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How to Analyze the Real Estate Market to Avoid Major Investing Mistakes

How to Analyze the Real Estate Market to Avoid Major Investing Mistakes

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Jeff Brown

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What’s a “macro” analysis? Very simply, it’s an overall statewide, regional or nationwide analysis of the general real estate status quo. Though some see it as time you’ll never get back, it can and has saved my bacon time and again.

Here are a few examples from my own experience.

6 Examples of Macro Analyses, 1976-2014

1. 1976

The year I switched from owner occupied housing to the investment side of real estate brokerage.

If it was beyond analyzing what day of the week it was back then, I definitely wasn’t the guy for the job. However, my mentors — God bless everyone of ’em — explained to me we were in for an indefinite period of inflation and therefore consistent appreciation of real estate values.

Related: Why Investors Undeniably Matter to the Real Estate Market

Their Bottom Line Advice: Buy now. Exchange now. Let simmer. Rinse ‘n repeat. From ’76 through around October of ’79, I called ’em the Amazing Kreskin Group (AKG). (For those who never saw Johnny Carson at work, The Amazing Kreskin had the answers to questions not yet asked. He was a seer.)

There were many who executed more than one tax deferred exchange in that four year period. It was as if Christmas of ’75 lasted that long. For San Diego, it wasn’t JUST inflation they began to see. Another powerful engine behind this prediction was the staggering number of families moving here. In fact, from around 1970 to 2013 the county’s population grew from 1.35 million to just under 3.35 million. Year in and year out, the county’s population increased, net/net by over 50,000 — and sometimes over 70,000.

Supply/Demand works every time it’s tried, right?

2. 1979

Though since 1976 my experience accumulated at the rate of roughly a couple years per year, I was still too rough around the edges to be called a bona fide expert. And that’s being kind, as Grandma would say.

Can’t remember exactly when, but sometime before summer, AKG told me they sensed the end was near. Double digit inflation can’t continue forever without payin’ the piper. They didn’t realize that invoice would come due in a matter of mere months.

Their Bottom Line Advice: Batten down the hatches. It could be a rough ride for a while. The tone of their voices didn’t convey sunshine and happiness. They told me I should be warning clients that taking cash out via refinance or secondary loans should be avoided like the plague. They also opined it could go on for as long as a couple years.

As grim as that sounded to a soon to be 28 year old, it turned out to have even longer legs than that. In fact, I didn’t transact a straight multi-unit purchase with conventional financing ’til December of 1983. It was an adjustable loan (no negative ammo) starting at 11.75%. Lookin’ back, I chuckle at the memory of my client being impressed that the interest rate began under 12%. 🙂

It (recession) lasted at least four years in “real estate time.”

I realize history defines that recession’s lifespan as 7/81 through 11/82. For real estate investors, that’s a joke. Goin’ into 1980 the owner occupied interest rates were already double digit. Investment rates are generally .5-1% higher. By 1981 FHA — for Heaven’s sake — was around 16.5%, and many conventional rates hit 18%! Unless I missed it, rates didn’t get down to remotely affordable ’til loooooong after the end of ’82.

In fact, in ’85 home loan rates had just dropped below 13%, at about 12.5%. That’s three years after the recession “ended.” It wasn’t ’til 1989 the rates went under 10.5%. It took ’til the early 1990s to arrive at interest rates for home buyers literally doubling today’s rates — and folks were in the streets doing the Happy Dance.

The Takeaway from That Era: Recessions aren’t ever truly over ’til the Real Estate Lady sings. The rest is whistlin’ past the graveyard.

3. 1984

AKG burst into uproarious laughter as I proudly told ’em of my December closing. Turns out it was the timing that was so funny. They were about to tell me the stage seemed to be set for a sequel to the 1976-79 run of appreciation. Now, I was laughing, but more in relief than anything else.

Up to that point in my career, I’d not survived tougher times. In fact, from 1980 through 1983, I learned firsthand the truth of what AKG had earlier told me: “The backbone of the real estate brokerage industry is a working wife.” Turns out that was funny ’til the day it wasn’t. 😉

Their Bottom Line Advice: Buy now. Exchange now. Simmer in the aromatic juices of appreciation. Rinse ‘n repeat. As in the mid to late ’70s cycle, many astute investors transacted more than one tax deferred exchange in the years beginning in 1984 and ending during 1990. Median investor IQs rose above 150 — or at least in their own minds. Net worths skyrocketed beyond that of original goals set long ago.

Down the road, the AKG called this type cycle — derision drippin’ from every word — The San Diego Birthright. They unblinkingly predicted there’d one day be a horrific ending to such a cycle. Sadly, only two of ’em were still alive when that prophesy became reality in late 2006/early 2007.

Towards the end of 1989, AKG began to show signs of visible foreboding. Almost overnight I began callin’ them the Prophets of Doom. At first I told myself it was due to their general nature, which on good days didn’t scare the holy crap outta me. 🙂 But they said the S&L problems wouldn’t be going away any time soon. They were divided as to the ultimate impact on the economy — and real estate in general.

Related: How to Know When Your Real Estate Market is Getting Bad

But they absolutely insisted it wouldn’t bode well for brokerage owners like me.

4. 1990

AKG told me in no uncertain terms that the potential for the S&L “problem” to escalate into full blown crisis —their words — was more likely than not.

They scared me. I’d yet to see a downturn worse than the recent early ’80s recession. As they told me this, I was now in my late 30s — and far more experienced, educated and knowledgeable. On the other hand, AKG had three members who’d seen the 1929 crash as either teenagers or young men. They’d all had it explained to them by their parents. If you blinked you coulda missed the transition from “Happy days are here again!” to “Holy crap on a cracker, what new economic plague is this?!”

Interest rates for that decade went from give or take 7% to around 9%. Investment property rates were, of course, higher; that is, if they would lend at all. I remember thinkin’ that AKG was right again, something that kept me nervous most of the decade.

Their Bottom Line Advice: Stay alert and watchful, to say the least. Tell your clientele to go about their lives for a while in order to wait and see what might happen. Don’t make a real estate move of any kind. Be ready to go fishin’, literally. Now THAT was the last straw. I immediately accused them of overreacting.

Wrong move, WhipperSnapper breath. They told me to find out how many S&Ls had already either gone belly-up or that had been deleted by the government. OK, OK, you win. They said I should prepare for not doin’ any business for a year or two, maybe more, though they couldn’t say when that might begin, if ever.

Well, from the fall of 1994 to November of 1996, I went fishin’, just as they had predicted was possible. In early ’95 I didn’t renew my office lease, closing the doors ’til further notice. I told clientele exactly that, and that they should do likewise; that I’d stay in touch. There was a whole lotta soul searching goin’ on about then.

During those two very dark years, I hardly met with AKG — maybe 4-5 times. “Keep your chin up” was about all they said. For those who maintain the early ’80s recession was the worst ’til the bubble, I say it was the early to mid ’90s. Heck, even post bubble, interest rates remained historically low, which allowed for folks with decent credit to buy property. It allowed brokerage owners to remain in business, even if it was as a short sale and/or foreclosure specialist.

I’d never heard of anything called a short sale ’til the bubble burst. Think about that. Over 35 years in the biz by then, 30 of which were as a brokerage owner. It’s not that I didn’t know what it was, but that I’d never even heard the phrase before.

5. Late 2002

By now I’ve at least earned my seat at AKG’s table, if only as a “kinda sorta” equal. In fact, by the late ’90s they’d added a new rule to our mentoring sessions. Before hearing from them, I was to give MY take on the near and not-so-near future, based on experience and any evidence at hand. It was akin to an ongoing oral dissertation for a graduate degree. As usual, there was no slack given. It was both invigorating and nerve-racking at the same time.

I miss them so much, I can’t tell ya.

In 2002 my growing anxiety wasn’t yet based upon funny money loans. Instead, it was primarily founded upon the already previously shameful rent/price ratios in San Diego actually worsening. They had quickly become the punchline to a horrible joke.

Want an example? How ’bout a half century old duplex in a blue collar neighborhood. Sold in about 2002 for roughly $515,000. It’s GSI for the year was under $26,000!! That rent/price ratio was painfully embarrassing at barely .4%. Who does that on purpose?! Even if you didn’t invoke Murphy’s spreadsheet, and used 40% for vacancies and expenses, the NOI was no better than $15,500. Gotta love that 3% cape rate. The 1-4 unit investment loan rate at the time was around 7.5% or so. They had to put almost 36% down in order to merely BREAK EVEN. Yeah boy. Sign me up for that rockin’ party. 😉

I told this to the November 2002 meeting with AKG. Furthermore, I posited the thinking that there surely were other states with better rent/price ratios — and superior overall economic indicators. A rare sighting of smiles all around the table was my reply. An arrow could’ve gone through my heart then and there, and I still woulda died happy.

Sadly, AKG is no more. One doesn’t know me on sight. The other two died, the last one in 2008.

6. Late 2014

Methinks I was partially right when, in late December of last year, I said the party might’ve been over for the latest run-up in home prices, which in some markets has been significant, to say the least.

However, I don’t think it’s a pause before resuming its upward course. I think this is Bubble-2 popping. I realize this doesn’t set me apart from much of the crowd. Flippers had far more impact than I first thought, which created upward pricing pressure via competition with traditional home buyers. Add to that the ridiculous rebirth of relatively easy money, and, well, you get it, right?

Flipping is now beginning to fade. There are more folks underwater, or virtually so, than we previously thought. I think in the long run this won’t change investors’ longterm plans much. I do think it should affect current and near term decisions to sell rental homes. The price you’ll get for the remainder of this year could (and I think will) be measurably higher than next year.

Plus, as homeowners wanting to sell in the first coupla quarters of next year will quickly observe, buyers will have read the memo too. Investors can keep on buying. IF an investor can afford to offset capital gains taxes with stored losses elsewhere, they should sell yesterday, wait awhile, then buy at a lower price. The only possible downside is any uptick in interest rates.

Oh, and I could be dead wrong.

I just don’t think so. This also bodes well for folks not buyin’ into advice saying they should buy in lower priced neighborhoods “to make a killing.” In my view that could end up comin’ back to haunt them — and sooner rather than later. For the foreseeable future, the 1-4 unit investor should strongly consider buying very young properties in regions offering solid economic fundamentals, in areas nice enough you’d let your grandma live there alone.

I’m hopin’ AKG is givin’ me the ‘golf clap’. 🙂

What’s your view of the “big picture” of real estate? Where do you think we’re headed from here?

Leave me a comment below!