All Forum Posts by: J. Martin

As I was poking around at the relationships between jobs and potential predictors of job losses, I started looking at a mathematical representation of something less quantitative, that we are all familiar with. This statistic seems to have a strong correlation with job growth and losses in the US. As you read below, you will see how I went from the raw data, to a transformation that shows a more clear relationship..

Orange Line is job growth/loss in the US. Blue line is my indicator/predictor..

What we can see is that there appears to be a pretty strong correlation between changes in these two variables. What is even better is that I have already transformed this data to show the strong correlation, even though my predictor variable actually significantly precedes jobs growth/losses. The predictor above is already "lagged" in time by 2.5 years! So let’s “unlag” it to it’s natural timing.. Slowly...

24 Month Lag

18 Month Lag

12 Month Lag

No Lag - Actual Data

The yield spread is the difference between 10 year and 2 year treasuries. "10's and 2's." When I first saw the chart directly above, it wasn't so obvious what the relationship was, but I could see the changes in job growth seemed to "chase" changes in the yield curve. And looked like it took about 2 years.

The yield curve is both a result of and a driver of the economy. A steeper curve generally indicates more economic health (demand for long-term borrowing), an accommodative federal reserve,

 The billion dollar question... Smooth landing, or bumpy and destructive? I do not know. Sort of in uncharted waters. Lending not as loose for unqualified people. But affordability really be stretched across the spectrum, with the Fed left to do a lot less than they could in the past..

I just thought it was neat that you could clearly see the rate of growth slowing during the last slowdown also, while RE prices were still increasing (at a slowing rate). And seemingly in every other downturn. Even not knowing what will happen, it allows you to reposition or side-step a good chunk of that "uncertain" part of the cycle, if you should choose to do so..

I wouldn't say that the parts where real estate slows down (or goes negative) is totally unpredictable!! (at least from a cyclical - not quarterly perspective..) That's valuable information for me, even if I don't know if there's going to be a serious fallout..

"Everything that is unsustainable must come to an end." (for you Amit! ;)

I only heard this the first time recently, but thought it was pretty funny.. Seriously though, the leading index for CA makes it look like the beginning of the end of this cycle, historically. We'll see if it continues decelerating the next 2-3 quarters, along with San Francisco - Oakland - Hayward economic conditions, and local job growth deceleration. Takes a year or two to unwind though.. ;)

San Jose - Sunnyvale - Santa Clara RE Prices w/ local economic conditions, stock market

I don't know how much the impact, but the stock market dip and volatility can't help, right!? Look at the dropoff in local economic conditions, followed by a slight deceleration in employment growth..

@Ben Leybovich,
"Call ahead." I will call ahead! Thanks Ben! Would love to see that shed you built! ;) Glad I got to meet you in person in Sacramento the other weekend, and will have some better questions to pick your brain with next time :)

@Tom Shepard,

"Casa Shepard -- with plenty of space for you and yours, just let us know when you might come by!"

That is awesome of you to offer Tom! Would love to take you up on the offer, and take you out for a night to your favorite places! Nashville is up on my list of US cities I haven't been, up there near Austin. And nothing better than getting the hometown experience!!! Just sent you a message about potential timing. Let me know if you're coming out towards the Bay! :) I also read your bio, and congrats on another purchase in Dec, and keeping the pace going! Wish we had more deals out this way! ;)

@Helen Rolls,
"Hi, if you end up in Australia I would be happy to show you around Sydney. There is plenty of room here too."
Thanks for the offer Helen!! Everyone on BP is so kind! :)  I don't have Sydney on my "immediate" list, partially because the place is damn expensive! No? I'm trying to keep it cheap, at least to start.. But you will be the first to contact to get a tour if I make it that way! Thank you! :)

2 REO HOMEPATH TRANSACTIONS:
I have purchased 2 4plexes in 2 separate transactions about 2 years apart from 2 different listing agents as REO's from HomePath during this last cycle. The first as owner-occupant in the "first look" period. The other as an investor after more than 6 months on market. Contrary to others, I have found them great in CA! (probably depends on the price point - just under $400K apiece here.) I believe all HomePath properties have a "first look" period for owner-occupants for the first 15 days or so. Forget exactly how many. Look on the site.

FIRST LOOK - OWNER OCCUPANTS
This is great if you are, because in my experience, they will not consider investor offers during that period, and if you are the highest offer at or above the list price, they will accept it. However, in my area, they would never accept an offer more than 2-3% off the list price. They prefer to bring it down slowly and see if anyone bites. That second one was on market forever, brought down in $15-20K increments over 6 months. There was finally a point where market rents and prices were overtaking the list price, and it fell out of contract after 3 months or so, so I jumped on it. It's my best cash flowing property I own. And anyone paying attention to the market could have grabbed it.

DOUBLE-END FOR LISTING AGENT
I recommend letting the HomePath listing agent double-end the deal to get your foot in the door, if you are comfortable not using your own agent, and it is competitive. The agents do tend to have a lot of listings with HomePath, so they might be busy, but just follow up with them and make it worth their while.

GET A DEAL?
The less responsive the listing agents are, the more you should hound them! But give them an easy commission! The other investors already hung up and moved to the next property where the listing agent responds. So there may be some opportunities there.. But because there is less foreclosure inventory than before and deals are getting picked over, there is much less opportunity with HomePath today that there was a few years back. What's new!? lol

Good luck!

PS: I usually tell people not to trust those with alliterative names, but I'll make an exception! lol

@Laura M.

It all depends on your circumstances, needs, prospects, and alternative investments, but here's what I like to look at:

Annual Cash Flow / Net Realizable Equity
Net Realizable Equity is the amount of cash you could receive if you sold the property (after commissions, sales costs, capital gains taxes, etc.). If you look at that cash flow yield relative to the amount you could invest in an alternative asset, and still like that yield, given everything else you think about the prospects for your property, you may have a better idea..

Good luck!

@Johnson H.,

You chose an EXTREMELY AUSPICIOUS DAY to hold this meetup.

March 11th is the first day of the rest of my life :)

I will be starting the first leg of an indefinite-leg trip on March 11th! But because I'm flying now instead of driving on Friday, I may just fly out of San Jose instead ;)  Would have to leave early, so I might come early..

 I agree. And I also would like to be rich and beautiful, but look where I am in life!!! lol
("I personally would rather be free and clear with unfunded HELOCS..")

The 30yr fixed rate option (insurance) is good for me given my situation. If I had tons of cash and financial resources, I wouldn't worry about just going for some variable rate in my mix of the portfolio.

At the end of the day, no matter rates, prices, etc up or down, I NEVER have to refinance that mortgage or experience a change in mortgage payments for the next three decades. I have the option to go down if I want to switch to variable or a lower rate and qualify at that time. Or Not! But I don't need to anyway. So I guess it helps me sleep well at night, knowing how much I leveraged to get here.. Someday, I will have less leverage like you and Minh. But I'm still growing into my fishbowl ;)

George, first, I appreciate that you are looking at this and sharing it. Where did you get these charts from? Can you get the underlying data? I would love to have it!

Second, it looks like your housing price chart is inflation adjusted, just judging by it not being multiples higher than 100 today. However, it appears that your 10yr Treasury chart is not real interest rates (inflation adjusted). So you're seeing this massive pull on nominal interest rates during times of inflation, that don't show similar movement on the RE prices, because the increasing RE prices already got inflation-adjusted out..  No?

INFLATION SINCE 1947 (THE DATA I HAVE HANDY - 1000% MORE EXPENSIVE; 10x)

ANNUAL INFLATION

INFLATION AND RE PRICES: 1975 ON (DATA I HAVE HANDY FOR RE)

You can see that especially during the 80's there was a strong correlation between inflation and RE.. How about rates? Did they diverge from the rest significantly?

 I agree with the inflation vs. fixed rate mortgages, which is why I've focused on them in the last downturn. However, I somewhat disagree that we will all end up having to pay the progressively more expensive dollars under deflation. (At least nor for long!) Huh? With every 30yr fixed rate mortgage comes an embedded option: the option to prepay the principal balance with cash, refinance, etc. into another loan. On conventional loans, they can't even charge a prepayment penalty for it! Even if rates do not go down, you could refinance to a variable rate, which is typically 75-150bp less (we'll see in the future). Or with deflation, I think most would expect low or lower interest rates.. This is assuming qualification, equity, lending. But probably not the craziest idea. So another option to refinance down..

So I see the 30yr fixed rate mortgage as an insurance policy. If you are a well-qualified borrower, you should have good odds of qualifying for something else if you don't like a potentially longer-term deflationary environment.

Some bigger fish like @Account Closedhave already prepared for a longer-term low-rate environment by taking advantage of low variable rates for a while now, and has been pocketing the difference. I gotta say, he has been right so far!! If I would have had one of those variable-rate 30yr am's I think you were recently talking about, I might have considered it! I think he and I probably agree on the general idea of the 30yr fixed rate as insurance since you don't have to stay in it forever. But unlike me, he doesn't think the cost of the insurance is anywhere near worth it! I think I'm drifting more and more into his camp.

I guess I shouldn't be too disappointed for each year my insurance policy does not "pay me out." But it does make me think about the cost of the insurance!! ;)

Speaking of insurance, Warren Buffet:

"Be greedy when other are fearful, and fearful when others are greedy."

While some people are talking about being cautious, I think their actions are saying otherwise, at least in Bay Area residential and commercial real estate (SF office.. wow! $6, $7/sq ft/mo rents for prime & rising.. ) Residential rents up 40-50%+ in the core bay all over. Prices riding fantastic appreciation. Overbidding like crazy (even considering intentionally low list prices). Many multiple offers w/ no contingencies or appraisals needed, and miniscule days on market. Actions say that others are being greedy, IMHO.

@George Gammon , @Gloria Mirza, and @Nick L., great commentary.

With all this discussion of wages, home prices, interest rates, and qualification, I have to refer back to one of my favorite pieces of data that I haven't been updating lately: The Housing Affordability Index!

Here's some good historical HAI data I got together and analyzed mid-last year. I'll update it in not too long..

https://www.biggerpockets.com/forums/311/topics/190248-how-close-to-the-top---sf-bay-area-housing-affordability-analysis---by-me

Scroll down a bit and look at how interest rates impact home price qualification. A lot of support came from decreased rates.

HAI from November: (courtesy of Paragon's Patrick Carlisle's work, with link:

http://www.paragon-re.com/Housing_Affordability_and_Market_Corrections )

INTEREST RATES AND RE CYCLES

In regards to George and Gloria's comments regarding the direction of interest rates and RE prices, I think we really need to differentiate the short term from the long term, and what is going on in the background. In the short term, increases in rates can cause all kinds of counterintuitive behavior (buyers buying more at higher prices expecting even higher rates). When rates are increasing over a cycle, it's usually because employment and lending conditions are improving, optimism improving, more cash on hand, oftentimes more than offsetting higher rates.

What I think we can say with a high level of certainty, is that in any given economic backdrop, lower rates would very likely cause higher prices, and higher rates would very likely cause otherwise lower prices. Imagine if the 30yr fixed mortgage rate was only 2.0% instead of 5.5-6.5% during the peak of the last market, with everything else (optimism, super loose lending, etc) the same (ceteris paribus as they say in econ...) My god!! Things would have almost certainly gone crazier. Conversely, imagine if, under the same circumstances, rates were 12%. Would things have been different? I have to say almost certainly, at least one home would have sold for less! lol 

Inflation, Deflation, Fed Balance Sheet, Yield Curve, Graphs from prior conversation..
https://www.biggerpockets.com/forums/311/topics/28...