In the game of real estate investing, those who are prepared are typically the ones who win.
As any seasoned investor can attest, not every investment is a guaranteed home run. Whether you’re buying to flip, buying to rent out, or buying to own and occupy, you need to be well-aware of both current and future market conditions if you want to stay ahead.
What separates the successful from those who aren’t is their ability to make sound predictions of where the economy is heading.
However, this is easier said than done.
Not only do you need to have a good understanding of the housing market at a local and national level, you also need to study up on terms, data, and other macroeconomic factors that can impact property prices.
But don’t get overwhelmed just yet. With the right tools and support, you can prepare for any possible setbacks and avoid any potential losses.
So where can a new investor like you learn about upcoming marketing changes? From the experts, of course! As usual, I’m here to help new realtors stay on track by helping them make informed decisions and keeping them in the loop of what’s happening in the industry.
A while back I talked to Daren Blomquist (VP of market economics at Auction.com) and I talked about some alarming issues that may affect new investors. If you don’t have time to listen to the whole thing, I’ve condensed our insights into one easy-to-read blog post below.
There’s been a lot of talk about a possible recession this upcoming year and novice investors are beginning to panic.
First things first, there’s no need to worry. While a recession can be a frightening thought, it doesn’t automatically mean that your investment will plunge into negative equity.
But it’s certainly a concern that’s worth addressing. After all, we’ve gone 10 years without one and they typically happen every 5.7 years.
Does this mean that we’re due one? What’s going to happen? Are home prices going to drop 30% just like the last time? Probably not. But Daren says home price appreciation may slow down a bit and you’ll just have to adjust to it.
Unemployment rate and manufacturing index- Key indicators
According to Daren, one of the most reliable ways to gauge whether a recession is on the horizon is to take a look at unemployment rates. Historically, whenever unemployment spikes, a recession tends to follow within 18 months. This is because unemployment spikes create ripples in the economy which can take time to be felt.
At present, the unemployment rate is low. This means workers have capital and it means they have the ability to pay their rent and debts like homeowner loans. So that’s encouraging for investors.
Another key indicator is the manufacturing index which gives an overview of business conditions nationally. At present, the index stands at 49. So it’s just barely on amber alert having fallen below 50 but it’s nowhere near the danger point of 45.
Again, even if we were in a recession, you don’t need to pull out your investments. A recession is just a natural part of the expanding and contracting of an economy. It certainly doesn’t mean it’s 2008 all over again.
If the economy was your car, you might hear a little bit of a rattle, but you’re certainly not going to notice any drastic difference in performance.
Current affordability and delinquency stats
What about affordability? That’s obviously something to need to be aware of. Not only do you need to think about the cost of your investment, but you also have to think about whether people will be able to afford to buy your newly flipped property, pay their rent, or buy your owner-occupied home when it’s time to move on.
Affordability is all about the ratio between house price growth and wage growth. Compared to 2012 when the housing market hit historic lows, we’ve seen 84% growth in home prices and a 20% growth in wages. So while workers’ wages have grown, there’s a disconnect there and a trend that’s not sustainable.
Relatively, this isn’t an issue across the board and there are even some prime areas like certain parts of Idaho, Utah, Alabama, and Florida in which affordability is improving.
Plus, let’s not forget that many places where affordability is declining are chronically overpriced markets (hello, New York?) and not necessarily an indicator of an impending crash.
As for delinquency rates? They’re at an impressive low, indicating that owners and lenders alike have learned their lessons from the 2007-2008 crisis. This is especially encouraging in light of the fact that the debt-to-income ratio has actually gone up in the last decade.
With affordability and delinquency at an all-time low, the stage is set for prudent investments in key areas to pay real dividends.
What about those federal rate cuts?
So, what about those federal rate cuts? What do they mean for new and seasoned investors alike? Reduced interest rates historically mean cheaper borrowing. And because lower interest means less earned on savings it actually makes real estate an even more appealing investment.
That being said, FHA loans allow you to borrow more - meaning you can potentially borrow up to 50% of your income. And this can be a double-edged sword. The more you borrow, the more it can squeeze your cash flow or reduce the profits you make from private rent.
Remember that just because you can borrow a certain amount, doesn’t mean you should!
How Auction.com can help provide access to market level data
Having been able to talk to Daren allowed me to shine a spotlight on Auction.com. If you’ve been in the world of real estate for some time, you likely already use Auction.com or may even have bought real estate through their platform.
Auction.com is a marketplace that sells 60,000 properties a year. It’s also a rich repository of market-level data. All you need to do is set up a free account and you can get instant access to the data you need to do your due diligence as well as get access to great deals on closed properties.
And if you want to stay on the loop of what’s happening in the industry, this tool can give you that advantage!