixed first and could cause ripple effects i the economy.
When the New Leadership evaluates the housing markets and the changes that were made during the last regime, they will see the need to address changes here as a high priority as well. Over the last several administrations we have seen monumental spending increases from the Government with the guise to help the citizens of these United States of America, but our Nation Debt is over 20 trillion dollars and growing every day. We must change this radically or our once great country will be viewed as bankrupt by the rest of the world. If this happens America and the US Dollar could lose world currency status, which could be so detrimental that America could fall as the world Economic Leader, thus causing a worldwide depression. That may not be as far fetched as it sounds if we keep spending recklessly with no repayment plans. These are some big issues that the new administration must address quickly. Be aware if the debt issue is addressed first there could be a recession as a result, in the short term. There would be no way of avoiding that, as when the Government Beast stops or slows spending, those people and companies that have been dependent on that spending will be no longer receive federal funds and thus will go out of business sending many to the unemployment lines. Unfortunately, this is what has to happen in order to fix the growing problem, or the rest of world could just forgive that fact we owe more than we are worth, but I don’t think China would just say “no problem, we will just give you back all the treasury bonds and securities we bought from the US”. That said, there will have to be a strengthening of our private industry first to stabilize income and private jobs. There needs to be incentive to go to work from the government back to the private sectors and this must been done before there can be cuts to the government. It has has to start by lowering taxes, and providing non-monetary incentive to business’ to not only produce their products in the US but to expand in the US. These actions would bring business back to America and increase employment and thus create more taxes as more people are employed and businesses are making more money in the US thus paying US taxes. You see this concept is where most people are fooled or ignorant on how things work. With a lower tax rate on people and business’ and incentives to live work and produce in the US there will be more tax dollars going back into the system. Simple math, less people paying more in taxes is worse than more people paying less in taxes and having more people and businesses employed in the US. For example; would you rather own 2 rental properties that you receive $10,000 a month on, valued at $500,000 each, or would you rather own 10 properties valued at $100,000 each where you receive $1,000 a month on each? The theory here is multi fold, although you have the same value of real estate if you have a vacancy on one with the high value properties you lose half of your income, where if you have a vacancy in one or two of the lower value properties you are only missing 10-20% of your potential income. Also, the chances of the $100,000 properties increasing in value at a faster rate than the higher priced properties is greater as there is more demand for affordable housing than luxury housing. Same holds true in the labor markets if you create a demand for low cost labor and you can’t get enough you then need to pay more to entice labor to work for you, thus higher taxes and higher employment and the Government receives more income proportionately with more people and business working within the US in the private sector. With higher wages in the private sector government could cut back and thus lower the debt. Simple math that gets confused by some believing that you should tax the higher wage earner and business’, the very people and business’ that employ Americans, rather than lowering their taxes and provide incentives to employ and hire and expand within the US.
I digressed a bit, but feel the education is necessary as it may be obvious to most folks others may have never heard of this concept. So as the new administration makes changes to to bring business back to America and incent them to stay in the US we will gradually see a real demand for employment as business will need more folks working for them here in the US. This will not happen overnight and there will be a lot of resistance, believe it or not, as some people actually believe that the Government can spend your money better than you can. None the less, it will take time for any of the changes to take affect, but what you will see is a raising of interest rates in anticipation of a rising inflation due to a more game fully employed America. This will slow housing in the short term until the average American sees the increases in pay from all of the positive incentives for businesses to do business in the US. We saw this with President Reagan, his whole first term was dedicated to lowering taxes and providing incentives to businesses to expand. The US economy didn’t see the effects of the changes until his second term and Reagan was almost not elected for a second term simply because of the time lags in the economy.
So the long term outlook is great for the Real Estate industry, however, the short term will be a slowing down in Real Estate. California, in the short term, will see an overall slowing of housing appreciation and demand will slow with higher interest rates. The short term will be over the next 1-2 years. We will not see a devaluing of Real Estate like we saw due to the mortgage industry implosion in 2088 through 2011. We will see builders catching up with the pent up demand, however, interest rates will slow their growth as less people will be able to qualify with the higher rates. Unfortunately California has implemented high taxes on companies and employers that companies will continue to move out of California as it will not be profitable to do business in California. The California State Government seems to follow the doctrine of over regulating and taxing business in this state to the point where good businesses are leaving the state in droves in search of a friendlier environment to do business. Until this State figures out basic economics the State will continue to go backwards. So long term Real Estate trends for California I feel are going to be different for different parts of the state with the bigger Cities and their bedroom communities maintaining their values and a having steady demand, however, not as high as they have been enjoying over the last several years with low interest rates. The central valley of California will be slow but steady with some depressed Cities like Stockton down to Fresno seeing a relatively flat Real Estate market as these would be the areas in the state that growth could occur but with high taxes on businesses the businesses that would consider moving into the state will seek other states to do business in. Real Estate is always the best long term investment anyone can make, it is a hedge against inflation and over the long haul they aren’t making any more of it so it will have to enjoy growth. To make America Great again will take the efforts of the whole not just the people educated in economics.
Well with another year upon us and the stock markets in turmoil what might that mean for Real Estate? Traditionally when the stock markets have been down for an extended period of time the Real Estate Markets have taken up the slack. But this Real Estate market is going to be a little bit different as there just is not the capital out there with the appetite for Real Estate or any kind of speculative investments as there has been in the past. This is not a negative statement it is just the facts. The job situation and relative incomes have not increased like we have seen in the beginning of past real estate booms. To top it all off the availability of credit has tightened to the point where it is difficult for the majority of Americans to get a loan.
Let’s look at what traditionally has driven up Real Estate values. In the past we have seen the Real Estate markets driven by supply and demand with the supply side being the catalyst for investors to enter the market. The supply of Real Estate that is currently on the market is in excess of 3 months’ worth of inventory nationwide, locally in Northern California we have a 1.2-month inventory. Which means that if there are enough homes for the current number of buyers there is no real upward pressure on prices. If prices are not forecast to go up investors will not enter the market. Which means there will be ample supply of new homes entering the market to satisfy the need or demand for housing. A good indication of a Real Estate Market that is about to take off is when investors start gobbling up Real Estate and we are not seeing this. Oil prices have hurt the Real Estate markets in places like Texas, South Dakota, Montana, Wyoming and Alaska. Although, these markets are not large metropolitan markets it does have an effect on all markets in America. With these people that work for the Oil Companies in America we are seeing larger than normal unemployment with these types of jobs. With a higher unemployment people will not be able to buy homes. With the new “shadow unemployment” numbers (unemployment from those who have dropped out of the search for a job or settling for a lower income job) that can’t be quantified, consumers just don’t have the confidence to make those large purchases as they would with a good income.
With the average American making less household income the likelihood of them venturing out to purchase a new home or an investment property is low. The Stock Market is showing investors that the economy is just not what the government has been reporting to us that it is. The Federal Reserve (the US Central Bank) has raised interest rates and subsequently banks have raised their lending rates. This makes money tougher to get for investors or the average person on the street. Banks have also raised their fees on their services that the average consumer may not even know of, such as overdraft fees, and usage fees. Even with these measures Banks and Financial Stocks have been on the decline and if that continues there will be lay-offs in that sector of the economy. We are close to another recession or an extension of the one we have been in; however, you want to look at it. I know this sounds like a lot of economic mumble jumble, and it is, but, it takes some of us that actually follow this stuff to bring it to the attention of everyone.
I am not trying to be negative on the Markets in general, but I want to open the eyes of those that might not otherwise be looking at what is going on in our economy and with government regulations and in some cases corruption. We saw the collapse of the Mortgage Markets in 2008 and that should have opened the minds of Americans, but I think it was just too confusing for the average American to comprehend. So I will paraphrase that situation and the current one facing us all. The Government blamed a system that had been in place for almost a century, the mortgage business, with corruption, fraud and a few other choice words. When in reality it was the government that allowed for this to happen and in some cases encouraged it for the gain of the legislatures. What the news stories have not told the people is that most of the Senate Banking Committee and other legislators were invested in these types of investments so the longer it could go on the more they would profit from it, and don’t forget that most of our legislators are attorneys and our law makers are exempt from insider trading. Then when the crash came it was blamed on private industry and the Mortgage Brokers not the Government and Wall Street where the blame should have been levied on. You will not hear that story form the mainstream media as they are all in bed with each other. In addition, the legislators and the Federal Reserve board, to make their investments good, they bailed out the banks that caused the problems in the first place under an action that has never been investigated as legal or challenged for that matter by anyone. Over 100 Billion US Dollars used to bail the Big Banks out as the Government deemed them “too big to fail”; I wish I was too big to fail. The Government, in an attempt to “make good” on their mistakes or corruption with the Mortgage Markets, have put regulations in place that takes away the ability of the privately owned mortgage markets to make decisions without the possibility of being fined, prosecuted, or imprisoned. So if you wonder why it is so difficult to get a home loan in today’s world you can thank the Government again. These laws and regulations enacted by the Dodd Frank Act of 2008 have been steadily tightening down on individual Real Estate borrowers every year since, to the point where an average borrower will have to sign paperwork that is even more confusing than ever before, all under the guise that it is to help them.
There is hope for both Real Estate investors and new homebuyers. I predict that more and more investors are not going to look to Wall Street as their investment of choice, I believe that Real Estate Investors will soon learn to be their own banks. Big Wall Street firms have learned this trick so why can’t the individual investor be their own banks? Which simply means that all investments are driven by yield, the higher the yield the more attractive the investment, yield to Banks are interest rates and fees. So why can’t an individual lend their own money for a yield that is acceptable to them. Answer is they can, in fact Wall street has tried to be on top of this by creating such investments called hedge funds. These hedge funds invest in mortgages that are higher risk and get higher interest rates as a result. These loans in these funds are not as high a risk as they would like you to believe they are, as the loans are backed by large equity positions in Real Estate. For example, if you go to a non-traditional lender and they are getting their money from a Wall Street Hedge Fund the money is coming from investors directly in that fund. The lending requirements are less stringent than if you were to try and get a Conventional, FHA, or VA loan. Generally, they will require the loans they invest in to be at 80% Loan to value or less, but they will not require things like tax returns to qualify borrowers as they figure the more money a buyer is willing to put into a piece of Real Estate the less likely they are to lose the property to foreclosure. Even if the property they invest in goes to foreclosure the lender still can sell the property and get the money back they lent out. Banks do this as well but have more rules and regulations to go by than a private fund or an individual investor. So again I see investors wising up and using Real Estate Brokers to put together these types of transactions to gain yields of 9-12% on the average and essentially be their own Bank. On the other side of the fence I see Homebuyers that cannot otherwise qualify for traditional loans, with all the new rules the Government has imposed on them, going to sources like the Mortgage Broker to get this type of financing. This is not going to happen overnight but it has begun on a small scale and we are currently doing this at MAE Capital for both our investor friends and our borrowers.
So as the Real Estate Markets go along in 2016 at a normal pace with no big ups or downs, unless you live in a market effected by the Oil industry, we will see business as usual. Keep your eye on the Stock Markets and start thinking of diversifying your investments. Your Stock Broker will advise against this for no other reason than they will no longer receive commissions for managing your money. If you see a good deal in Real estate buy it you can’t go wrong with that investment over time. If you are a first time buyer, buy a home it is and always will be the best investment you will ever make, but don’t treat your house like an ATM card and take equity out every time it goes up in value you will lose every time doing that. For more Real Estate investment advice give us a call at 916-672-6130 or visit our site at MAE Capital Real Estate and Loan we value you as our customer for now and into the future. As I write this blog and every other blog post on this site I am entering my 32nd year in the Mortgage and Real Estate Industry and have seen a lot but still have not seen everything and will pass on as much advice and goodwill to my clients as I can. We look forwarded to working with you in 2016.