Economic Update

By Christina Suter on Sep 28, 2019 at 10:00 AM in Real Estate Issues
Economic Update

In 2005-2006 I learned I wasn't as smart as I thought I was when I didn't get the memo to sell everything before the market tanked. I was smart enough that I had cash when I was done; as the downturn happened I sold everything, gathered my cash, brought it back home and started doing hard-money lending. At that time people were flipping houses so there were a lot of people to whom I could lend money. After that, I began to use my geek-ism to understanding the market and economy better than I had before. I have a Bachelor's degree in business and a Master's in Psychology, but I knew it was essential to my future to learn and understand the economy.

Investing is an intentional, conscious business model that grows when you feed it energy. In 2017 the mortgage report said homes nationwide were selling faster than any time in recorded history. The "days on market" plummeted to record lows meaning the amount of time the inventory (amount of homes for sale) stayed on the market was low. The faster the real estate turns the higher the prices they sell for. Six months on the market is considered a balanced market. When houses sell faster than six months that's considered a seller's market. When houses sit for sale longer than six months it's considered a buyer's market because no one wants to buy so sellers sell for cheap so they don't have to pay each month to hold onto houses. 

A cycle in real estate is 7-10 years; at 7.5 years right now, we're nearing the end of the current cycle. National Association of Realtors (NAR) said "Existing home sales slipped 2.3% in April 2017 but days on market fall to under a month. Existing home sales were 1.1% in May 2017 and median sales price ascends to a new high." Existing home sales rebounded in May and the median sales price soared to a new high. In 2004-2005 I was the person who'd walk into a house for sale, walk back out, fill out the offer form on the hood of my car, and walk back in with it and a check and ask to buy it. I've seen firsthand a really hot, tight market, and the current market is similar but no better.

Months of Inventory- How long will it take me to sell the houses on the market?

Days on Market- How long will the house sit on the market before it gets an offer?

There was an all-time low in 30-year fixed interest rates; the interest rate in America has been going down since 1980. At 4% I can buy a $100,000 house for $477 per month. But if the interest rate goes close to 7%, payments become $733, which is a little harder. Pending sales are the leading indicator in the market because it shows how inventory is moving. If I have no properties that are coming up for sale, my market disappears. In 2004 and 2007 pending sales went down and multi-family units were the first to recover because investors thought about the fact that people losing their homes were going to move to multi-units. Single-family units took about 3 years to recover. I had a 7% cap when I bought my first multi-unit which is unusual for an LA multi; the cap-rates now are 3%.

"When I say to a group of realtors, would you buy the buildings you're selling, and they go, 'no way', that's a really good indicator that, that particular asset class is way overpriced." -Bruce Norris

What I paid for the property minus the basic expenses (not the mortgage). So let's say I bought a multi-unit for one million, I get $100,000 a year from it (a 10% cap-- which doesn't usually happen) I take $30,000 out for expenses, leaving me with $70,000 (and I still have to pay mortgage) and I divide that number by how much I paid for the building, which in this example is about 7%. 

FRED Federal Reserve Bank of St. Louis is my favorite website and a great resource where you can get and make graphs for free.