Seven Factors Affecting Home Prices – And the Stock Market Wild Card

DOW 40,000 or DOW 8,000 – where does real estate stand?

Many pundits agree the stock market is overvalued based on price to earnings ratios. This is pointing to a market correction. What does that mean for real estate?

What You Really Want to Know When Asking “How’s the Market?”

This generic query masks many deep concerns, questions, hopes and fears.

At the root, folks want to know things like:

Am I going to lose my money? Is this a good time to buy, or should I sell now? Does it make sense to invest more at this time, or should I be taking profits out of the market? Is the current trend likely to continue? Will I regret not increasing my investment in this market? Will I leave money on the table if I sell now?

Essentially, what does the future hold?

“How’s the market?”

Because I am in real estate, this question usually refers to that market. My quick answer right now is the market is strong, inventory is low, and prices are rising with demand.

Before I get into where the real estate market may be heading, let’s talk about the stock market. The DOW breaking 21,000 for the first time ever has made headlines everywhere.

Full Disclosure: I am not a stock broker, and am not making any predictions. This is just a collection of observations and how one market may affect another. My opinions are irrelevant when even the professional market forecasters are so wildly diverse. My purpose here is to expose you to the variety of professional opinions, and to relate that to the real estate market.

Stocks are at an all-time high. For some, that means it is a great time to be investing more because “the trend is your friend”.

Others see record high valuations as a warning that “what goes up, must come down”.

If you do some research, it quickly becomes apparent that there is very little consensus as to where the market is heading. The predictions are all over the map, actually.

Do you want the good news or the bad news first?

Some forecasters are predicting DOW 25,000; 30,000; even 50,000 by 2025.

On the other hand, others are predicting DOW 12,000; 10,000; even 6,000 as early as 2018.

Those are the extremes, certainly. And they don’t answer any of the questions folks really want to know when asking about the market.

My research has found there are those in two strongly opposing camps, and others in the middle ground area.

The strategies you would follow if you agreed with one prediction would be devastating if the other scenario actually came into reality. And vice versa.

Bust: the deflationary camp expects the markets to reset downward. Rapidly and painfully downward. DOW 8,000 or less. Gold under $700 per ounce, which would be almost another 50% drop from recent levels, which are almost 40% off of the highs for the precious metal. This scenario states the values of everything will decrease. Real estate would see another tumble similar to the one we had a few years ago during the Great Recession. Cars, food, commodities. Everything would be cheaper, not just stocks.

The strategy for those planning on this scenario is to sell all of your current assets, convert them to cash, and get ready to buy back everything on sale.

Boom: the inflationary camp is just the opposite. The stock market, real estate market, cost of food, gold, everything – continuing to go up. Some in this camp even see rapid increases and possibly hyperinflation similar to that which hit Venezuela, Argentina, and numerous other countries over the last 25 years. Gold prices jumping to $2,500; $5,000 even $10,000 per ounce. Real estate values going through the roof. Prices for everyday expenses rising faster than you can imagine.

The strategy for this scenario is to buy all of the assets you can get your hands on, because cash will be worthless and “things” will have value.

I admit, the two extremes hold no appeal to me. I don’t want to live in a world where gold is worth $10,000 an ounce, almost overnight. Nor does the prospect of going through another Great Recession sound interesting to me. Especially not when there are huge numbers of people who have not had much of a recovery from the last one, and don’t have the resources to weather another storm so soon.

Most of the mainstream projections are a lot milder, and the middle of the road is more appealing to most of us. Even if markets don’t care about what appeals to us.

A few things that many do agree on: Quantitative Easing (opening the spigot and flooding the market with cash) has pushed up the stock market, but has not brought about the economic expansion that was hoped for. That money is pumping up Wall Street, but not enough of that cash is falling into the pockets of the average man or woman on Main Street.

Similarly, zero percent interest rates from the Fed have not spurred the economic activity needed to bring about a strong recovery.

We may see more QE and near zero rates, but neither of these “Solutions” can be utilized for extended periods without significant negative implications.

Where does that leave us?

Quite frankly, hoping that the middle ground wins.

Many pundits agree the stock market is overvalued based on price to earnings ratios. This is pointing to a market correction. Hopefully just a middle of the road correction to cool the jets, not anything drastic.

What does that mean for real estate?

In the past, many of the investors who get out of the stock market prior to a correction have put their money into real estate. Likewise, those who didn’t get out first, pull the cash out when the market is falling and look for some good deals in real estate to park it in. Both of these are bullish for real estate even when the stock market is bearish.

Note: All real estate is local. The real estate market is not national. There can even be significant variances within small geographical areas. Consult a qualified real estate professional in your area before buying or selling.

There are a number of factors favoring real estate right now. And of course, there are some concerns to be addressed.

Leverage. One of the most attractive things about real estate as an investment is the ability to buy it with just a small amount down. Your out of pocket cost can be a fraction of the value. If you want to buy $100,000 worth of stock, you need $100,000. But you can buy $100,000 of real estate with as little as $20,000, $10,000 even $5,000 of your own money. That is significant leverage! If your $100k property increases in value by $5,000, that is a 25% gain if you put $20k down; a 50% gain if you put $10k down; and a whopping 100% gain if you only put $5,000 down!

What if you paid all cash? A 5% gain beats the socks off what you would get with that money sitting in a bank account!

Demand. People are looking to buy real estate and demand is strong. Baby boomers are retiring and buying in areas they have dreamed of their whole lives. The clock is ticking for them. Many put the dream on hold during the recession and now that markets around the country have recovered, they are moving forward with their plans.

Interest rates. Low interest rates are bullish for real estate because it allows folks to leverage a small down payment into a large purchase. This frees up their cash for improvements and other things, like vacations and investments. Interest rates will rise over time, so locking in at lower rates favors those who act quickly.

Favored status. The US government grants owners of real estate tax deductions and privileges that increase the value of owning. 1031 Tax-deferred Exchanges also allow individuals to sell a property, lock in the gain and rather than paying taxes on the gain, roll it into another property and defer the tax indefinitely. There is some talk of changes coming to the 1031 program. Changes may actually spur more real estate activity if owners want to trade their current properties for different ones under the current guidelines. Talk to your CPA about tax savings.

Millenials. The youngest generation of potential homebuyers actually outnumbers the baby boomers. They should have a significant impact on the value of real estate over the course of their lifetime. However, they are not impacting it as much as could be expected because many are hindered from obtaining mortgages by large student loan debts and jobs that don’t pay as well as the jobs their parents had. When debts go down and pay goes up, they will become a driving force similar to the baby boomers, based on the sheer number of them.

Pent up demand. This comes from the millenials who are stuck living with their parents (or multiple friends) and also from the baby boomers and Gen X-ers whose plans were put on hold. During the recession, not enough new homes were being built to meet the average needed for a growing population, new family creation and replacement of older homes.

Rental Nation. Many who are mentioned above are renters by necessity. Strong rental demand and rising rents are encouraging investors to buy all types of properties and rent them for cash flow.

We know where the market has been, and where it is now. What the future holds is anyone’s guess.

Make decisions based on your personal wants and needs. One major benefit of real estate is that it is tangible. A home has usefulness and value beyond just the price put on it. You can live in it, create cash flow with it, and spend time in it with those you love, whether the value is going up or down.

When is the last time your family spent a cozy evening inside your stock portfolio?

When stocks go down, all there seems to be is pain, unless you were betting against them.

Many folks invest in real estate to diversify their portfolio and as a hedge against inflation, even if they aren’t buying cash flow properties. As the saying goes, “Buy land, they aren’t making any more of it!”

Real estate offers the ability to create memories for a lifetime, and generational wealth. Contact your favorite Realtor to see what opportunities are available to you in today’s market that matches your long-term goals.

I send a bi-weekly, digital newsletter with insights into the real estate market, as well as helpful hints, tips and trends for homeowners. If you would like to receive it, just send me a message with your email and I will add you to the next mailing.

All the Best!

Jim Sweat, ABR, CLHMS, CRS, CDPE, GRI, e-PRO, ILHM

REALTOR

Featured in Scene Magazine’s Men on the Scene 2016 issue

Author of REAL ESTATE CSI: CONTROVERSY, SECRETS, INSIGHT (coming soon)

Jim Sweat – Helping Buyers & Sellers Choose Wisely Since 1995 ™”

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All-Time Record-Breaking Home Sales in Sarasota & Manatee Counties

Real estate experts predict that more existing homes will sell in Manatee and Sarasota counties in 2015 than during any other year in history.

And that is in a market with low inventory levels!

On a pace that the president of the Realtor Association of Sarasota and Manatee calls “historic,” Sarasota County is expected to exceed an all-time high of 11,550 home sales by year-end. In Manatee County, sales need only average 360 per month in November and December to break an 8,004-sales record set in 2013. Nearly twice that number sold in October.

By the end of October, the pace of sales had dropped only modestly during the autumn selling season, which is historically viewed as being “slow.” At the same time, median prices are near a five-year peak and homes are typically staying on the market a little over a month before selling.

Excerpted from article  published November 30, 2015. Written by Matt Johnson, Bradenton Herald business reporter.

Strong demand is pushing prices up substantially. That trajectory may slow as more sellers put their homes on the market, but with the number of homes for sale at or near a half-decade low, some buyers are jumping in while properties are still available where they want them at the prices they want to pay.

Housing inventory has been well below the six-month level of supply that defines equilibrium between buyers or sellers.

In October, the supply was between 3.5 and 3.9 months across the single family and condo markets in the two counties.

Higher prices, low inventory and rising interest rates may temper the sales pace next year, but all indications are the all time sales record will be broken this year.

 

Is This Another Real Estate Bubble?

Two questions need to be answered when multiple offers, bidding wars, tight inventory, and Realtors buying properties become the norm.

We have been seeing strong demand and rising prices for the last three years. The real estate market in Southwest Florida was decimated during the real estate crash, so it is not only reasonable, but also smart, to be alert for signs of danger. Values dropped by over fifty percent from the boom prices of 2005 to the depths of despair in 2011.

Many have been asking if the bidding wars we are seeing are leading to another bubble. Multiple offers are a sign of strong demand, which we definitely have.

There is one irrefutable sign when prices are not sustainable. I will get to that in a moment, first you need to know the two most important questions to ask:

  1. Who?
  2. Why?

Who is buying real estate, and why are they buying it? If you pay attention to the answers, you will have a good grasp on the overall health of the real estate market.

During an eight month period of 2014, over half of the agents in my office bought real estate. Now, we have a small office, still you had six agents buy property in a short period of time. Is that a warning sign?

It could be. The first wave of foreclosures during the crash was heavily populated with agent owned properties. I cover that in more depth in my upcoming book, Real Estate CSI: Controversy, Secrets, Insight. A real estate agent exposes dangers and dirty tricks that cost you money.

The second question determines if that is cause for alarm. Why? Answer: We all bought real estate to own it. None of those purchases was for a flip, or an attempt to get into the chain of title for profit. We all wanted to own the properties we bought.

That is a strong indicator of healthy market growth ahead.

During the boom, everyone was buying real estate. Anyone who could fog a mirror was clamoring to grab the next property available, and many times contracts were selling multiple times before the first closing even took place. Properties weren’t even changing hands. Just the contract to purchase was being sold at a profit to someone else.

Who? Everyone.

Why? For fast money. They didn’t want to own the property; they only wanted to get their name on a contract that could be sold tomorrow for more money.

The most important sign among the many:

When “everyone” is buying, but few actually want to own it, that is a bad sign.

So who is buying real estate today, besides half of our office? Baby boomers; early retirees; investors; snowbirds; first time buyers; move up buyers; people who love Florida and want to enjoy it for more than a couple of weeks a year; and the occasional flipper.

These are good people to see spending their money in the marketplace, and a sign that bodes well for the future.

Respectfully,

Jim Sweat, ABR, CRS, CDPE, GRI, e-PRO, ILHM

REALTOR

Author of REAL ESTATE CSI: CONTROVERSY, SECRETS, INSIGHT (coming soon)

American Realty of Venice, Inc.

700 W. Venice Ave

Venice, FL 34285

941-484-8080

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