Many real estate investors question real estate investing in todays market, primarily at what might be considered the height of the market. However, a few factors suggest were not necessarily there yet, and the exposure is manageable.
The “Trump Effect” (deregulation, tax cuts and possibly infrastructure spending) all contribute to keeping the economy positive and pushing a recession further down the road – it is coming thought, but when. One economic forecaster, David Rosenberg, thinks “…we are about 90% through, which means we are somewhere past the 7th inning stretch in baseball parlance but not yet at the bottom of the 9th.”. Translated, the real estate and stock markets have 1 -3 years before a correction, so real estate should continue to appreciate until that time.
Demand for mid to lower end of the market. In a January 3, 2018 article titled “What the Tax Plan Could Do to OC Housing”, ATTOM Data’s Daren Blomquist tells GlobeSt.com (as a result of the Tax Plan – the mortgage interest deduction): “We will likely see even more demand for homes priced below the $950,000-to-$1-million price point (approximately where the Maximum Loan Amount for High-Cost Areas for 2018 would be needed), putting more pressure on the mid to lower end of the market.” Translated, the median price point of a home in Orange County is in the sweet spot.
Historical Factors. The US Financial collapse of 2008 saw the stock market (DJIA) crash 54% from its highs and real estate here in the OC droped 35% from its peak to 2003 levels.
According to the California Association of Realtors Historical Housing Data, the Median Price of existing single-family detached homes in Orange County is as follows:
- $482,421 June 2003
- $671,215 June 2004
- $723,003 June 2005
- $749,697 June 2006
- $775,424 June 2007 (Peak Price in 2007)
- $502,647 Sept 2008 (US Financial Collapse)
- $541,089 Sept 2009
- $557,390 Sept 2010
- $500,000 Sept 2011
- $561,830 Sept 2012
- $672,680 Sept 2013
- $696,190 Sept 2014
- $705,000 Sept 2015
- $739,000 Sept 2016
- $799,000 Sept 2017
- $818,000 April 2018
If we were to apply the past economic numbers to a purchase of a median priced home in Orange County and set a correction of a 35% decline in value in 2020, assuming an average rate of appreciation of 5%, it would take six years to recover the market value lost. If we used an average rate of appreciation of 3%, it would take ten years to recover the market value lost.
Summary. For flippers, real estate investing is quite subjective, because the profit is realized on a number of factors such as acquisition costs, holding costs and price appreciation due to market and/or capital improvements to the property. However, many will agree, it also hinges on the buy price. However, in general flippers who can list a property within the next 18 months, and real estate investors holding long term – 10+ years, are relatively insulated from a down-turn in the economy.