Clues in the News – Housing Sales, Home Improvement and Foreign Investors

Every real estate investor is afloat in a vast economic sea. As an investor, it’s easy to believe you’re on stable ground … only to wake up and find you’ve drifted far from your goals.

We believe SMART real estate investors (you!) have to act a bit like ocean biologists … tracking the winds, noting the undercurrents, and keeping detailed observations of the environments you find yourself inhabiting.

One way to take your notes is to read the news. And in this edition of Clues in the News, we bring the news to you! Listen in to hear from:

  • Your economic sea biologist host, Robert Helms
  • His lowly research assistant, Russell Gray

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Slumps in home sales, builder confidence

This is a trend we’ve been observing for a while … existing home sales are decreasing. In June, they dropped 1.8% to the second lowest level this year.

If we stopped right there, you might think the economy is in trouble because people aren’t buying houses. But let’s take a closer look.

While sales of homes overall are dropping, the median home price in June was $263,800 … 6.5% higher than the same time last year.

All housing types aren’t equal. While prices are rising for houses in the 250k+ category, they’re falling for homes under 100k.

Just further evidence, like Robert Kiyosaki says, that the rich are getting richer while the poor are getting poorer.

The article linked above quotes Lawrence Yun, NAR chief economist, who says, “The demand for buying a home is as strong as it has been since before the Great Recession.”

So why are home sales dropping?

Many factors could contribute to a slow market … the growing number of millennials with high debt and inadequate income, for example. And the flux of institutional investors entering the real estate market.

Severe housing shortages are also leaving folks on the sidelines.

While the average median home price has risen, the median price of a new home has dropped by 3%.

Homebuilder confidence in recent months has reached record lows … leaving buyers hoping for a new home in the lurch.

If you look at the stock market, it would be easy to believe everything is peachy. But look at homebuilders … and you’ll see an indicator that not everyone has a bright outlook right now.

Fewer new homes, more home improvement

Speaking of homebuilders, housing inventory is at a 30-year low.

This while home prices have risen to pre-crisis levels in most markets (and far higher in a select few).

It’s a conundrum. Why are homebuilders moving at a snail’s pace? Why is homebuilder confidence so low?

Take a look at capital markets, and you’ll get a partial answer … real estate is heavily dependent on financing, and while the markets may have recovered from 2008’s recession, banks are still wary about giving loans.

In addition, 78% of homebuilders complain that labor shortages are their No. 1 concern.

Reliable, skilled labor is difficult to find. One reason? Construction workers found different careers during and after the recession … then never returned to the home-building business.

In lieu of buying new homes, homeowners are instead spending record sums on home improvements.

According to an article in the Wall Street Journal, “A shortage of new single-family homes across the U.S. is pushing up prices and locking many buyers out of the market.”

Note the certainty in that statement? Reporters are quick to assign cause and effect.

It’s your job to look at the bigger picture and see what’s going on. Then reexamine the conclusions made in the news … and draw your own.

Sales to foreigners up, buyers and sellers struggle outside U.S.

While home sales overall are down, Forbes reports that foreign investments in U.S. properties have skyrocketed recently. Sales to foreigners are up 49% over last year.

If you’re a U.S. investor familiar with the current political situation, you may be wondering what these investors are thinking.

But think about it … the U.S. has strong property rights, lots of renters, a relatively stable government, and strong infrastructure.

Buyers from China and Canada want to move their cash to a place where they see a better long-term future … and the U.S. fits the bill.

Speaking of Canada, a model produced by Better Dwelling predicts that Canadian home prices still have farther to fall.

Canadian real estate markets started crashing when the Canadian government made policy changes that hinder foreign investment.

It’s a lesson for investors to look at both the economics and the politics of a situation … then align themselves financially to policy decisions for the smartest payoffs.

You also need to be aware of the data … and what that means in terms of rising trends. While the Canadian housing market is struggling, lonely urban centers are predicted to be the next big real estate trend in the country.

While our friends across the border are seeing home prices fall drastically, our friends across the pond are seeing a dearth of affordable housing. 

An article we found recommends the London government lower tax rates for new homeowners and suggests 100% mortgages as another option.

The alternative is that London will see a “brain drain” as young workers unable to find affordable housing move outside of London.

This is a problem in the U.S. too, as large companies seek to find locations where workers can afford decent housing and quality-of-life measures are high.

The good thing about problems? (And there is a good thing.) If you’re creative, a problem is only an opportunity to create a solution.

Businesses and people need good places to live. Real estate markets have the opportunity to create them.

Homelessness and hedge fund managers

A recent article in Bloomberg listed the cities where rent hikes leave the most people homeless.

The bottom line is markets with less slack see more homelessness. The message for you? Slack is good.

It’s crucial for you to dig into your local market and figure out the dynamics driving outcomes. Many things can put a squeeze on your bottom line … make sure you’re aware of current and potential trends in demographics, jobs, and the local economy.

Winning markets don’t require a good economy to stay viable. They allow you to stay profitable even when factors change and be the recipient of demand when other markets are struggling to keep prices down and renters happy.

Remember, when you invest in the rental marketplace, you’re getting into a long-term contract. But a stable one.

Stability is probably one of the big reasons hedge fund managers and other wealthy investors are making a break for real estate.

They see the opportunity for a safe haven … but most don’t want to get their hands dirty. If you do, you may find doors opening for you.

Tune in to our next episode to hear an amazing guest make his case for entrepreneurship.

Until then, go out and make some equity happen!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.

Weird happenings and the squish factor …

We got a fascinating boots-on-the-ground report from a friend of ours traipsing about Hong Kong … and no, this isn’t about Hong Kong.

“My Big Short moment …” was the subject line.

“The Big Short” refers to Michael Lewis’ book and the recent movie of the same name, which both tell the tale of events leading to the 2008 financial crisis.

Our friend went to an “open house” for a pre-development condo tower. Prices STARTED at $700,000 USD for a 216 square foot condo. Crazy.

Non-Hong Kong residents pay an ADDITIONAL thirty-percent “speculation” tax. Ouch.

We’re guessing government is trying to discourage global hot money from bidding up properties and pricing out locals who need places to live.

Our friend reports these condos are only fetching $2,000 per month rent. Even with today’s low interest rates, those numbers make NO sense.

Nonetheless, our friend says bank financing is available … with 40% down.

Apparently, the banks aren’t completely insane.

However, he says the developer is offering much more attractive 30-year, 15% down, “teaser rate” financing. It starts at prime less 2% for years 1-3, then prime less 1% for years 4-5, and then prime plus 1% for years 6 forward.

Now, for those around pre-2008, these loans sound hauntingly like the infamous 2/28 loans which triggered the mortgage meltdown.

But it gets better.

Apparently, the demand for these tiny, grossly expensive condos is so high, the developer set up a lottery system for buyers.

A prospective buyer must pay $100,000 HKD to enter for the CHANCE to buy a unit. And there’s nearly THIRTY wannabe buyers for each unit!

Does all that sound just a tad overheated?

Of course, Hong Kong’s not the only place real estate values are out of control. Last week, we made mention of growing concerns about Canada’s housing boom.

Does this mean real estate investors should hibernate until things calm down?

We don’t think so. But we certainly aren’t suggesting anyone buy into over-heated markets or product types.

So what’s going on?

When an economy gets flooded with cheap money, prices get bid up because the ratio between money (technically currency) creation and product creation favors money.

More money chasing the same goods means prices rise.

But prices don’t rise everywhere on every item across the board. It depends on who gets the cheap money and what they do with it.

There’s a bazillion factors affecting how excess money gets into circulation. No one really knows for sure where it’s going to pop-up.

We call this “the squish factor.”

If you squeeze a water balloon that has enough elasticity, it will squish out between your fingers … somewhere. But you don’t always know where.

And if you push it back in one place, it pops out another. Again, you don’t always know where.

Speculators try to guess where it’s headed, and front-run it. They’re called the “hot money”. Their goal is to get in and out early, and let the late-to-arrive and late-to-leave crowd take the lumps.

And you never know where the next bubble will pop-up … or recede.

The reason bubbles recede is because there’s nothing REAL underneath them creating value.

So when the hot money leaves to front-run the next asset class, the air comes out of the current bubble … and it’s pricing recedes to the true value based on income.

The big short of it (sorry, we couldn’t help it) is … value is based on income.

Rents of only $2,000 per month can’t possibly justify a $700,000 value. All the excess value is from hot-money “air” … and the only exit is the greater fool or the poorhouse.

So what’s an investor to do?

First, let’s make a distinction between an “investor” and a “speculator”. The former focuses on cash-flow, while the latter focuses on capital gains without adding value.

“Investors” use currency to acquire assets which produce cash flows. Acquiring assets is the objective.

Conversely, “speculators” trade assets to acquire currency. Acquiring currency is their goal. Buy low, sell high, collect currency. Repeat. The cash flow comes from the sale of assets, not the holding of assets.

By those definitions, an “investor” would NEVER buy one of those Hong Kong condos. The numbers preclude it. They just don’t make sense.

But hot money speculators will … and apparently are. At the margin of the hot money is the dumb money. The dumb money gets in and out late … if they can get out at all.

We know. We’ve done it. It’s VERY tempting because the profit can be BIG and FAST. And when you win, it feels GREAT. But …

So, YES … it is possible to make HUGE gains getting in and out of a bubble asset. Be it stocks, bonds, commodities, currency or real estate.

It’s also possible to make a lot of money in a Ponzi scheme or at the craps table. But it’s not investing.

We’re NOT saying capital gains are bad. Far from it! We LOVE equity. But REAL equity comes from CASH FLOW and holds up MUCH stronger when the tide of hot money recedes.

So while speculators are drunk with cheap money in the bubble casinos … sober investors are poking around boring markets looking for cash-flows and value-add opportunities with multiple exit strategies.

The great news is cheap money spends just as well in the boring markets and product types, but there’s no hangover after a binge. Values up. Values down. Cash flows fairly steadily.

With all the weird happenings in the global financial markets, it’s more important than ever to stay sober and focused on finding real value … markets with sustainable drivers and nice boring cash flows.

The irony is that when the air comes out of the over-heated markets, some of the hot money will flow into those boring markets. Which is a fun ride for those already there.

Meanwhile, many of those markets aren’t over-crowded … yet.

Until next time … good investing!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.

6/5/11: Ask The Guys – Answering Your Real Estate Questions About Tax, Legal, Foreign, IRA and more!

One of the best parts of learning in a classroom is hearing the questions asked by other students.  Sometimes they ask things you would never think of!  And even if the question isn’t directly applicable to your current situation, who knows what tomorrow may bring?

That’s why every few weeks we dedicate an episode to reaching into the email grab bag and pulling out several of the many great questions we receive from our listeners each week.

In the radio schoolhouse for today’s Q&A:

  • Your host and headmaster, Robert Helms
  • Co-host and teacher’s aide, Russell Gray
  • Special guest and attorney, Mauricio Rauld

Not only do we get questions on a variety of topics, but through the power of podcasting, we get questions from a variety of locations – many outside the U.S.!

The collection of questions for this episode have us discussing what to do when you can’t find a good deal in your target market, how to get started with little or no money down, what to do when a property is underwater and you want to move, and how to find a great agent in a foreign country.  Plus we talk about landlording in tenant friendly states, profiting from distress without kicking people out of their home, and ideas for creating quick cash when you have the short term use of OPM (other people’s money).  Enjoy!

To submit your question to The Real Estate Guys™, visit our Ask The Guys page.

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