Well Its that time of year again when the days get a little shorter, there is smoke in the hot air from all dry fires starting all over California. The kiddies are starting a new school year. It is the “dog days of summer” and with everyone changing their attention to things other than Real Estate, we generally get a seasonally adjusted lull in the action. This is all perfectly normal and being in the industry now for over 32 years it is pretty normal. The only other time we have not seen the lull was in 2004, 2005 and 2006 when things were abnormally busy, due to an overheated Real Estate Market. Although the Real Estate Markets have been brisk over the summer it was more of a normal healthy market with move up buyers and first time buyers entering the market. Real Estate Prices rose but only in the price affordability ranges.
So why even write about the Real Estate Market you ask? Well as a business owner and an economist I like to share the trends that I see developing so my readers can be informed in their investment approaches. This is the time of year where California starts on fire and I am not referring to the Real Estate market I am literally talking about wild fires. In late August, September and October we generally have not seen any significant rain fall since May, which causes dry tinder conditions perfect for wild fires. This However, can’t be said for other parts of the country that have had record rainfall and severe flooding. I am sure California Fire fighters would love to have just one day of significant rainfall to help knock down our fires. If you have followed Real Estate trends for any length of time you will know that it is very cyclical and predictable if you know the signs to look for. Folks looking to move to California may take a step back during this time of year as they may think the whole state in on fire per the wonderful media that reports on all the fires. The truth is, although there are several fire throughout the state and the smoke can be seen throughout the state, on a percentage basis is is only a very small percent of the state that is affected by the fires (less than one percent). I can’t talk to the flooding in Louisiana but my guess is that there are parts severely affected and other untouched we just hear the bad.
Anyway, you ask what is ahead in the Real Estate markets in California for the rest of the year? I am here to tell you that whether you are a buyer or a seller of Real Estate that you will be able to find great deals if you are a buyer and sellers will be able to sell at prices that will stay steady through the end of the year. However, if you are buyer you might notice fewer homes hitting the market this time of year as most people don’t like to move when their children are starting school and they generally don’t like to move over the holidays. What this creates is slow down in supply of houses hitting the market. In economics, if the demand for housing exceeds the supply of housing prices will go up. Conversely, if the Supply exceeds the Demand then prices will go down. So, although we see less sellers putting their homes on the market, this time of year, we also see the demand to purchase taper off as well. So with both demand and supply tapering off till the end of the year there are still great opportunities out there for both buyers and sellers.
Interest rates will stay low through the end of the year as well. How do I know this you ask? From an economic point of view, you have to know what drives interest up. Interest rates will be driven up if we start to see inflation. Inflation is where prices of goods and services are increasing. We are currently at about a 2% or less inflation rate annually, which is lower than what would be considered a “normal” inflation rate. We can predict inflation rising by watching personal income levels and employment rates, as the more money people make the more they tend to spend which would raise inflation and thus interest rates. So I don’t see any great increases in personal income from now until the end of the year thus a steady inflation rate and thus no interest rate increases.
What will the election in November do to the economy? Well, again if you know economics, there are what are called time lags that occur when something major happens in the economy like an election. So no matter who is the next leader of the free world it will not affect housing at all this year. In fact, I don’t see any major changes occurring at the earliest the second half of next year. The markets will need that amount of time to see what the new administration is up to. What I am focusing on is the new laws from this administration that have choked down the ability for people to qualify to buy homes. These last 8 years have been the toughest 8 years in Real Estate in the history of Real Estate and Finance and Government intervention. Over the last 8 years we have seen the implementation of the Consumer Finance Protection Bureau (CFPB) and the re-writing of the all the lending laws that were in existence prior to 2008. We have seen Loan officer Licensing across the country. We have seen the regulation of underwriting standards when a person qualifies for a loan. We have seen the CFPB put fear into lenders of being fined so they don’t take any risks in underwriting loans. We have seen predatory attorneys taking advantage of people that feel they have been wronged by a lender simply because they can’t make their mortgage payment. In the past, the free markets were left to weeding out bad lenders and bad loans as those bad lenders writing bad loans would end up bankrupt and out of business. In 2008 we saw our government “bailout” those bad lenders deeming them “too big to fail” thus a new world of banking has emerged. Today we see those same Banks that were deemed “to big to fail” ruling the banking industry and with their profits sky rocking they have been able to buy their own legislation to carve them out as “to big to be regulated”. I could go on and on with the negative effects of Government intervention in a free market economy but that will be for another article. We just need to be diligent as voters and recognize that a bigger Government gives the people less freedoms. So Real Estate will continue steady until the end of this year but what happens next will be up to all of you to do your research and educate yourselves. I will not tell you who you should vote for if you value Real Estate Investing or if you are going to be in the market to buy or sell your home in the next 4 years you need to educate yourself on the market facts. As a voter don’t be fooled by all the social noise you hear in the media, you need to educate yourselves on the benefits of a free market economy and the problems that a free economy faces when Government intervenes. I wish all well and if you need help with your Real Estate endeavors I hope you remember us here a MAE Capital Real Estate and Loan as we would love the opportunity to work with you for either you Real Estate buying or selling needs in Northern California and or you lending need or both.
In California, as with the rest of the Nation, the Real Estate markets are red hot. What exactly does that mean, you ask? Well, simply put, there are more home buyers out looking to buy homes then we have seen in years. There are multiple reason for this, but the biggest driving factor is the low interest rate environment. Low interest rates are also causing a refinance boom for home owners to lower their monthly payments. There are some limiting factors that are inhibiting otherwise qualified home buyers from getting in the market while rates are low. Specific limitations are the Dodd/Frank rules that have choked down the qualifying criteria for a home loan. However, while the rules are far stricter for owner-occupied homes the demand is still there and we are now starting to see builders building homes again.
Low interest rates allow for people to qualify for more of a house with the income they have. These lower interest rates are also causing the prices of homes to go up from the demand to buy affordable housing. It is interesting to watch this market as the homes in the “sweet spot”(this is where the housing affordability is in relation to the local incomes, in the Greater Sacramento area this “sweet spot” has risen to homes between $300,000 and $450,000 in value) are being pushed higher in value, while the upper end homes are not in as much demand. This is usually caused by first-time buyers entering the marketplace in the “sweet spot”. We are seeing the pent up demand start to work its way into the first time buyer markets as most of the first time home buyers grew up through the recession and the great Real Estate crash of the beginning of the century. These home buyers are feeling more comfortable with their income and do not want to repeat what their parents had happen to them. As these home buyers get later into their 20’s and into their early thirties they are entering the Real Estate Market older than the generation before them. This is causing more demand as these first time buyers are mixing in with the move up buyers and the people that lost their homes in 2008-2011 that are now re-entering the market. Coupled with lower the lower interest rates you have a market ripe to expand.
Sellers of homes are having a tough time pricing their homes and their Agents are helping but still it is a challenge. If you are looking at selling your home, and the house down the street with the same floor plan just sold 2 months ago for a lower price but there is nothing else for sale in the neighborhood, that same home may sell for 5-10% more today. The problem with that is that an appraiser will have trouble appraising the house, as the comparable sales will be older and homes selling outside the neighborhood are selling for more, proportionately. So how do you price your home? One of my tricks would be to price the house up about 5-10% than what the market is for the neighborhood and accept offers at the higher price to see what kind of demand your home is bringing. The higher demand will result in full price offers knowing that the house will not appraise. At this point 2 things can happen; one, the seller can sell it for the appraised value by lowering their price, already knowing the that house was priced higher than market to begin with, and or option number two; the buyer can bring the difference in cash to the table to make the deal work. Option number two, with the buyer bringing in more cash, probably will not work if the house is under contract with a FHA or VA loan. As FHA and VA buyers, most of the time, do not have much cash to work with as they are generally first time buyers using their savings to buy the house. A seller should take into consideration the type of financing they will accept on their home prior to putting it on the market.
All potential home buyers in this marker should be approved for their financing prior to even starting to look. This should be a given, but there are Agents out there so excited to have a potential home buyer to work with they miss this valuable step. If a buyer makes an offer on a home that becomes accepted and Both Agents (the one representing the buyer and the one representing the seller) don’t get this approval first the escrow could potentially fall out later in the transaction due to the lack of loan approval and everyone has wasted their time. Believe it or not I have seen this more lately as we also do loans for those folks that don’t otherwise qualify for traditional financing and they call us in desperation to get a loan after they have been declined for traditional financing. Sometimes we can help but most of the time we should have talked to them before they made the offer. With these cases the buyer has wasted everyone’s time and if the seller is in a hurry to sell because they may have bought another house, that deal may also fall through. All potential home buyers have to look at the big picture, not only for themselves, but for all the folks involved in a Real estate transaction. I know that is unrealistic, but if this article can help one transaction I have done my job by writing this.
All the new regulations with the Dodd/Frank act and the CFPB (Consumer Finance Protection Bureau) making lenders qualify all potential home buyers of primary residences on their verified income, has reduced demand a bit as it has disqualified the self-employed segment of the home buying population as well as others that should be able to buy homes. It also has made it significantly harder to obtain financing for a primary residence as the laws and regulations has made lenders so self-conscious about approving loans that lenders are fearing the fines that the Government can levy on them that they have tightened their standards making it harder to obtain a traditional loan. These laws have played a roll in keeping the demand under control, but I worry for the future when the markets cool off and the supply exceeds the demand. Housing supply in excess of demand will cause Real Estate prices to plummet quicker than ever before.
Summer housing is red hot now and should stay healthy for near future as Rates should stay low. The Federal Reserve will probably not raise rates in the near future as the underlying economy is not as good as the numbers being produced from the Government indicate. We are also in an election year, one that is probably the most important one of last 50 years, and that will also keep short-term rates low as the current powers want to keep the same political agenda going for the next 4 years. The long-term implications of the Real Estate markets will hinge greatly on the next administration America elects. One candidate that is a Real Estate mogul and is second generation Real Estate wealth who knows the value the Real Estate markets play in the American economy, and another candidate that is a career politician that has not done one good act during the time she has been in public offices. Not to name names, but if you are interested in Real Estate and how it drives the American Economy you know what you should do with your vote. Capitalism is what has made America great and the more we move towards Socialism the closer we get to our demise as a nation. History proves this to be true with Russia, Greece, Spain, Portugal and a dozen other European countries that have failed in that experiment. Britain’s have seen this first hand as they were one of the countries supporting the failed counties in the European Economic Union, that is why they voted to leave and start to help themselves again. I digress, Real Estate is the best wealth vehicle America has, so I am a little partial to the industry as I have given the last 32 years of my life to this industry. I wish everyone GOOD LUCK and happy hunting out there. as always if we can help you with your Real Estate or Mortgage needs we would love to talk with you. (916) 672-6130 www.maecapital.com.
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.