Market Trends and Predictions for 2020

Once a quarter I like to check in with Daren Blomquist, the vice president of Market Economics at Auction.com about the state of the real estate market. Moving beyond gut feelings and internet chat boards, Daren uses hard data his company collects to show us where the market’s been so that we can better predict where the market might go next. By looking at the yield curve, manufacturing index, consumer sentiment, unemployment rate, and foreclosure starts, Daren explained the trends he’s seeing in Q4 of 2019.

Sell While the Sun Still Shines

If you’ve been holding on to inventory for any reason, now is the time to sell, stresses Daren. There’s a strong demand for inventory, and many of the real estate investors who have an appetite for foreclosed homes haven’t slowed down at all.

The issue facing the distressed market is supply. There just aren’t a lot of deals out there, and I’m sure many of you are finding this to be true too. Even with foreclosures, fewer of them are making it all of the way through the process. Banks have been stopping foreclosures, which has continued to hold the supply down.

There will always be the 4 Ds of real estate: death, disability, divorce, and distress. On the other hand, Daren’s just not seeing the same volume of foreclosed houses that we used to have. The spike in 2017-18 was driven by natural disasters, so for the most part, foreclosures are a shadow of what they were in 2009.

Days on the market are up, while median prices continue to rise. Daren sees some cooling in markets like California and Florida, and Nevada, which is traditionally a bellwether market, has seen the biggest increase in days on the market year over year.

Markets to Keep Your Eye On

We hear anecdotally about people leaving California and fleeing for cheaper parts of the country, so some of Daren’s net migration data should not surprise you. Some of the tax benefits in more expensive states were taken away, so that is having an effect on states like New Jersey, New York, Illinois, and of course California. In addition, anti-flipping laws, rent control, and anti-investor sentiment in these states are chilling real estate investors’ interest in these areas.

So where are people moving to? Arizona, Texas, the Southeast, the Midwest, and Florida are attractive markets for those looking to escape being priced out of their own markets. Even Boise, Idaho is enjoying some of the net migration out of expensive markets. While everyone enjoys housing appreciation, people tend to leave areas that just cost too much money to live in.

By drilling down to a county-by-county look at where people are moving to and from, Daren can see that prices are going down in some places in California like Santa Clara County and San Mateo County. Between the net migration and the cooling of the housing prices, he sees a little weakness in the current California market.

What Banks Are Saying About the Real Estate Market

Daren surveyed his clients that have foreclosure inventory in December 2019 to get an idea of where they predict the market to move to. He asked them if they thought foreclosures would increase, and where they thought that shift would come from.

More than two thirds of Daren’s clients, who together make up 87% of the servicing volume for this industry, predicted that foreclosures would increase. 60% of them said it would only increase slightly, and 6% of them thought it would increase substantially for the year.

As Daren suspected, government insured loans are predicted to be the biggest source of additional inventory. Over the last few years, FHA loans have become some of the riskiest loans in the marketplace with the low or no down payment options. You can get a rural VA loan with 100% financing.

And while it’s a great deal for veterans, Daren’s seeing the inflow data increase in this area. The FHA’s own data lags a little behind real time, but in November 2019, they were reporting 90 day delinquencies up 3%, and 60 day delinquencies up 16%. So I’d keep an eye on those numbers going forward.

The Fundamentals of Real Estate Are the Same

Don’t get desperate to buy a deal and overpay. I understand that you might want to move into a market, but paying 80-90 cents on the dollar and hoping for appreciation is going to catch you. There is some weakness in certain markets, so understanding the local nature of the market you’re investing in will give you a cash flowing property that can weather any downturn. The fundamentals of investing remain the same: leave yourself enough cash flow to pay down your debt service during a recession.

Daren’s data showed us that there isn’t blood in the streets and that the next six months look pretty stable. If you’re in one of those pretty stable markets, I wouldn’t continue to keep my cash on the sidelines because I just don’t see a crash coming any time soon. Remember that it takes months and months for foreclosures and distressed properties to work their way through the snake.

Investors need to keep an eye on the data to make sure they’re prepared in case the market starts to shift. In nearly every market correction, investors were ahead of the data as they pulled back on buying homes right before a crash. Sticking close to the numbers from a place like Auction.com can help you make informed decisions. And if you’re seeing prices rise and you can’t find any deals, start expanding your marketing or your market.

 Be daring,
Josh

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The Pandemic’s Impact on Real Estate Prices

As states across the country start talking about opening up and going back to work, we can start assessing the damage done by the COVID-19 pandemic. Our Q1 data shows that housing prices started off solid, but the market has definitely slowed down in the last few weeks as the shutdown has begun to impact the real estate data.

You need to remember that real estate is a slow-moving economic niche. It’s not like stocks where commodities are bought and sold with the click of a mouse. It takes time to show the house, find the buyers, sign the contracts, and close with the title company. So there is going to be some natural lag. What we see in the stock market won’t immediately show up in the real estate market. When stocks were down 50 percent in 2008, it took three years for real estate to follow. With 26 million people out of work, we are going to see some foreclosures, but it’s not going to be right away.

Rather than guessing over where I think the market’s headed, I talked to Daren Blomquist about the data he’s aggregated for us. As the VP of market economics at Auction.com, Daren spends a lot of time poring over nationwide trends, and he has some solid data about retail market trends, investor insights, and distressed market trends.

What First Quarter Retail Market Trends Look Like

There are two main indicators of the real estate market: the first is retail sales and the second is home units. According to Daren, there’s been a nearly 45 percent drop in home units, but that doesn’t mean that prices are dropping. Supply is down, demand is down, but Daren is seeing an increase in the price of homes in the $375,000 range.

The impact of the lockdown cannot be understated. People that might’ve been looking for a house are having to hold off or have changed their minds. People that might’ve planned on selling and moving are having to stay put while they wait for their states to open up again. It’s normal that home units are down, and it’s not an indication that prices are going to start falling yet.

Currently supply is down, which would indicate that sales will go down too, and then prices would follow. But Daren’s not seeing that here. Supply is leading here and it’s down more than demand. It’s currently down 52% when comparing year over year levels. Demand is down, but only about 25%. So prices continue to hold steady in the real estate market. For now.

As certain markets start to open up, I think we’re going to see a little more volatility. Week by week, the data that Daren’s looking at has been changing just as quickly too. Buyers want to look at vacant homes, but they’ve also shifted to shopping virtually for homes. Social distancing guidelines may continue to impact housing trends long after quarantine orders are lifted. We will definitely be keeping a close eye on this as we go into Q2.

How Distressed Market Trends May Impact Real Estate

One of the biggest unknowns right now is how banks are going to respond to the unemployment crisis and the forbearance loans that are being offered. Banks are going to have to get flexible about these loans by adding the amount to the end of a mortgage or something else, or they’re going to have a lot of defaulted home loans. The average American who is living paycheck-to-paycheck isn’t going to be able to come up with all of the arrears in month 4 or 7 when the forbearance period ends, and that may dramatically impact future foreclosures.

If banks have mortgages on the books that are non-paying, then banks have to set aside more money in reserves to offset those delinquencies and defaults. This is that domino effect that we have to keep an eye on because then it decreases banks’ liquidity, and prevents them from loaning out money. All of these things are interconnected.

During the hurricane season of 2017 when banks offered forbearance, only 1% of the homes that took it actually went into foreclosure. That means that 99% of people pulled themselves out of the hole they were in. I’ve also seen some data showing that Fannie Mae and Freddie Mac are going to buy some of these forbearance loans in bulk, which could improve bank liquidity.

If banks aren’t willing to be flexible, we could be right back to 2008, ‘09, ‘10 all over again. I’m really hopeful that bankers have learned their lessons from just twelve short years ago.

My Personal Investor Insights for You

How this pandemic situation impacts you will depend on what kind of investor you are. Are you a buy-and-hold guy? Or are you a fix-and-flip guy? If you’re dependent on the after repaired value of a house, and the housing prices go down, then you might get caught if the market corrects. However, if you’re in this for the long-term, you’re not going to be too worried about all of this volatility. In fact, when houses are foreclosing, this actually helps the long term buy-and-hold strategy because people will start moving into rentals as they lose their houses In 2008-10, housing mortgages were the problems. But this time, I feel like housing in this environment could be part of the solution. We don’t have a liquidity problem or massive amounts of foreclosures yet. It’s still possible for banks to work this out in a way that prevents massive foreclosures.

When I talk to my investors, I think that dry powder, cash, and liquidity are really important right now because we were already seeing an uptick in foreclosures. Cash will help you scoop up deals when everyone else is holding off. Prices aren’t going to crater through the floor any time soon. It’s going to take time to get all of these current foreclosures through the system, and meanwhile both supply and demand is down, which is helping to stabilize the market.

If you have any properties that you’ve even been thinking about selling, now is the time to put them on the market. Prices are still holding steady, and supply is still far below current market demands.

Be daring,
Josh

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