January 6th, 2016 7:08 PM by Gregg Mower
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.