Is Now the Time to Buy? How to Determine if Your Market Is Worth Buying In.

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In 2002, Robert M. Campbell dedicated his book, Timing the Real Estate Market, to the millions of home buyers and sellers who every year regretfully say, “if I had only bought  (or sold ) a year or two earlier, I would’ve made a killing.”  Just as cash-flow is more important than appreciation to most Real Estate investors, market research and timing is much more important than, “Location, Location, Location.”

So, the real question is: are we approaching an ideal “BUY Time” in the current Real Estate market? I agree with Robert as to the relevance of his five vital signs of when to buy Real Estate. Let’s look at the five signs and how they apply to today’s market:

#1  Existing home sales

  Existing home sales are picking up. According to the National Association of Realtors, the housing market is up an overall 10.3%, and in the North East where I’m located is up 6.8% from last year.

#2  New home building permits

 If building permits increase for six months in a row you have to start to think we’re on an uptick.  It’s saying builders are gaining confidence to fill orders. The National Associate of Home Builders’ data shows that privately owned housing starts in April were at a seasonally adjusted annual rate of 853,000.  This is 13.1 percent (±5.1%) above the April 2012 rate of 754,000.

#3  Mortgage loan defaults

First-time delinquent home loans have fallen to 0.84 percent of the 50.2 million mortgages in March, the first month below 1 percent since 2007, according to Bloomberg.

#4  Foreclosure sales

 Foreclosure activity in the U.S. has dropped to a 6 year low, RealtyTrac reports.

#5  Interest rates

 They have been favorable for real estate investing and really don’t have anywhere to go but up.  Falling or rising rates don’t really predict the real estate trend just the momentum or strength of the trend.

Since the downturn in the overall real estate market in the United States, of which Real Estate drives up to 1/4 of our economy, I had shifted many of my investing strategies over to paper assets backed by Real Estate largely due to unfavorable mortgage financing. But recently I was privileged to see Jeffrey Otteau, an information provider on real estate trends who’s been a contributor to the New York Times, the Wall Street Journal, CNBC, Bloomberg and NBC, and to listen to some of his insights and other factual data that he provided.

Current economic trends:

– It’s anticipated that the Fed will be taking their foot off interest rates.

– 10% overall increase in the Real Estate market

– The United State will need income increases and job increases for housing increases to continue

–  Since the recent collapse, 9 million jobs are lost, 6 million are back, and 3 million are not coming back. These jobs aren’t likely coming back largely due to the collapse of the Soviet Union. Even though this happened over 20 years ago, it has taken this long to see the effects of jobs being exported oversees to many low-paid workers, that upon the fall of the Iron Curtain, entered the global workforce.

– Technology has impacted the business world. Manufacturing only requires one-tenth the number of workers. Kodak employed about 140,000 people. Instagram, 13. Now that may be a drastic example, but these changes aren’t likely to stop anytime soon.

– Corporate profits are high but we still have high unemployment and income is decreasing.

–  In my market of Philadelphia, we’ve only recovered 50,000 of the 130,000 jobs lost.

Residential trends:

– Homebuyers starting to feel a sense of urgency – the fear of interest rates going up (which is the only way they can go at this point), plus there is less supply.

–  Negative equity will start to go away, Otteau estimates by 2017 equity will be at comparable levels to what it was before the crash.

– Foreclosure discount rates have fallen from 55% to 5%

– 60% of baby boomers don’t have enough money to retire

–  Senior rental housing needs are increasing

–  80% of households are 1 to 2 people

–  7 out of 10 households have no one under age of 18

–  Vacancy rates are approximately 3%, creating more of a demand for rentals meaning rents are expected to increase.

–  There’s trouble for boomers down the road with “McMansions” over 4000 square feet because fewer buyers need or can afford these in the future with the shift in the job market and the increase of debt for the average person.

Commercial trends:

–  Increase in warehousing near ports in the Gulf and on the East Coast due to the Panama Canal widening completion in 2015. Also, there is more demand from online sales meaning an increase in warehouse space, but a decrease in retail space.

–  Retail space has been and will further be in dangerous territory. For example, in my market, currently there is 33,000,000 square feet of retail space available in my area with an absorption rate of only 2,000,000 square feet per year.

So what does it all mean?

Depending on your area of business and where and when you plan to invest, current market trends could be a serious consideration to take into account when buying or selling. There was a time when I just invested for the long haul and didn’t pay much attention, but today I’m always looking at trends so I can reduce my risk. Now with the current trends and data, it’s starting to look like the time to jump back in and pick up some more hard Real Estate to take advantage of the next “up” market. So, what are some trends and factors that you on BiggerPockets look at before investing?

Photo: House of Joy Photos

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

13 Comments

  1. A young or beginning investor can use this as part of their overall investment plan. Knowing what to look for in ones area will help guide them in the right direction in buying the right properties. Great post!

  2. Great article Dave! Are all the “current economic trends” and “residential trends” bullet points from Otteau as well? If not, would you please provide the resources.

    Thank you!

  3. Jeff Brown

    Hey Dave — “60% of baby boomers don’t have enough money to retire” And, “The United State will need income increases and job increases for housing increases to continue.”

    The first has already caused buying decisions AND renting decisions to be affected, especially as it relates to size. Parents are movin’ in with their kids at a rate with increased velocity.

    The second is why (duh) some states are losing their best and brightest, along with many of their high income earners, plus businesses. The states demonstrably generating a routinely enlarged job base year after year is where the investment capital is flowing.

    Great stuff, Dave.

  4. Ali Boone

    Great pile of statistics and trends! I love reading all of those together in a short, sweet to the point version. So many articles or newspapers or whoever present the stats and trends I could care less about (and half the time don’t believe anyway), so it’s great to see them from an investor’s perspective.

    Very informative!

  5. Dave,
    Good points. As a CA resident/investor, I listen to and respect Bruce Norris. He also predicted past crashes and booms and made many wealthy investors out here. His company also lends money and buys property so they have an in the trenches view of the CA market. Looking forward to 2 of his classes in June!

  6. One of my college professors taught that “an investor can go broke waiting for the highs or lows of a market.”

    One problem inherent with analysis like this is that other investors have access to the same information. Is the investor trying to get in ahead of or get out ahead of the rest of the crowd?

    Another major factor is transactions costs. It is easy to get into and out of publicly trades securities. MUCH more difficult with real estate.

  7. Kevin,

    Your college professor is absolutely right, but who waits? I didn’t. When the market tanked I switched gears from hard Real Estate to paper. You can make great money not waiting, but sometimes you can maximize your money when riding the trend. It’s like Warren Buffet says, “To swim a fast 100 meters, it’s better to swim with the tide then work on your stroke.”

    And sure other people have access to the information I presented in this article, but most people don’t know what to listen to, when, and how to apply it. That’s why I reference Robert Campbell’s book, which is a great resource for how to interpret this data.

    Transaction cost do come into play if you’re jumping in and out of Real Estate, but these trends that I’m referring to tend to be years, it’s not unheard of trends like these lasting 10 years plus. But I agree with you on one thing, hard Real Estate isn’t always the most liquid investment. Again, another reason I do paper!

    Best,
    Dave

  8. Christopher Lesko on

    Dave,

    Thanks for putting together the info! You mentioned you’re in the Philadelphia market. Any resources you’d recommend when trying to determine residential rental market trends for each neighborhood?

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