In July, we spoke to a sold-out crowd of nearly 500 investors and real estate professionals at our “California Comeback 2: Fast, Furious & Dangerous” event. In our 280-page report, with over 350 charts, I shared with the audience why in December I made the prediction that theCaliforniamedian price would increase 20% for 2013. In addition, I shared information on whyCalifornia’s real estate market is on its way up, and why now is the time to invest in real estate.
The opportunity at hand is going to stop when it always stops: when we price ourselves out of the market. It’s important to understand that every area may experience different levels of appreciation and price volatility. What we’re experiencing now in Californiais nothing new. Californiais best known for its terrific boom and bust cycles. Our job as real estate investors is to analyze, understand, and stay on the right side of these wild cycles as much as possible.
What paralyzes many investors is the mainstream media headlines written by media professionals who aren’t necessarily experts in the real estate field. They are often quoting world-renowned economists, of which very few had the last bust cycle correct. They often speak in national terms, and as we all know, real estate is largely local.
Whenever we release a market timing report, it is our goal to share all the data and resources so investors can read through the headlines and make intelligent decisions they’ve thoroughly researched. Here are the top myths you may run up against in the coming years while reading your favorite news source, and why you might want to think twice before making hasty decisions.
Decreasing Affordability Is Bad?
You will probably start seeing articles in the next few years about a real estate affordability crisis in California. We’ve been hovering over the 50% affordability mark from 2009-2012. In 2013, we’re now back in the 40% range, which is still higher than the downturn in the 90s.
The last five years we’ve lived through the highest level of affordability we’ve experienced since the California Association of Realtors began measuring this statistic back in the late 70s. This Traditional Housing Affordability Index measures the percentage of households that can afford to purchase the median priced home and includes median price, down payment, interest rate, and monthly payment information.
As this number continues to decline, consumer advocates will make headlines announcing an affordability crisis. In their view, decreasing affordability means the average consumer is losing the ability to get into the housing market because they are being priced out. However, looking at the chart below, this chart means something very different to real estate investors. When would you have rather owned real estate?
Source: California Association of Realtors
As you see in this chart, affordability dropped all the way to 17% annually in 1980, 1989, and 2005 before the boom was over. Leading up to these pivotal years, price appreciation was strong and owning real estate was extremely profitable. There’s still a long way to an annualized 17% affordability number and we’ll most likely get there with a compilation of both interest rate increases and price appreciation.
Prices Can’t Increase Past Our Former Boom Price?
Did you know that markets like the Silicon Valley and San Francisco have already exceeded their peak prices reached during the boom years? This disproves what many pundits have said about our ability to reach new highs compared to our last boom. I keep an eye on local affordability because it includes the median price into the calculation, as well as consumer income information and interest rates. Price is only one factor in the calculation.
Even if banks or hedge funds magically released inventory, the market could easily absorb it as we continue to experience sustained, record lows of inventory across California. There’s plenty more demand moving forward as new buyers come online and former owners re-emerge after their three-year hiatus from housing. And, if our economy starts to improve, which I suspect it will with builders and construction coming back online, migration will drive demand further.
If Interest Rates Increase, It’s Over?
I’ve already heard many investors express concern and even tell me they’ve exited the market because of the increase in interest rates over the past few months. While certain areas like the Silicon Valley and San Francisco feel a bit more speculative, there are still plenty of areas in California where affordability is still extremely low. Not only that, several areas still have a monthly payment that is less than what the consumer would pay in rent. In addition, current interest rates make it possible to hide some hefty appreciation and not make much of a dent in the monthly payments. For every $50,000 price increase for the consumer, it’s only adding $253.30. Ten years from now, I’ll wager that the sub 5% interest rate will be looked upon with envy and the slightly higher monthly payment will be seen as irrelevant.
“Creative” Financing Is Dead?
We thought no-doc and subprime loans were a thing of the past. You’d think after HAMP, HARP, and the laundry list of lawsuits and regulation that Dodd-Frank created that we’d forever be finished with these unsavory financial tools.
Think again. I just received word of a bank that has restarted a loan program with no income documentation. Don’t expect to watch the banking industry sit on their hands as prices increase. Furthermore, expect politicians (from both parties) to intervene at some point to make financing possible to keep homeownership numbers as high as possible.
Do Your Homework
As mentioned earlier, all real estate is local. You must be extremely knowledgeable of your product type and market forces including unemployment, sales, interest rates, and prices. Even in this highly manipulated market, real estate investors have continued to make a very decent living. Our hard money loan business has been experiencing record-breaking growth, and we as a company also continue to buy, repair, and resell successfully. I am bullish on the market but understand that it is indeed “Fast, Furious & Dangerous.” However, there’s money to be made in any market.
“Buy from the fearful and sell to the euphoric.” – Charlie Dow
Bruce Norris is an active investor, hard-money lender and real estate educator. A talk show host in his hometown of Riverside, Calif., Norris is a frequently quoted in financial publications and a speaker at investor club meetings throughout California. His latest study, The California Comeback 2, was released in July 2013 and provides the statistics that substantiate his predictions. More information about Bruce Norris, his research and his investment seminars are available at www.thenorrisgroup.com.