March 5th, 2015 1:41 PM by Gregg Mower
Is it time to buy Real Estate? Is it time to invest in Notes? These questions face investors every day. With the Stock Markets hitting all-time highs you might be asking yourself if you should take your money out of those markets and buy real estate or focus your new investments in Real Estate and Real Estate related investments. Great questions, so let’s explore what is going on to drive the Real Estate Markets upward over the next few years in California, and might just be the case for the entire Nation.
Basic economic theory states that where there is a shortage of supply prices will go up. So the question of supply in the Real Estate Markets comes to question here. The supply of Real Estate is actually a ridiculous concept as there has always been a limited supply of Real Estate, as last I checked the world is not adding any new land. That being said, we already know there is a limited supply of Real Estate and we also know that our population keeps growing, and the housing markets have to keep up with that demand. Problem has always been to keep up with that demand and not over building while attempting to keep pace with demand.
In 2005 we hit record highs in building new housing and commercial space. It has taken until now to actually have demand catch supply in housing. In economics we call this the equilibrium point. Have we reached this equilibrium point or is it just a moving target. As we know economics is very fluid and has several factors that affect the theory. In housing there are far more factors that actually effect housing, such as jobs in the area, demographics, or the age of the population. As an example of how jobs affect the Real Estate Market, take a look at the Silicon Valley in the San Francisco Bay area. Here there are a limited supply of housing and high paying tech jobs in a concentrated area. People tend to want to stay within a 20 mile radius of their jobs. Thus, you have a limited supply of homes with a high demand for them with people making a higher than normal income. The average price of a single family home in this region is over $900,000. Prices in this region of California are so high that a worker with a normal paying job just can’t get in to the buying market in this area. If you take this micro economy model and apply the basic theory to any Real Estate area you will be able to see what areas are poised to see increases in Real Estate Values.
Although, this sounds easy, people have been trying to do this with accuracy for decades. We also have to take demographics into the big picture. Yes, that age groups that are buying Real Estate and what has traditionally been their trends. Traditionally, the average age of the first time home buyers have been in their mid-twenties, and we have seen this pretty consistently for the last 70 decades. However, this trend has been bucked in last decade. Yes, the traditional 20 something’s buying their first home has actually moved to the early thirties. This is due largely to the economic rescission that started in 2005 through 2011. When a formative child or teen see their parents go through the Real Estate hangover, or failure, they tend to stay away from what hurt their parents. Another huge reason the 20 something’s have not entered the Real Estate Market has been the lack of good paying jobs. The government has been telling us that the unemployment number has been declining, but what they have neglected to tell us is, the jobs created have only been in the low paying areas. If you have low paying job that maybe you had to take to get started or survive with, those jobs don’t qualify you to buy a home but the unemployment numbers go down. The number of better paying jobs has increased over the last few years allowing for more people to consider buying a home.
Now that your economic lesson is over we can apply what you have learned to the Real Estate Markets. We now know that supply and demand affect the Real Estate Markets, and that good paying jobs or the lack of good paying jobs in a specific area will also affect the Real Estate Market. We know that a certain group of traditional home buyers have stayed away from buying Real Estate longer than normal trends have been. So what does all this mean and how do you apply this to your Real Estate Investing plan? It means that we are starting to see those millennials enter the market several years later than they usually did and we also see that the next generation is right on their heels to buy at the same time. We also know that new house building has not been active since 2005 due to the lack of demand from the recession. We know that it will take time for builders to start building again as the demand heats up. We know the job market is regional and some urban areas have better jobs than others with different pay scales in California.
Looking at California there are areas that are more affordable areas than others due to these factors, but what areas are the best for investors? A first time home buyer will buy in the area in which there income is produced in. A Real Estate investor has to evaluate what their overall plan is, such as flipping, holding and creating rental income, or investing in Notes in a specific area. The affordability has to be taken into consideration as well. We know that places with high demand such as the Silicon Valley, and certain Beach communities in Southern California will always have a high demand. These high demand areas are not really that good for investors as there is a high cost to enter those markets and they are not as liquid as they should be for an investor. Most investors are looking for returns that will can be consistent and fairly liquid. That being said, a stable job area is always a good for investors to be looking in. Areas like Sacramento and surrounding communities have a high government job market which creates a stable job market. Regions like the Los Angeles area have the entertainment industry, as well as a good mix of financial and manufacturing type jobs.
Overall California has a good job market and is poised for growth. The most affordable housing markets in California are located in the Central Valley, From Sacramento on the Northern end to Bakersfield on the Southern end of the Central Valley. As we see more folks hitting the Real Estate Markets we are going to see supply of homes for sale dwindle and that will send prices rising again. This makes now the best time to invest and hold in Real Estate that we have seen in over a decade. Builders will start to enter the market but will not be able to keep up with demand for a year or two, keeping prices rising. Knowing that builders were heavily hit by the last Real Estate Bubble, they will be hard pressed to build as fast as they did in the past, keeping supply limited during this new business cycle and prices up. So all in all Real Estate Investors should be looking to invest now either in the Real Estate itself or by investing in Notes. Notes are a great investment as you can get high yields with very low risk with rising Real Estate Values. As Real Estate rises in value people are far less likely to let their house go to foreclosure, making investing in Real Estate a far safer risk than before. At MAE Capital Real Estate and Loan we look forward to helping you with your Real Estate needs from buying and selling Real Estate to investing in private notes. We look forward to assisting you with all of your Real estate needs.