It seems like every day, multiple times a day, we’re bombarded with news about the real estate market.
“Rates are down!”
“Inventory is up!”
“Appreciation has slowed!”
“Is another recession on the way?”
In the middle of all this frenzied news, it can be difficult for a real estate investor to sort fact from fiction and determine what they do and do not need to be worried about.
To shed some insight on current market trends and address the question of where the real estate market is headed, I recently chatted with Daren Blomquist, VP of Market Economics at Auction.com.
Daren had so many awesome tips and statistics to share with me. I couldn’t possibly fit them into one blog post – or else you’d be here all week. (And, let’s face it, you have stuff to do).
So I tried to condense our conversation down to the most helpful, concise chunks of info that I possibly could.
First, let’s look at a super-brief rundown of what Daren shared about current market trends:
- Mortgage rates are low.
- Employment is really strong.
- Affordability has been an issue with this market, but it has actually shown some improvement.
- Existing home sales continue to be down.
- New home sales are volatile, with an increase one month and a decrease the next. But, median home prices on new houses have been falling.
- Inventory is inching back up, even as overall home sales continue to decline.
- Opportunities to buy distressed properties are fewer, because delinquency rates and foreclosure rates are down.
- We’re still seeing appreciating prices in most markets across the country, but it’s slowed down to a more reasonable pace.
Of course, things change day by day, but these are the overall trends and patterns that have occurred in the past couple of quarters.
And now, let’s get straight to your most pressing questions about what we can expect from the real estate market soon…
Is another crash imminent?
When it comes to the real estate market, there’s a ton a fear and discussion about another market crash. Are we doomed to face the same crisis that impacted so many people in 2008 and the years immediately following?
In Daren’s opinion… no.
Instead of a crash, we’ll probably go through a correction. The market may soften, prices will probably decrease a little bit, and things will slow down. And really, a softening might be a good thing… because if the market kept going up, we would be experiencing a true bubble and an overheated market.
In the coming months, there will probably be less people interested in real estate investing or flipping, but it will be nowhere near the decrease we saw in 2008. One reason for this is because there are many more legitimate alternative financing options (like Lending Home and Freeland Ventures) in the marketplace for flippers and for investors.
And, even the traditional lenders like Fannie Mae, Freddie Mac, HUD, VA, and FHA still have fairly strict lending standards. They’re not just giving away loans today like they were in 2004, 2005, 2006, and 2007. That type of financing just doesn’t exist.
Granted, subprime lending is creeping back into the market to a small degree, but even that isn’t like the crazy lending you saw in 2004-2007 that caused Bear Stearns and Lehman Brothers to go bankrupt. That doesn’t exist in the marketplace today. And so long as Fannie Mae and Freddie Mac keep a tight purse string on those end buyers, I think that’s going to keep the market in check.
So, as I said, you might see a correction, but nowhere near the 2008 crash.
Is it still a good idea to buy distressed properties in the coming months?
For most real estate investors, purchasing distressed properties is always going to be a viable option. In the current market, this is still true.
One great tip that Daren gave be was this: if you’re looking for foreclosed bank-owned properties, it can be really beneficial to use a site like Auction.com (and, of course, that’s his company, but he has the numbers to back it up.)
Most REOs or bank-owned properties are currently selling for close to 100% of their market value – if you purchase one off the MLS. But, if you use an online auction site, you can snag most bank-owned properties for about 80% of their market value.
This is because the properties listed on online auctions are ones that the banks don’t typically put any rehab money into. The properties they list on the MLS, however, are usually ones where they’ve invested some repair money.
Besides the deep discounts you can score on these sites, you can also typically get the property much faster than you would with an MLS-listed property. Most banks will be willing to sell their online auction properties for less and just get rid of them, because they’re not experiencing all the hard costs, the liability, the risk of owning the asset, etc.
But why auctions? What about other (non-MLS) methods for finding fix-and-flips?
I discussed this question with Daren to get his input. He mentioned that buying fix-and-flip properties at auction, in general, will be more profitable than buying them through other methods.
Well, the root of this answer lies in home appreciation stats. Back in 2012 to 2015 approximately, home price appreciation was going crazy… in the double digits. So flippers could buy properties close to market value and just rely on price appreciation to get them a good profit.
Now that the market has tightened up a bit in the last few years, flippers must find that value. They need to purchase properties at a deep discount, up front, and add value in order to really turn a good profit.
So, while the average profit per flip is going down, there’s still a significant demand for flip financing. Many of the investor students and borrowers I work with are very much interested in securing private money or hard money for properties that they plan to flip. And that’s because the profits can really be worth it – even though you need to work a little harder for them in the current market. Home flipping remains a very viable strategy and there’s still a lot of investor confidence in this market.
How do we invest strategically, without knowing what’s to come?
First of all, don’t buy in to the crap that the fear mongers are spreading about the market imploding in the near future.
Daren mentioned that, as part of his role at Auction.com, he is responsible for preparing their business for the future. He expects (and I agree with him) that we’ll experience a mild to medium recession within the next 18 months to two years.
So, yes, the market will probably correct itself, but it will be nothing like the recession that we saw last time around.
Of course, it’s hard to predict. But I think proceeding with caution and understanding your business strategy – but also not being ruled by fear – is probably the best avenue for investors going forward.
Remember, we’re not timid people… we’re daring.
So be daring,