It seems that in these past two weeks, we have experienced a tremendous increase in relatively negative news regarding the real estate market.  Usually I just chalk up all this negativity to the media working hard to score a few extra bucks.  However, this time I am choosing to not be so hard on the media and the bad news.

Why?

Several reasons.

Is Housing Overheating?

The biggest reason is that I believe that the housing market in general is in danger of becoming overheated… again.  As evidence, just look at who the buyers are:

1. First-time homebuyers getting loans that for some consume almost 50%of their income
2. New investors with little cash and less knowledge rushing into the market because they see the “opportunities”
3. Seasoned investors buying everything they can… because the prices are just too good to be true.

While I could spend a considerable amount of time discussing each item above, I would like to focus instead on the second item: “new investors with little cash…”

New Investors Jumping In Too Soon – Unprepared?

Much of the news these past 10 days has either discussed the extreme number of foreclosures in the past 3 months or the fact that housing prices will continue to decline for the next several years.

Consider this article in the Miami Herald that indicates that housing prices will decline another 30%, and that is already on top of 48% declines since 2006. 

Or this article on DailyFinance that talks about every bubble following the same trajectory on the way down that it did on the way up.  The chart in the article tells it all.

Most experienced real estate investors know how this works.  They understand that old mantra, “You Profit When You Buy,” and purchase their deals accordingly. Making sure their deals reflect projected value trends which they factor into their purchase price.

Where it is more unsettling for me, at least regarding the new crop of investors, (did you know some gurus estimate that there is a 50% churn rate of noobs into real estate investing every year?) is that these investors just see low prices and without knowledge of or consideration to long term trends they jump in and ultimately end up getting slaughtered. 

Bottom line, the overall housing market has a long way to go before things return to normal, whatever normal is at that time.   Don’t be lured into deals that look too good today, because depending on your market, prices have not yet bottomed out. 

If you doubt this statement just ask someone who purchased a $40K property in Detroit last year, what it’s value is today.

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Is The Housing Market Overheating . . . Again?

First of all, I should tell you that I do not have the faintest notion why those dudes stole the freaking salmon from a fish hatchery in Kennewick, Washington! I can only tell you that, according to the Kennewick website, the dude allegedly stole the entire salmon. Doesn’t say if he was hungry or trying to sell the fish on the black market (is there a black market for salmon???) or whether he was, perhaps, romantically involved in some way with the big fish. Look, we are talking about Kennewick, Washington, so anything pretty much goes.

Now what brought me to the official Kennewick website in the first place, you may ask? (That’s okay. If you didn’t ask it, I just did.)

I’ll get to that in a minute. But first…for those not familiar with Kennewick, Washington (and I’m guessing that’s like 99% of you, right?) it is a city of almost 66 thousand people (and an unknown number of salmon I’m guessing) that is about a three and a half hour drive from Seattle.

In the winter, the temperature rarely drops below 44 degrees and in the summer seldom climbs much above 88. Except when it does.

The city is in Benton County which fits very nicely into the southeastern portion of this northwestern state.

And, did I tell you that Forbes ranks it number two in job growth for the entire United States? (Suppose that could mean it has just added two new jobs!)

Now I am getting to the interesting part.

Bucking the National Housing Trend

I looked up all this stuff about Kennewick, Washington because right there, smack in the middle of a CNNMoney.com story about how national home prices are now forecast to actually go down another 11 percent–guess which metro area is bucking the trend big time?

Oh come on….this is easy. YES….Kennewick, Washington of all places on Earth.

Says the world’s most self-important network: ” The biggest winner will be the Kennewick, Wash., metro area, where home prices have ramped up 8.9% over the past three years and are expected to increase another 3.4% by June 2010.”

Now, of course, CNN, being CNN, doesn’t bother exploring why this might be? Why Kennewick, Washington?

But I have this feeling it all has something to do with the theft of that stinking salmon. Well, the salmon was probably not stinking yet…but probably still smelled like a fish right off the bat, wouldn’t you think?

I mean, I started thinking: what would motivate someone to steal a salmon in the first place? And, more important, why would that “news” make it to the city’s website????

Damned if I know. But I do know this: Anyplace that can make a big deal about a swiped future dinner course, can probably live with the fish tale that it is THE place to invest in real estate. Now, pass the tarter sauce, please.

Photo Credit: bugeaters via Flikr

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Kennewick, The Stolen Salmon & Why Real Estate Is Booming There

I hate running. I pretty much hate any form of exercise. I have no problem doing my real estate work, but when it comes to working out, I’ll admit I’m very lazy and lack discipline.

I remember many of my mentors telling me how important it was to exercise on a daily basis and how exercising was often the first thing they did in the morning. I’ve also read the same thing in many books written by successful people. I recall one successful entrepreneur/writer saying that no matter what, he does three things every single day: 1) He writes 2) He promotes his business 3) He exercises.

This is What Happens When You Get Older

I’ve heard this advice for years and I just ignored it and didn’t think it had anything to do with success. Well, I must be getting older because a few weeks ago I started feeling run down and I didn’t have as much energy as I used to. Come 9:00 at night I’d be ready to pass out, even though I had just sat at my computer all day and hadn’t had a stressful or rigorous day.

I was talking to one of my friends about my lack of energy (who happens to be a personal trainer) and of course she told me it was because I didn’t exercise and because I didn’t eat well. So… what did I do? Two weeks ago I decided it was time to start running every day. Now, I don’t really care about the health aspects (even though I should.) But I care about having more energy so I can be more productive and make more money.

How Long I Run and How Often

I now run from 6:00am to 6:45am every morning, Monday-Friday. It’s only been two weeks but I am amazed at how good I feel. Really, it’s almost unbelievable. During the time I’m running I dislike it, but as soon as I’m done I feel great. Plus, I have so much more energy at night. At 9:00pm I’m no longer ready to pass out. I’m able to work until 11:00 if I need to and I feel fine.

Also, my mood is much better and I don’t seem to get irritated as easily from sellers who drive me crazy, or perhaps from a tenant that’s going to be a little late with rent.(I feel like I’m doing an infomercial right now… “And what do I owe this amazing energy increase to? Well, the XYZ super-duper, magic exercise pill sells for only $19.95… but if you order now, I’ll give you three bottles absolutely free.)

You Need To Add This To Your Daily “TO DO” List

Anyway, my point is, if you’re like me you want to be an incredibly successful real estate investor who makes a ton of money. To help you accomplish this, I would encourage you to start adding to your daily “to do” list to exercise for 30-60 minutes. It could be one of the smartest business decisions you’ve ever made.

Now my next goal is to start eating right… however, one thing at a time… baby steps.

Photo Credit tangywolf via Flikr

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Why Exercising Could Make You a Wealthier Investor

Last week, I started looking into the Washington, DC Metropolitan Statistical Area (MSA), which consists of the District of Columbia, Northern Virginia and parts of Maryland.  Given the growth in the federal budget over the last few years, I wasn’t surprised to see that the DC MSA was “the most educated and affluent metropolitan area in the United States,” according to Wikipedia.

The District of Columbia itself has made great strides in recent years, including greatly reducing the rate of violent crime.  You may recall that it was known as America’s murder capital during the crack-filled 1990s.  However, the city’s unemployment rate is actually fairly high, at 11.1%.

Maryland and Virginia, on the other hand, are very prosperous.  Both are among the most economically successful states in the country.

Maryland’s Doing Pretty Well…

Maryland, DC’s (mostly) northeastern neighbor, has seen fairly consistent population increases and has a well-below-average unemployment rate of 7.2%.  It actually has the highest median household income of any state, although this can be deceiving – the cost of living is also very high there.  (The second highest median household income is in New Jersey, which is not currently an economic paradise.)

However, Maryland has many advantages.  It is a transportation hub, has (as you would expect) many government agencies, and also employs many people in biotech.

Maryland unfortunately also suffers a business climate that is 34^th in the nation according the Pacific Research Institute.  It ranks 43^rd in fiscal policy, 28^th in regulatory policy, 47^th in judicial policy, 26^th in size of government and 19^th in welfare spending.  This should be considered slightly below average, and as seen by Maryland’s otherwise excellent economic performance, is not enough of a burden to cause major problems.

As in DC, Maryland’s real estate value has diminished over the last few years, but at a relatively slow rate.

But Northern Virginia’s Doing Better!

Northern Virginia is at the perfect storm of economic success.  How do we know?  One of the major issues in the upcoming VA governor’s election is transportation planning.   Northern Virginia (also known as NoVa)’s current system of highways and public transit simply can’t cope with the extraordinary number of people moving to the region.  And why do people want to move to NoVa?

One reason is unemployment that is well below average.  Virginia as a whole currently has 6.5% unemployment.  That’s not great in normal times, but fabulous compared to the national current average of 9.7%.

That very low unemployment is driven not only by federal government employment, but by an outstanding business climate ranking of 9^th from the Pacific Research Institute.

Even better for Virginia, all neighboring states have much lower rankings.  That means that many businesses that could settle anywhere in the area around Virginia will probably choose the Old Dominion.

Virginia’s population has increased by at least 10% every decade since 1940, and is now three times what it was in 1940.  It also includes the nation’s fastest-growing county, Loudoun County (population up 59% from 2000-2006).

In short, everything is perfect in Virginia.  What could go wrong?

Well, the state has had a nice little bubble bust.  In Loudoun County, for example, prices have dropped about a third since the 2006 peak.  Fairfax County has lost about 25%.  Prince William County, about 40%.  Those are some big drops.

In Virginia’s case, however, I’m going to call this a feature instead of a bug.  Consider other states that have suffered real estate busts that, almost by themselves, caused terrible unemployment.  (Florida and South Carolina, I’m looking at you.)  Much of their employment was based on construction, which meant they had a continual need to keep growing.  That’s not the case in Virginia because of the terrific business climate and diversified industry.  I see the state coming out of this recession fast and strong – and recommend it.

I can see one major possible problem for Virginia in the future (other than the transportation mess, which is going to get resolved one way or another).  That is the possibility that the real NoVa real estate bubble might still be ahead of it.  In other words, people who buy now might be looking at some major declines down the road.  However, it remains an excellent choice for long-term investors.

bunkosquad via Flickr

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Maryland and Virginia Real Estate Markets Show Promise

Note to readers: I’ve been criticized for some blunt statements about real estate markets in the past.  You can disagree with me, but I ask that you not doubt my integrity.  I have no real estate interests outside New Hampshire and am not representing anyone.

When I started researching the Washington, DC real estate market, I was impressed by the stability of institutional markets in general and astonished by the growing disparity between federal government and private industry employment.  Put bluntly, the federal government has become the best employer in America.  It is the most stable, with a headcount that grows annually and essentially guaranteed salary increases.  It also offers the best benefits and salaries, except for the very top (the government’s CEO, President Barack Obama, makes $400,000 per year – a nice paycheck, but lower than that for almost any CEO in the Fortune 500).

As you might imagine, having the biggest employer in the country in your back yard is a good thing.  When that employer can always be counted on for a raise, that helps.  Partly as a result of that, the DC real estate market is looking pretty darned good.

The Washington Metropolitan Statistical Areas (MSA) is best understood as three separate areas: southwestern Maryland, the District of Columbia and northern Virginia.  I use DC, the District of Columbia and Washington interchangeably, as they really are the same.  The three areas are very different and present different challenges to investors.

In this post, I’m just talking about the District itself.

The population of DC has actually declined significantly since the 1950s as residents have moved out to the Virginia and Maryland suburbs.  Unemployment in DC is also fairly high, at 11.1% compared to 9.7% nationally.  Almost all job losses have been in the private sector.

That’s the bad news.  The good news is that DC is improving in several ways.  One big one is the rate of violent crime.  Everybody “knows” that Washington, DC is the most crime-ridden city in America.  It’s not true!  CQ Press, using data from the FBI, ranks DC 21^st among cities.  Rates of all forms of violent crime, in particular, have decreased sharply since the 1990s.  That’s not to say that Washington is a safe city – the violent crime rate is about three times the national average.  That is still lower than Orlando, Cleveland, Memphis, and even Minneapolis.

Many DC neighborhoods, particularly in the western part of the city, have been gentrified and experienced fast-rising property values.  These are the “cool” neighborhoods where young professionals like to live: Columbia Heights, Adams Morgan, Mount Pleasant and others.  I have no doubt that many DC investors are currently on the hunt for the next “cool” neighborhood.

Understanding DC’s business climate is a bit tricky because many studies don’t include it.  However, the tax climate is somewhat worse than average – residents have a bit higher than average state/local tax burden and corporate taxes are significantly higher than average.

DC real estate has declined in value over the last few years, but relatively slowly, as seen in this chart.

I think DC’s future looks bright.  The reduction in crime is one of the great under-reported stories.  The city is beautiful, and as noted before, the biggest employer isn’t going anywhere.

Image by Willscrlt via Flickr

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

How is the Washington, DC Real Estate Market?

Many landlords are attracted to markets with a large institutional presence because they offer stability.  Hospitals, universities and government agencies rarely make major cuts in employment, and they very rarely close.  That means your prospective tenants are not likely to leave.

This also used to be the case for military bases.  Years ago, career soldiers could build very comfortable nest eggs by buying a home in every base where they were stationed, and keeping it when they were transferred.  They would always be able to find other soldiers to rent their homes.  That’s changed to some extent because of the number of base closings over the last couple of decades.  However, the largest bases will remain active for many years.

Are these markets really stable?

Big institutions almost never make up more than half of the employment in any market, meaning those markets are still subject to other private industry employment losses and gains.  Often, institutions such as universities and medical centers spin off technologies and companies that spur private-sector job growth.  Later, those companies may fail, cut their workforces or do their expansion out of state – causing downward pressure on the state economy,

Institutional markets are also subject to bubbles and busts, because bubbles and busts are rarely driven by changes in employment.

However, market volatility is dampened by the presence of the big institutions.  A recession or housing bust panics fewer people because most of those working for the institutions know their jobs aren’t going anywhere.

The result is a market with some volatility, but much less than in areas that are heavily dependent on private industry and entrepreneurship.

The Boston Example

Consider the Boston Metropolitan Statistical Area (MSA), which has some of the finest hospitals and universities in the world.  These institutions helped create the state’s high-tech economy, as students and researchers created companies based on their ideas.

That’s the good news.  The bad news for Boston’s economy is that many of those companies have failed, been sold (with subsequent loss of local employment), or had massive layoffs.  Others kept their technical core in the Boston metro area, but expanded out of state or out of the country.  This upheaval has been moderated by institutional employment, which has remained steady or grown at a moderate pace.

The Boston real estate market is down right now, but not by as much as others.  It boomed during the good years, but not by as much as some other markets.

The Boston-Quincy-Cambridge MSA’s average home price peaked in mid-2005 at about $410,000 and is now at just over $300,000.  That is about a 6% annual drop.  Scary, to be sure, but not nearly as scary as the Miami-Fort Lauderdale MSA’s plunge.  Home values in the Miami MSA have gone from an average of $307,000 in mid-2006 to a current average of $169,300 – nearly a 13% annual drop.

Targeting is important

Even the biggest institutions can only have so much impact.  The biggest institution in the United States is, of course, the federal government, which employs nearly two million people.  The government dominates employment in the Washington MSA.  However, that area includes three million workers in Maryland, the District of Columbia and northern Virginia.  Only 285,000 of those people work for the federal government.  I will be writing about the Washington Metro Area in my next blog post.

In other areas, an institution’s impact is going to be limited to two or three towns surrounding it, simply because people generally like to live close to where they work.  For example, Fort Bragg is located next to Fayetteville, NC.   Chances are not many people drive to it every day from Clinton, NC, which is 34 miles.  That means there may be great reasons to invest in Clinton, but Fort Bragg’s proximity isn’t one of them.

Doing further research

If a relatively stable economic environment appeals to you, start by mapping out the biggest institutions in the area you are considering.  Look at the towns right around those institutions as the most likely candidates for long-term stability.  But bear in mind that a strong institution does not by itself make for a promising town.  Areas that are suffering long-term private industry collapse, e.g. Buffalo, New York or Detroit, are not going to be saved by their institutions, no matter how strong those institutions are.

Image by Kansas Sebastian via Flickr

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Big Institutions Mean (Mostly) Stable Rental Markets

It was the worst of times and it was even worse than that. A recent Case-Shiller housing report finally showed some hopeful signs recently. The report showed that housing prices for the second quarter of this year were up for the first time in three years for 18 of the 20 markets that were tracked. The two that were down? Detroit and Las Vegas.

The two markets were very much the same, yet so different. The same in that they are still showing price declines but the future outlook for each is like night and day.

Detroit

People are well aware of the problems facing the auto industry. With so much of the industry based in the Detroit area, is it any wonder that they are so severely impacted by this recession? The unemployment figures for July show that Detroit suffers the nation’s highest rate of joblessness at a whopping 28.9%. What happens when there is no work? People move in search of better opportunities. There is such an oversupply of available housing due to the lack of demand that prices had to fall.

The economic outlook is bleak for the region. Couple that with high taxes and cold weather. There is no reason for people to move to Detroit, which means that demand can’t be expected to rise anytime soon.

Las Vegas

Las Vegas is suffering from an oversupply of housing as well. This was caused primarily by speculation, which led to overbuilding. The unemployment rate for Las Vegas stands at 13.1%, significantly higher than the national average. Construction was the number two industry in the area and it has pretty much dried up. Tourism is the primary driver of the economy and that is down significantly due to the slumping economy.

The prospects for recovery in Las Vegas are far better than Detroit for one major reason – people want to live there. Las Vegas has a much better climate, a favorable tax structure including no state income tax, and a multitude of entertainment options. Home prices have reached a point where they are affordable again and the sales activity reflects that.

To be sure there is a long way to go yet. Until the employment picture improves you will not see a true recovery in Las Vegas, Detroit, or anywhere else. However, Las Vegas is a significantly better real estate bet than Detroit.

A study of economics usually reveals that the best time to buy anything is last year. – Marty Allen

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

A Tale of Two Real Estate Cities