Please Let There Be a Crash

Said the person who didn't buy in 2009-2012. 

And the person who didn't take advantage of the 3-4% interest rates of 2013-2020.

And the 2% interest rates of 2020-2021.

And the seller buy-downs of 2022-2023.

While some of those freakish events are long gone now, at least most people can agree that real estate is still a great hedge. Live in it, rent it out, short-term rent it out, rent it for filming, spruce it up to sell for a profit after 2 years (and avoid capital gains tax), use it as a work space and write it off. And as we know, over time, real estate always appreciates.

Do you know of anyone who said they wish they hadn't bought 10, 15, 20, 25, 30 years ago? I don't.

Doing the Opposite of Everyone

Investing mantra #1. Remember the crash of 2008? Anyone who saw opportunity between 2008-2012, while tons of people were jumping ship from their homes, did well

In 2020, what is everyone doing? Everyone is buying in the suburbs. Everyone is paying top dollar to get out of the city. You might think of buying in dense city centers now while prices are more reasonable. 

Something to think about.

Why have LA home prices been so resilient?

The market in urban areas has come down since pre-COVID. On average, in NYC, about -18%, in SF, about -10% and in DTLA, about -4%. (Prices in the more suburban areas of LA are up about +1%)

Why has LA been more resilient? 

1. First, prices in LA were always lower than in NYC and SF. And suddenly, the nice weather, larger spaces and lower prices are looking pretty good when you can transplant yourself anywhere and work from home.

2. Remember, NYC was and still is the hardest hit COVID zone. LA, with it's huge population, has a fraction of the number of cases and deaths. Something is being done right in LA in terms keeping things safer. 

3. People still want a city, and LA, with its proximity to green spaces, mountains, beaches, deserts, etc, is proving to be the ideal place to settle during this uncertain time. 

4. There is a lot more space in LA than in other major cities. The average home size is about 1300sf in greater LA, and that's not including yards and other outdoor spaces. Compare that to 700sf is SF. You do get a lot more space for your money in LA, it's just a fact. 

5. The population. LA has a huge population. Where there is a population, whether employed or not, is going to need basic services, and that means jobs. Why else are companies like Amazon buying up warehouse spaces in LA? Because of demand for goods. 

June 2020 Recap + Changing Times

QUICK HOUSING NEWS, OPINIONS, STATS: 

- Things are sitting on the market longer. (Average is about 45+ days). The beginning of June wasn't great with the aftermath of the looting and riots, this hurt momentum, but the end of June saw some mild recovery in prices and activity.

 

- Signs of change. Never has the knock-on effect of events been so apparent until this pandemic. The lockdowns ended up causing a slew of businesses to stop cold turkey. This caused unprecedented unemployment in the US. As lockdowns eased, unemployment claims eased. This points to companies stabilizing (maybe the CARES Act helped?), and some are even rehiring. June 2020 stats showed the 4.8 millions jobs were added, though unemployment still remains high. See NYTimes article here: 

https://www.nytimes.com/2020/07/02/business/stock-market-today-coronavirus.html#link-5f5a419 

and

https://www.marketwatch.com/story/dow-futures-surge-400-points-after-jobs-report-for-june-shows-48-million-jobs-added-unemployment-falls-2020-07-02  

 

- Possible V-shape recovery in housing. Real estate has been "open" for 3 months now. April was the worst month so far, with COVID lockdowns fresh in people's minds. As lockdowns eased in May, real estate started to bounce back and May was great in terms of activity, and most importantly, prices. June was about the same as May, if not slightly better as pent up demand and low interest rates drove some buyers out there. See some optimistic housing news here from Business Insider:

https://www.businessinsider.com/housing-market-v-shaped-rebound-us-could-start-economic-recovery-2020-6  

- Possible plateau or dip in housing early next year. Three big unknowns that could rock the boat in the coming months. FIRST, if there's no vaccine anytime soon. SECOND, Interest rates rise, shutting out a lot of potential buyers. THIRD, unemployment remains high and stunts consumer activity.

- Less foreign buyers, more domestic buyers. Those who've been priced out are becoming more able to buy due to less competition from foreign money. 

https://www.wsj.com/articles/foreign-home-buying-dries-up-easing-the-way-for-domestic-buyers-11593682201  

- Mortgage applications fell since May. In June, super low interest rates helped the housing market, A LOT. This is seriously the single biggest thing helping buying activity right now. However, the number of mortgage applications fell, and this could because taxes are due on July 15, continued uncertainty in the market,  job insecurity. 

- There will likely be an influx of renters in the next 3-12 months. We know that with job instability and unemployment, there is a percentage of the population who will continue to rent, or sell and decide to rent. Rent prices have dropped as well, but minimally. About 1-2% on average.

 

- Inventory is still low. I mentioned this before, and this, along with low interest rates, is what's keeping prices afloat. People aren't selling because many don't have to. The majority of people who own now are special in that many have equity in their homes, unlike back in 2008, when no one had equity and the tiniest shift in the market caused people to be upside down on their mortgages. That was ugly.  

  - Real estate as a good bet against inflation. It's hard to know where to park cash these days, and with inflation and interest rates so low, keeping it in a savings account isn't ideal. But buying a house is looking like a safer bet against the falling dollar. 

https://www.forbes.com/sites/davidkudla/2020/06/30/inflation-will-come-here-are-five-ways-to-combat-it/#59cc16dd6deb

 

  - Virtual home shopping on the rise. Lockdowns have forced people to pivot, and now more people are touring homes via virtual tours, videos, and photos. According to Zillow, virtual tours for buyers has increased by 600% in the past couple of months. 

 

- Working and playing from home is the new norm.  It's not just a tech industry thing anymore. Every large company is rethinking their work culture and it's predicted that the majority of white collar jobs will become remote in the near future. Same goes with some of the non-work related stuff. Interesting article about virtual activities partnering with online retail.  And it makes sense. 

https://www.marketwatch.com/story/lululemon-acquisition-mirror-could-generate-700-million-and-reach-600000-subscribers-by-2023-bank-of-america-2020-07-01?mod=home-page

- Brace yourselves for the long haul.  The days of 15-30% ROI within a year or two of holding real estate are gone for now. You have to think conservatively, like 2-3% gains per year, with micro fluctuations in between.  Too many factors that affect housing are keeping growth at slower pace, but hey, I'm grateful that there is growth at all in these times.

 

- Malls may become the new housing solution. Interesting article on how malls may become housing, since as we know, the shopping mall is definitely going the way of the dinosaur. This could solve the housing shortag,e maybe?

https://www.bloomberg.com/news/articles/2020-06-30/a-case-for-turning-empty-malls-into-housing?srnd=premium

The Holiday Buy List Should Include Property

The winter is the worst time to sell, but the best time to buy. This is when deals can be made, price drops seen and desperation is running high for sellers. 

Which brings me to talk about buying during the holidays. Two of my investment properties were bought during the holiday months. I lowballed, got the offer accepted with no counters. This is because properties aren't selling as quickly and sellers just want to get out. So, buyers out there, remember that if you're thinking of waiting to buy in May or June of next year, then you will likely pay a bit more, or end up in a bidding war with other buyers. Of course interest rates could fluctuate, and they will, but the forecast is that they will be roughly the same as this year, or a tad higher.

Are We In A Bubble?

What a crazy time in real estate--again. Prices are high, inventory is low, people with cash are buying left and right, open houses on good homes are a zoo and bidding wars are still happening.

What's the difference between now and 2007? A lot.

1. Inventory is very, very low. Sellers aren't selling. That's a lot of why good properties in good areas are mobbed by buyers who are ready to go.

2. Rents are super high. Unlike the last time, when rents were very low, right now, rents are super high. LA is having affordability issues. (Well, not compared to NY and SF). More renters are in the buying market because they are sick of paying skyrocketing rents.

3. Interest rates are still low, and while lending is getting more creative again, it's still hella conservative compared to the last time. I remember when I refinanced my place in 2006, and they basically didn't ask for any paperwork except a bank statement and property tax info. The appraiser didn't even come out to the property--they just did it using the MLS and google maps. Things have changed.

That said, it's important to know that the days of buying low and selling high within 1 or 2 years are pretty much gone. If you're buying now, the only way to gain substantial equity is to buy and hold for 5-7 years, or buy a fixer and do some rehabbing to add value. Example: My client just bought a Culver City adjacent dump for about 5k. Recent solds on the same street are $1Mill. With real estate, what you do and when you do it are very key.

Doom and Gloom News for Buyers in LA

I had to do a post about this because all this doom and gloom about not being able to buy if you're a prequalifed buyer is mostly BS. Of course if your budget is under 500k, then yes, you will have very slim pickings. But you can still buy, you just need to reset your expectations.

My advice? Sit down with a lender and see exactly how much you can borrow. You might be surprised. I had a client who ended up qualifying for 100k more in his purchase price because his lender told him that the he just needed to wait until his car was paid off in a couple of months.

Maybe you need to buy a condo instead of a house? Maybe instead of Silverlake near the reservoir, you need to look into Atwater? Maybe that 1600sf loft you want should in reality be more like a 1000sf loft? You can't expect to have the same stock available to you as 7 or 8 years ago. Prices are up and inventory is low.

And remember, your first home doesn't have to be the end all. My last client who downsized into a smaller house because that was all they could afford, ended up renting out this house and buying a larger forever home. One property became two!

"Let's See What Happens in the Market Before Doing Anything"

A lot of sellers and buyers say "Let's see what happens in the market before I pull the trigger."

Usually by then, it's too late.

I always ask myself these 4 questions:

1. Have I made a lot of equity in my property?

2. Are things starting to plateau?

3. How long should I hold on this property? So far, holding has worked out well if you bought within the last 7 years. At this point we all have to decide if it makes any more sense to hold. The gains we've seen in the past 7 years are slowing. It may be another 7 years before we see increases like those again.

4. At the same time, historically low interest rates are going up. Do I wait to buy because prices might come down, and, risk a higher interest rate?

It's harder to get clear cut answers these days. But if you've been thinking of selling for years, now is probably one of the best times because we've surpassed heights again.

If you're thinking of buying, you need to really consider the interest rate lock. Sure the rates might come down and you can refinance, but what if they continue to go up?