Have you noticed that pretty much all of the financial indicators in our economy are on the upswing? The stock market has been going strong, and real estate values have finally recovered from the housing bust of 2008-2009. In fact, the stock market continues to set record highs on a near-daily basis, and in most parts of the country real estate values are appreciating.
It is certainly hard to know what to do with one’s money in this ever-changing economy. Fear and pessimism has persisted during this historic bull market, keeping trillions of dollars sitting on the sidelines missing out on the gains of the last 8 years, but it’s certainly not hard to understand why. On one hand you have financial entertainers touting, “The market is strong, better get in while you can!” while prognosticators warn, “We’re entering into bubble territory, better to keep your money in cash.”
So I set out to find what’s really going on in the market — in particular, the real estate market. Real estate is a major driver of our economy, and we all remember what happened last time when real estate tanked: it dragged just about everything else down with it.
Is this just a repeat of 2007?
My quest for a better understanding began in January upon meeting Julie Baldino, CEO and Managing Broker of Front Door Realty, a top real estate brokerage firm in the Pacific Northwest. “The real estate market looks a lot like it did back in 2006—” she began.
Julie now had my FULL attention.
I had heard that lending was opening up a bit, and that banks and Wall Street were again chopping up blocks of mortgages and selling them (CMOs, CDOs, etc.), but I wasn’t sure where we were in the market cycle. She continued, “We’re seeing similar pricing and inventory levels, and almost identical types of flipping activity as we saw in 2006. The lending standards are also getting loose again like they were then, and the current administration has said they want to further relax lending standards.”
Baldino has also seen an uptick in foreclosures, “50% of the homes purchased in 2015 using the homebuyer tax credit were foreclosures, and now those are foreclosing. The average foreclosure from 2008-2009 has been turned over between 10-12 different banks.” So the banks haven’t been able to clear their foreclosure inventory from the housing crash?! Interesting.
Look Out Below?
Next I spoke with Michael Zelina, Director of Sales & Business Development at Luxury Estates International in Las Vegas, a premier luxury home brokerage in Nevada. He had this to say, “We still have 20-30% of houses underwater, but there isn’t much inventory on the market and new homes are being built at the same rate they were before the housing meltdown. We still have homes that are vacant, and homes with people living in them and not paying their mortgage. The homes are so far underwater that the banks would rather just let the families live there to keep out the bugs than foreclose on them.”
Yet despite the foreclosure backlog, Zelina noted the real estate market is booming in the entertainment capital of the world. “I’m seeing properties that were selling for $250,000 going for $400,000 today. The pricing levels are very similar to 2006-2007, and I think we might have a little ways to go before we see a correction.”
He explained that the two main drivers behind the rapid appreciation are the continued relaxing of lending standards, and the anticipation of increasing mortgage rates. “Inventory is low, but people are buying because they’re worried about having a higher mortgage payment if they wait, and that’s pushing real estate prices even higher. It’s definitely a seller’s market.”
We’re no stranger to the real estate adage location, location, location, and apparently Las Vegas is no exception. Zelina believes that a future correction won’t affect all areas the same. “The high end luxury market, homes from $2-8 million, really didn’t get affected in the crash, it stayed pretty strong. So I expect that market would weather another housing correction.”
In general, Zelina advises that a home buyer’s first step is to establish a clear goal when looking to buy a house. “Base your buying decision on your long term needs,” he said. “If you’re thinking long term and you’re going to live in the house for 8-12 years, or you’re going to live there for 4-5 years and then rent the house, then buying now makes sense.” “But if you’re thinking about trying to get in on the action and buying a property you can sell for a huge profit in 3-4 years, I wouldn’t pull that trigger. Too risky for me.”
Is Real Estate an Investing Opportunity Again?
This led me to find a real estate investor perspective on the market. Enter Chris Jefferson, founder of Ridge Point Custom Homes in Richmond, VA. Jefferson’s company has invested over $10 million dollars in Richmond real estate over the last 4 years and he is seeing massive price increases as well.
“We’re seeing insane appreciation in the market, in fact, I just sold a house for double what I thought I would sell it for when I bought it.” Jefferson continued to say that not only are houses seeing rapid pricing increases, but even empty lots, “I’m selling a lot for $50,000 that was worth $20,000 just a year ago. And that’s just a piece of dirt.” Like Zelina, he believes that the real estate market has certain sub-markets, and the ones that have recognized the most appreciation are the areas that have received the highest levels of gentrification. “Certain blocks could be a selling opportunity, other blocks could be a buying opportunity. But I think to stop investing would be a mistake. Investing in front of the path of development is the play, in my opinion,” said Jefferson.
He went on to say that he’s planning for a market adjustment in 18-36 months, mainly due to loosening credit standards again. But he also feels that this adjustment won’t be as severe as the crash of 2008-2009, and that it will mainly impact the aforementioned sub-markets. Overall, Jefferson sees the real estate market as strong. In order to capitalize on price appreciation, he advises that homeowners to “consistently make small and cosmetic improvements to your property, maybe one thing a year.
“The biggest thing I see is people want to get in on the appreciation, but they haven’t made any minimal improvements to their house.” By making improvements in addition to basic upkeep, homeowners will be in a better position to capitalize on appreciation when it comes time to sell.
So What Do I Do?
It certainly seems that real estate is a seller’s market right now, so if you’ve been thinking about selling some property in the next 1-3 years, now might be an ideal time. On the other hand, if you’re looking to buy a home, Zelina’s advice to have a clear understanding-of-purpose is key.
And if you’re thinking about an investment property, heed Jefferson’s words to buy in front of the path of development. Don’t buy into a recently-gentrified area thinking that you can take advantage of the appreciation, because you’ve probably missed that boat.
Similar advice would be appropriate for anyone thinking about investing in the stock market. If you’ve been holding cash since 2009 because you were fearful about another crash, now is not the time to buy back into the market with a buy-and-hold strategy (mutual funds). You might be buying in just in time for the next correction. But you also don’t want to continue holding cash and miss out on any further market gains; because due to inflation, you would just be going broke safely. OWRS offers alternative investment options that capture market growth while limiting downside risk.