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Status Of The Phoenix Housing Market Heading Into 2019

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The Phoenix housing market has seen stable growth over the last several years. This stability has been a welcome change from the turbulent times that are still fresh in everyone’s mind.   The housing market in the phoenix area started growing at unsustainable rates in 2005, this unsustainable growth eventually lead to a collapse in 2008 that caused the housing crisis and great recession.  The phoenix area was hit particularly hard during the recession. Since 2012, we have seen a very different picture, instead of huge rises and crashes the market has seen steady sustainable growth.

Recently however, Troy Reeves and “The Reeves Team” have started getting questions on whether or not we are starting to enter another bubble.  So, are we entering a bubble?   Or are we just suffering from a case of recency bias that is making homeowners, and potential buyers nervous that the past is doomed to repeat itself?

To answer these questions let’s start by taking a deep dive into some of the metrics that determine the health of the phoenix housing market.

We will start by looking at the Absorption rate of homes in the Phoenix metro area over the last 12 months.  Absorption rate is a very important statistic to measure the health of the overall housing market.  The absorption rate is calculated by looking at the current number of homes sold in a month versus the number of total homes on the market.  The result is the total amount of months it would take to sell out of the current inventory.  Three months is the ideal number for a healthy housing market.  We were around the 3-month mark in March of 2017 however we have been dipping under that number since that point.

So, what does it mean that our absorption rate has been steadily under 3 months?  The biggest takeaway is that there is not an ideal supply of homes on the market to meet the demand from the buyers looking to purchase a home.  This points to a rise in housing prices in the short to medium turn.  While the current absorption rate is not dramatically under the ideal mark if it continues lower look for even sharper price movement upwards.  If you are looking for additional insights into the absorption rate and what it means for your housing situation please reach out to “The Reeves Team” for an even further in-depth analysis.

Next let’s look at the most straight forward metric of them all, price.  While price may not give us as good of a gauge of what’s going to happen in the future as absorption rate, it gives us a great idea of what has happened in the past.  While the past in real estate doesn’t necessarily repeat itself, it does often rhyme.

So what does the price analysis over the last 12 months tell us?  The biggest take away is that we have a great deal of stability in the market.  Unlike from 2005 to 2012 these lines are fairly smooth instead of having huge spikes upwards and huge drops downward we have slow sustainable growth.  As you can see towards the end of the chart there has been a recent uptick in the median listing price and in the median sales price, this is to be expected as we continue to see an absorption rate of under 3 months.

As a side note this pricing graph demonstrates something we at “The Reeves Team” always explain to our clients.  If you want your home to sell quickly and for the highest possible value, it is important to price your home correctly when you put it on the market.  Look at how close the <strong>new median list price</strong> and the <strong>sold median list price</strong> are. This tells us that the homes that are priced correctly are selling and the homes that are overpriced are sitting on the market.  In the Phoenix housing market buyers have options so it’s important to be competitive if you want your home to sell for top dollar.  If you are interested in putting your home on the market or just want to have an idea of how much your home is worth, contact “The Reeves Team“.

Next up let’s look at inventory.  Inventory is a measure of how many homes are on the market, versus how many are being sold.   As with price you can see that the number of new listings and sold listings are very similar.

What is striking about inventory going into 2019 is how stable is has been since the housing market started recovering around 2012.  Take a look at this article written by “The Reeves Team” in July of 2012.  This was one of our most viewed articles ever as you can see by the over 30 comments that were posted when it was written.  Troy Reeves correctly predicted that the housing market was returning to normal and that normalcy has continued on until today.

The last item we are going to look at before we zoom out to the big picture overview is the Sold Days On Market.  This metric takes a look at all the homes that were sold during a given month and averages how long it took those homes to sell.  There are a couple of takeaways from this data over the past year.  The first takeaway is that the metric has been under 90 days for the entire last year.  The Sold DOM under 90 days for a span of an entire year reinforces what the absorption rate told us above, that buyers are wanting homes faster than sellers are listing them.  While the margin is not to wide at this point, it is something that could lead to a run up in prices in the short term if it continues to fall.

The second take away from the Sold Days On Market is that buyers want to buy homes during the summer.  As you can see the days on market dips dramatically during the summer months when kids are out of school.  You can expect this pattern to repeat for the foreseeable future.

After reviewing the detailed short term metrics we can see that prices and inventory seem very stable, and point to continued sustainable growth.  Now that we have looked at the short term lets take a look at the bigger picture and zoom out and look at prices before and after the run up and crash of the housing market.

 

Looking at this chart that began in 2000 and runs to today we can get a great perspective on just what happened and where we are today.  First you can see that we had sustainable growth from 2000 until 2005 when the housing boom, fueled by the rise in subprime mortgages, took off.  As you can see by the parabolic rise in prices from 2005 and peaking in 2007 these prices were not sustainable.  In 2008 the housing prices absolutely fell off a cliff and bounced around at the bottom until around 2012.  Its clear to see looking back that during the 2010 to 2012 time period we were clearly in oversold territory and a rebound back to normal prices was needed.  This rebound was accurately predicted by Troy Reeves” in November of 2012.  To give you some perspective “The Reeves Team” drew a red line that continued out from the original sustainable growth between the years of 2000 to 2005 up until today.  What is remarkable is, even with the parabolic run up and huge crash and recession that followed, the market has stabilized back to where it would have been if the slow sustainable growth had continued from the beginning.

Reasons to be optimistic.

There are many reasons to be optimistic about the housing market moving forward.   The biggest reason to be optimistic, is that it does not appear that we are in a bubble.  While housing prices have had growth at a slightly faster than average pace over the last few years, it is mainly fueled by the fact that prices previously were to low and we have been catching up to where we need to be all along. With that being said, it is always a good idea to keep an eye on prices in the future, and if you see another parabolic jump in prices be cautious.  However, looking at the data we have reviewed, including the absorption rate, prices, sold days on market and inventory a bubble does not appear to be an immediate threat.

Reasons to be concerned.

Wouldn’t it be great if there were no downside and everything was looking positive?  Unfortunately we are not that lucky.  Interest rates have been on the rise in recent years and the Fed Chairman Jerome Powell has indicated he plans on continuing to raise them, possibly even increasing the rate at which we see rates rise.  So what does this mean for the Phoenix Housing Market?  The biggest takeaway is that if rates go up, the amount of money home buyers will be able to finance will go down, as more of their monthly payments will be eaten up by interest.

Final Thoughts.

The effects on the rising interest rates may take time to play out, but for now “The Reeves Team” remains cautiously optimistic that we will continue seeing long term sustainable growth in the Phoenix Housing Market.  The market appears to have completed its return to normalcy and the deep dive that we did on the short term numbers appears to say the same thing.   If you want any additional analysis on the market or your home in particular please reach out to “The Reeves Team“.

Let us know what you think of the analysis below!

How Will The 2020 Elections Affect Gilbert Real Estate

With growing uncertainty in the economy many are Americans are beginning to look toward the 2020 presidential elections to determine how the economy is going to look for the foreseeable future.   As President Trump tries his best to continue the momentum we have had in the American economy over the last 10 years, there are many headwinds he is fighting against.  The Reeves Team is constantly monitoring the market and is here to keep you informed on how it might affect your pocketbook.

The trade war has started to slow growth in the American economy and the stock market is lower now than it was a year ago at this time.  The federal reserve has just recently started cutting rates again and we had the dreaded yield curve inversion.  So what does this mean for the general public and their bottom line?  When many people think about the economy they think about their largest investment.  For the vast majority of Americans their biggest investment is the home they live in.  So how will the Gilbert housing market be affected if Trump wins reelection or if a Democratic candidate wins in November of 2020.  With the elections nearly a year away lets dive into some of the consequences that could be felt. Here are a few scenarios.

Rental Tax Credits

Most elections candidates are weary to talk about the housing market.  People feel very passionate about their homes, for good reason, and don’t want to feel like the government is meddling in their largest investment.  This election seems to be different.  Many candidates have been discussing tax credits for both renters and buyers.  If trump wins reelection in 2020 I would not expect much change, however some democratic candidates may mix up the status quo.  Some candidates are trying to tackle the problem of ever increasing rent prices in the hottest markets in America.  Gilbert rent prices have nearly doubled in the last decade, so Gilbert would certainly see some effect from these tax credits.  Some of the proposals include giving a tax credit for families that are spending over 30% of their monthly income in rent.  While this could be helpful in the short term proposals like this will probably only increase overall rent prices, as well as increase home values as well.

Home Buyer Tax Credits

Its no secret that millennials have shied away from purchasing homes, however as they settle down and start their families many of them are beginning to look at purchasing their first home.  Unfortunately for millennials they home prices are higher, and they are straddled with more debt from college than previous generations.  One area that is being looked at is renewing the first time home buyer credit.  This was a credit that was put in place during the 2008 financial crisis and has recently expired.  This type of home buying credit and other credits for home buyers and home owners could also help out the housing industry.

General Outlook

Given the historic crash in home values in 2008 it is remarkable that home valuations are within 6% of their all time highs even when adjusting for inflation.  Given these lofty valuations if we do see a recession it is likely the market could dip.  It is important to keep in mind that last time the recession was driven by sub prime lending and crazy housing valuations, that will not be the reason we go into recession this time.  So if you are worried about a collapse in housing prices as big as last time you need not worry.

So what do you think about the possibilities of these tax credits? Are you for helping out those that are burndened by high home and rent prices?  Or do you see 12 Santa Clauses on stage when you watch the debate, and think we should stop spending more government money on tax credits? Leave your thoughts in the comments section below.

How Badly Would A Recession Hurt Gilbert Housing?

The federal reserve just lowered interest rates for the first time since the housing collapse in 2008.   At The Reeves Team we have been getting questions from our clients about what a rate cut means for the local housing market in Gilbert.  Since the 1990’s every time the Federal reserve has cut rates it has been because a recession was about to occur or because a recession has already started.  This has many people worried that another recession is likely.  Because of all the feedback we have decided to answer the three most common questions in a blog post.

Will this recession hurt real estate prices as much as the 2008 recession?

The 2008 recession was called the great recession for a reason.  The last recession was much larger than most.  Housing in Gilbert Arizona dropped by over 40% within the span of months.  Wealth that people had worked their whole lives to build up vanished almost overnight.  We have a recency bias when we think about recessions that make many of us assume that the next recession will see the same kind of stark decline in house values.  If we are entering into a recession it is unlikely that we will see the same kind of widespread losses in the housing market.  The biggest reason housing wont be hit as hard is due to the fact that the recession will not be caused by the housing market itself.  In 2008 the subprime mortgage fiasco was the reason prices were so inflated, it is also the reason the bubble burst so hard.  Lending standards have been much stricter, and while they have been loosening up as of late, we are nowhere near as bad as we were in 2008.  We don’t know what will cause the next recession but its unlikely to be housing that starts it.

Will we definitely have a recession?

As we pointed out above, the track record is not pretty.  For nearly the last 3 decades when the federal reserve cuts rates we are either in a recession or about to be in one.  However if you look back a little further you can find some reason for optimism.  In the early 90’s we had just had a long run of growth similar to the one we have just had.  As the economy started to soften the federal reserve stepped in and cut rates early.  When the fed cut rates back then it ended up lengthening the cycle for a few more years and averted crisis.  It is hard to tell if this rate cut will provide a similar situation or if we are already on the path to a recession.

How will Gilbert be affected compared to other areas?

Even if we are about to enter a recession if you own a home in Gilbert you will be in better shape than most.  Why?  Because people want to live in Gilbert.  Gilbert is a fast growing area with great schools and a great social environment.  Gilbert is also not as overpriced as some areas of the country such as California and the Hamptons.  If you own luxury real estate on the coasts a recession could have a major impact on your property value, also if you have an investment property in an area with declining population a recession could hit these areas hard as well.  Gilbert does not have those problems and should hold up extremely well if we do enter a recession.

So what do you think?  Are we headed for a recession or do we have a few more years?  Let us know in the comments below.

How Millennials Are Changing The Gilbert Housing Market

So it seems like millennial might be buying homes after all.  The younger generation dubbed as millennials have been a punching bag for older generations on many topics over the years, and home ownership is no exception. Millennials are known to stay home longer, rent instead of own and move around frequently.  However recent survey data is showing that our young troublemakers may be starting to grow up.

A study from the Urban institute shows that 7.1 million people aged 25 to 34 now own their own homes.  This is 37% of the millennial population.  Not only that but nearly 60% of millenialls now aspire to own a home.  This is a very big change from recent surveys.  So what do these new statistics mean for the Gilbert housing market as a whole?

Favorable Outlook

Home ownership was once frowned upon by millennials.  While older generations looked down on them for it, it made sense for a couple of different reasons.  The biggest reason is that they couldn’t afford it.  While the federal reserve states that inflation is at 2% annually they must not be including housing when they release that figure.  Housing has become increasingly expensive over the last few decades and to young adults entering the workforce saving up 20% for a down payment can seem like an impossible goal.  In fact, According to a 2019 home affordability report it will take new entrants into the workforce an average of 14 years to save up 20% for a down payment.  That is a staggering number and it is easy to see how millennials could get deterred and just assume home ownership is not for them.  Secondly, owning a home means putting down roots.  When you buy a home you typically need to stay in the home for 2 to five years to make the investment worth it over just renting.  For a young single person or even a young couple that isn’t sure where they want to end up, a 1 year lease may seem like a more favorable option than a long term housing commitment.  millennials also came of age through the great recession of 2008 that was caused by massive losses in the housing market, this could also have a negative effect on their willingness to take a risk on a huge asset such as a house.

Still Some Skepticism

While we have seen a drastic rise in home ownership in millennials it may not all be roses quite yet.  The same study also showed that of the 37% of homeowners from the age of 25 to 34, that 63% of those homeowners regretted purchasing the home and had wished they had rented instead.  Some of the reasons that the respondents cited were unaccounted for expenses.  When you rent a home you know what your monthly budget is going to be for housing.  When you own a home you can have unexpected expenses that many first time buyers were not adequately prepared for.  At The Reeves Team, we make sure to prep first time home buyers on some of the expenses they can expect.  It is important to know what shape a homes roof is in when purchasing as well as having the rest of the house inspected for common concerns such as Air Conditioner or pool maintenance that may be in the future.  Another reasons home buyers regretted the purchase was due to the fact they had to sell sooner than they had anticipated.   Many jobs require frequent relocation, and we live in a world that is becoming more and more transient with multiple reasons we may need to leave the place we planned on being for the foreseeable future.  Because there are large overhead costs with purchasing and selling a home this can be a real negative when homeowners decide to sell sooner than they anticipated.

So what do you think?  Is it a good thing that millennials are starting to get excited about home ownership?  Or are you still skeptical based on how many of them resent their home purchase?  Let us know in the comment section below!

Should I Rent My Home Or Put It On Airbnb

Back in the good old days it was simpler.  If you were buying a new home you had limited options.  You could sell your existing home or keep it as a rental property.  If you kept it as a rental property you would either need to find a property management company and pay a third party a significant amount of your rent, or you would need to set aside a large amount of your time and dedicate it to being a landlord for your property.  Then everything changed.  In 2008 in the face of the financial crisis,  Airbnb was launched and the real estate world would never be the same.  Now second home owners and investors have another viable option.  Airbnb allows owners to open up their units to short term tenants, in much the same way a hotel would work.  Many home owners come to The Reeves Team with questions regarding the benefits of renting vs listing on Airbnb so we are going to break down the options to help you decide which is best for you.

Where is your home located?

Like most things in real estate location is a huge consideration when determining what to do with your home.  If you have a home in a highly trafficked area you will likely see higher returns on your investment.  Another important thing to consider is will your home be in demand more at certain times of the year than others.  For instance, if you have a home very close to the cubs spring training facility you can expect great returns when travelers come into town to view the games, but the rest of the year your returns will be more on pace with the average in the valley.  Now for instance if you have a home near downtown Gilbert or downtown Scottsdale you can expect higher than average returns on your Airbnb listing throughout the year due to there not being a real off season.  You can also expect higher returns during the winter months than in the summer as more people flock to the valley during the winter than they do in the summer.

Do you need a stable return from your investment?

As we mentioned above you can expect some variation in income if you decide to list your home on Airbnb.  This is even more true if you have a home that will have high demand but only seasonally.  You will need to budget accordingly and plan ahead for the months that do not have as high of demand and make sure to stay current with your pricing so you do not under charge during the peak months and lose out on potential revenue.  You must also make sure you adjust your prices down during the off season to make sure your property continues to get utilized and is priced competitively with other homes on the market.  With renting you know what you are getting.  Renting is more of a set it and forget it situation. You know the price you will be receiving every month and can budget accordingly.  If you are someone who is ok with fluctuations and wants to maximize the potential of your home Airbnb may be the way to go.  However, if you like consistency renting may be a better option for you.

Do you want access to use your property during some periods throughout the year?

One of the biggest benefits to using Airbnb is that you can have access to your property when you need it.  You can block out dates and stay in your home as you wish.  This is great for home owners that do not live in the valley but that visit frequently.  If you already live in the valley and don’t need access to the property then this is not a consideration to take into account.  If you have a home up north in the white mountains you use as a vacation home, this would be a perfect opportunity to rent on Airbnb the weekends it is not in use.

How big is your home?

The size of your house will matter when determining the amount you can charge for your property on Airbnb. If you have a one bedroom condo in a business area you will be in good shape, but if its in a family travel destination it may not be as marketable.  Also if you have 5+ bedrooms in your home you can anticipate multiple families staying in the house and will be able to charge significantly more than a 3 bedroom house.

Let us know what you thought of this breakdown between renting and listing your second home on Airbnb.  Have you tried both? If so which do you prefer?  Let us know in the comments below.

How Will The Trump Trade War Affect The Gilbert Housing Market

There has been no lack of drama surrounding the trade war with China.  At first many Americans believed the trade war would be over quickly and China would give into the demands of President Trump.  The stock market and home prices were largely unaffected in the beginning. As the tariffs on Chinese imports continued to rise there was more market volatility but it always seemed as though a deal was around the corner.   Now that talks have broken down and the tariffs have been increased to 25% more people are starting to believe we are in for the long haul on the China trade war. At The Reeves Team we are frequently asked for our opinion. So if we are in for a long trade war how can we expect this to affect the housing market and the Gilbert housing market in particular?  This is a complex issue and we are in some very interesting financial times.  What we mean by that its possible bad news for the housing market could actually end up being good news, at least in the short term.  Confused?  We will explain.

Trade war direct affect on housing market

First, lets put this into perspective.  There are direct effects that the trade war will have on real estate, and there are indirect effects.  The direct effects caused by the tariffs are the cost of material goods needed to build new houses as well as the goods needed to remodel existing homes. Rob Dietz the chief economist at the National Association of Home Builders stated that the new 25% tariffs will cost home builders an additional 2.5 billion when funding the construction of new houses.  This cost will need to be passed on to the consumer in the form of higher home prices which could in turn lower the amount of home sales and slow the economy further.

Some of the indirect effects the trade war has on housing prices is the increase in uncertainty.  Across the country over 12 million people plan on selling their primary residence within the next year.  Among those 12 million homeowners 44% of them said the trade war has made them consider selling their home earlier than anticipated to keep from losing value if the trade war continues.  If many homeowners decide to sell and the market begins to get saturated with homes you will see the prices start to dip and houses staying on the market longer.

What happens if the federal reserve lowers rates?

So we have laid out the reasons why a trade war could hurt the United States economy, and in normal financial times this would be it.  Its fairly obvious that tariffs on foreign goods from China and negative sentiment from homeowners can only be a negative right?  Well not so fast, it turns out we don’t live in normal financial times.   With the federal reserve seemingly eager to cut rates the trade war and the resulting slowing economy may give the federal reserve the ammunition that they need to decrease rates.   I know what you may be thinking, didn’t the federal reserve just increase rates multiple times last year and promise three more cuts in 2019?  If that is what your thinking you would be right, however it seems like they are set to do a complete 180.  Many economists have estimated the fed may cut rates up to 3 times over the next year.  So how does this affect homeowners?  Great question! Well the primary way it will help homeowners is that buyers will be able to pay more for houses because interest rates will chew up a smaller amount of the payment they can afford.  The second way that it will help home prices is that lower interest rates tend to help spur economic growth and will help with consumer confidence.  So we may be in a rare situation where good news is good, and bad news is good.  If there is a trade agreement announced that should be good for the overall housing market, if the trade war drags on and the fed cuts rates that could also be good for the housing market.

So what do you think?  Are we in a win/win situation?  Let us know in the comments section below.

When will the huge water park being built in Gilbert open?

Gilbert Arizona has announced it will be opening one of the worlds biggest and best water parks in the nation.  As families look to find any way they can to get outdoors during the summer months, aquatic centers and splash pads have been popping up all over the valley.  We haven’t seen anything quite like this before however.  The town of Gilbert recently announced the park will called The Strand @ Gilbert.

What is it?

The Strand will be a massive new Gilbert Regional Park.  This park will be unique in that it will be operated by a private company once built.  The park will encompass more than 270 acres and the water park itself will be 25 acres in size.

Where is it?

The Strand @ Gilbert is being built at the intersection of Higley and Queen Creek roads.

What activities will be there?

This is where it gets really exciting.  Current plans include some incredible attractions.  A cable ski lake is being built that will allow skiers and wakeboarders to be pulled by an electrically driven cable.  This will be a huge advantage for all those that love water sports.  Currently Gilbert residents flock to the lakes that surround the phoenix metro area, but soon they wont have to leave the neighborhood, oh and don’t forget you wont need to buy a boat either! A surf lagoon is also being built.  This isn’t your standard wave pool as there will be rideable waves for those brave enough to give it a go. There is also going to be a massive inflatable water park for kids of all ages.   There will be multiple swimming areas of varying depths for kids and adults of all sizes to enjoy.  Another very unique feature to be included will be real sand beaches to give you the feel of the ocean without the 5 hour drive to the coast.  There will also be restaurants and clubhouse to relax at.

When will it be ready?

The Strand is expected to open in the summer of 2020.  Stay tuned to RelocateAZ for updates when an exact date is announced.

How can we expect this to affect Gilbert housing prices?

This should have a very positive affect on housing prices in the Gilbert area.  While we at The Reeves Team expect it to help all Gilbert housing, the impact will be felt most for houses directly surrounding the new park.  If you are interested in purchasing a house near the new park let us know and we will be happy to find your dream home.

So what do you think of the new park being built?  Are you as excited as we are or do you have reservations? Let us know in the comment section below.

Bitcoin, Blockchain and Cryptocurrencies Will Upend Real Estate Market

A few months ago we are The Reeves Team wrote about the potential that exists in the blockchain space.  At the time of writing many people were declaring bitcoin and cryptocurrencies dead.  Unfortunately we live in a media age where a majority of what you read online and hear from “news” outlets is either clickbait or at worse fake news.  Since the time of publication the price of Bitcoin has more than doubled and people are starting to come to the realization that cryptocurrencies are not going anywhere.

Like any revolutionary technology it seems like something that is nothing more than a curiosity to the casual observer.   If you need a reminder of how people viewed the internet in the 90’s here is a clip of Katie Couric asking “What is the internet, Anyway?

It is safe to say that 20 years later you can replace internet with blockchain and that will let you know where we are with the adoption of the new technology.  It is safe to say that the internet has changed our lives on a daily basis but will blockchain and cryptocurrency do the same thing?

In the previous article we discussed how blockchain will revolutionize the title company industry and also a different ownership model.  Now that Bitcoin is back in the mainstream news we would like to present a few more ways that blockchain technology will revolutionize real estate as we know it.

Property Managment

Property management can be a pretty hectic process.   Often times there are multiple applicants that want to rent a particular property.  A management company will typically ask for an application fee upfront as well as extensive information from an applicant including personal information such as address and social security number.  More times than not this private information is sent to companies with varying levels of security and the applicant will not successfully sign a lease. Blockchain technology offers transparency that is not typically associated with the property management world.  What if you could see a persons rental history right on the blockchain?  What if the tenants could see if a lease was already signed directly on the blockchain instead of waiting weeks for the property management company to respond? What if you could share your credit history with someone without giving them your social security number? These are just a few of the efficiencies that will be provided when the blockchain revolution comes for the real estate market.

Real Estate Investment Trusts

We recently discussed REITs as a potential real estate investment vehicle. In this article we will dive into the implications that blockchain can provide for REITs.   To give a bit of a background a REIT is a company that owns, operates or finances income-producing real estate. These REITs allow anyone to invest in real estate in the same way they would invest in an ETF or a mutual fund.  The downside of REITs is there is typically high management fees.  With smart contracts blockchain technology could all but eliminate these hefty fees and will also allow for more transparency when investing.  There will also be more liquidity in the market as people will be able to buy and sell smaller increments of the property.

These are just a few ways in which the real estate industry will be disrupted by blockchain technology. Do you agree with us here at The Reeves Team or are you still a blockchain and cryptocurrency skeptic? Let us know in the comment section below.

How To Make Money Investing In Real Estate

It is well documented that fewer and fewer people are owning the homes they are living in.  It is a harder decision than ever before if you should own a home outright or rent.  Millennial’s notoriously are choosing the flexibility of renting over owning a house in historic numbers.  While many people people are choosing to rent there is another question you should be asking yourself.  Should I invest in real estate?  For many owning a home is the single biggest investment they will ever make, but is real estate investing a strategy that fits your goals?

Even if you chose to rent for the flexibility of being able to pick up and move whenever you want, it still may be a good decision to invest some of your capital into real estate.  Making an investment into real estate can seem like a huge undertaking but here at The Reeves Team we will show you that it doesn’t have to be the case.  Below are four different ways to invest in real estate ranging from the traditional to the unique.

Option #1 Owning a rental property

When people think of investing in real estate this is typically what they think of.  Owning a rental property can be a great investment.  Housing for the most part appreciates over time and you can also gain cash flow if you are able to collect more in rent than it costs to own the property.  There are some things to consider before deciding to purchase a rental property. You will either need to plan on spending a significant amount of time handing matters related to your rental unit, or you will need to hire a property management company which can eat into your profits.  Another great thing to remember when purchasing a rental property is the possible tax deductions.  Expenses are tax deductible and if there are any losses related to the property they can offset gains from other investments.

Option #2 Investment Groups

If you want exposure to the real estate rental market but don’t want to get your hands dirty by being a landlord you always have the option of an Investment Group.  Typically if you are investing in an investment group you will be investing in a company that purchases, or sometimes builds real estate.  Often the type of real estate you are investing in will be condos or apartments. Similar to owning your own rental property and hiring a property management company their is typically management overhead that will eat into your profits.  The benefit of an Investment group over a rental property is that you are more hands off in a way that you would typically see with a mutual fund or stock portfolio.  The negative side is there are more fees and you have less control than you would if you had your own rental property.  You will also need substantial capital to start investing in investment groups.

Option #3 Real Estate Investment Trusts

If Investment groups are similar to mutual funds or stocks then REITs are nearly identical.  REITs like many stocks will pay dividends and are basically the same as owning stocks.  This is good if you are familiar with owning stocks but you are not comfortable owning large amount of real estate.  REITs can be a great investment and can help you create a diversified balance sheet when you are investing.  You are however, less likely to hit a home run with REITs because unlike Investment Groups and rental properties they are not leveraged.  This means you don’t have the option of taking out a loan on a property so the gains and losses are not going to be as large as if you invest on a large property by taking out a loan.

Option #4 Flipping Homes

This one is not for the faint of heart.  We do not recommend flipping homes unless you know exactly what you are doing and have lots of experience in the real estate market.  If done right you can make a great deal of money flipping homes, but there is also a lot that can go wrong.  When flipping homes you typically have high interest short term loans on a property.  If you are not able to turn the home around and sell it quickly your profits could very quickly turn to losses. Also if the real estate market takes a turn you could be left holding a home you never wanted and paying extremely high interest rates on it.  However, if you are handy and know how to spot a good deal flipping homes can be a very lucrative business.

So what do you think about these 4 options for investing in real estate?  Do you use any of these strategies? Let us know in the comments section below.

Here We Go Again: No Income, No assets? No Problem

Back before the financial crisis we had some very exotic loan types that people considered standard.  We had 110% loans where the lenders would actually give borrowers money to close on their house.  We had no document loans where the borrower was not required to provide any documentation at all and was often discouraged from doing so.  Most people are also familiar with the ARM loans or adjustable rate mortgages that would adjust to the current market rate after 3 or 5 years, before 2008 many of these had payoff clauses where the entire amount would come due after 15 years.  The NINJA loan however was one of the most exotic we saw at The Reeves Team.  The NINJA loan stood for No Income, No Job and no assets required, this loan took off pretty heavily in the hey day as a large portion of the population could qualify.

Well would you believe not much more that 10 years after the financial collapse we are back at it again.  360 Mortgage group just announced its plans for the NINA loan.  This loan does not include a requirement for a borrower to prove their income or their assets.  They are calling this a pilot program, but its going to be pretty large for a pilot as they intend to allow for as much as 1 billion in these NINA loans.

So with these very loose requirements you would expect only the borrowers with the best credit scores to be approved right? Well you would be wrong as the program is allowing credit scores as low as 620 to be approved for these new loans.

One thing to note is that these loans will not be backed by Fannie Mae or Freddie Mac, these loans will instead be backed by private capital.  If Fannie or Freddie decided in the future to back these types of loans again that would open the flood gates for other lenders to start offering similar mortgages.  360 Mortgages have been on the forefront of pushing the lending envelope since the financial crisis.  They were also one of the first banks to offer 97% loan to value options in 2015.

So the question is, are we heading down the same path we did previously with reckless lending standards that will inflate the housing market again an cause another giant bubble?  The reality is one of the biggest problems that caused the bubble last time was that lenders were able to get rid of their sub prime mortgages and were not left on the hook if the borrower defaulted.  Now that the credit default swaps have been cleaned up and lenders are more responsible for borrowers that default we shouldn’t see as much of a bubble.  This still doesn’t mean that lenders wont get over exuberant and lend to much money to those who shouldn’t be purchasing, but it does mean that if things go bad it shouldn’t be as catastrophic as last time.

So what do you think?  Have we learned our lesson and this is just one example of a lender getting a little carried away? Or are we poised to make the same mistakes again only a decade later?  Let us know what you think in the comments section below.

How Quantitative Tightening and Quantitative Easing Affect Gilbert Real Estate

We have been on a wild ride financially speaking since the last financial crisis in 2008.  The crisis and the ensuing years were no picnic for the American Public.  The financial hardship that was felt could have been far worse if it were not for a tactic the federal reserved used called Quantitative Easing.  This is a phrase that sounds harmless, and also pretty confusing.  Quantitative easing is the introduction of new money into the money supply by a central bank.  The federal reserve buys up government bonds and other securities and puts what it owes on its “balance sheet”.  Central banks have the unique ability to purchase without actually having the money and this is what is sometimes refereed to as “printing cash”

 

Did quantitative easing affect real estate prices

Yes it did.  Many economists will say that quantitative easing is a new methodology and we don’t know yet if that is the reason for the economic upswing. However, we have years of data that show a correlation between the money that was injected into the economy and the prices of housing as well as the stock market.  Take a look at the chart below and you will see just how correlated the money the fed spent and the stock market prices have become. 

You can see that the fed was able to propel the economy forward and continued to do so through February of 2015. From February of 2015 the federal reserve stopped injecting money when the balance sheet hit 4.5 Trillion dollars.  The economy continued to do well for some time beyond that as the federal reserve also kept interest rates are near zero.

So isn’t the federal reserve reversing quantitative easing now?

Well yes and no.  The federal reserve began to raise interest rates and sell off some of its assets in 2018.  If you followed the stock market closely in 2018 you will know that the dow jones was down over 5 percent for the year.  So the first time that the United States economy didn’t have near zero interest rates and money being pumped into it from quantitative easing it lost money.  The federal reserve raised interest to 2.5 percent less than half of what the rates were before the economic crisis of 2008. When the markets began to freak out the announced they would not raise rates for the remainder of 2019.  They have been vague about quantitative tightening but many economists believe they will put that on hold as well. 

So what does this mean for real estate prices?

We are at an inflection point in the U.S. Economy.  We have what looks to be very weak economic data.  We can’t get the federal funds rate above 2.5 and when the federal reserve reduces the massive balance sheet it has, the economy starts to tank.  So this sounds bleak right?  Well its slightly more complicated than that.  The trump administration just recently stated that it would like to see a half a percent drop in the interest rate. This would bring the federal fund rate down to 2 percent.  If the economy shows signs of weakness the federal reserve could also just start to ramp up quantitative easing again.  It would stand to reason that easing will not be as effective as it was last time, but it would be foolish to think it would have no effect at all.  So it really comes down to judging how weak the economy is and how much the federal reserve is willing to do to keep a recession from becoming a reality.  Another thing to keep in mind is that we have an election being held in November of 2020 and we are already seeing signs that the administration wants the federal reserve to keep the easy money party going at least that long. 

So what do you think?  Are we going to continue moving up like we have been for the past 10 years?  Or are we due for a recession? Let us know in the comments section below.