Timing is everything in life and real estate is part of life. Transacting on a property is not only about transacting in today’s market, but just as importantly transacting on the property in the future, which is how true wealth is built in real estate. As a result of this, advisory and valuation services are incredibly integral to the success of any real estate ownership.
Real estate markets are consistently cyclical over time with valuations following them and the livelihoods of owners following as well, both positively and negatively. People consistently follow the herd. When the real estate market is hot and active, buyers wrap themselves into the excitement and purchase all types of property, often making foolish decisions that hurt themselves in the future. When the market is slow and inactive, sellers often react and do the same on the other end, by selling when valuations are lowest oftentimes knowing they will regret this in the future, but choose to take the sure dollar today as opposed to dealing with an unknown tomorrow. Others make the right choices regardless of the current market sentiment, and those who usually make the right choices are more often than not the most educated.
Our advisors may not make the final decision, but our ability to guide you towards the right direction is incredibly beneficial. We start the process by keeping things simple. People have a tendency to know their local areas – what schools are good, what schools are bad, what areas are expensive, what areas are not, which neighborhoods which are safe, and which neighborhoods are dangerous. Other “second-layer” items require more thinking but prove to be valuable instinctual evidence of economic prospects: who are the large local employers, how are these employers doing, has population increased or decreased locally, has infrastructure improved/changed, and how is the transportation in and out of the local area. Other outside elements such as the incoming presence of retail, fitness, running trails, and other amenity – like items will drive consumers towards one lane versus another. Understanding and pointing out what you already know is the first step to understanding the drivers of valuations. This basic understanding will serve as a foundation to making informed decisions as with any transaction.
The next step is understanding the whole picture. Any market, positive or negative, is composed of a variety of puzzle pieces that make up the picture of the current market and future markets, positive and negative. Searching for these puzzling pieces starts with understanding the local market but begins with searching the data. Knowledge is power. We offer periodic reports for our client’s review which will state a reflection of the larger market. This tracking is key to see where the market is trending, up, down, or status quo. In addition, we will analyze the local submarket, neighborhood, and even block effecting any particularly relevant property. If a particular property sold high or low, we want to know why, and we will find out. How is the property condition? Was it renovated or is it needing renovation? Sitting on a large lot? etc. Market comparable information will set expectations for future or current performance of particular property sales by highlighting recent sales and taking into account factors which will dictate an apples to apples approach when comparing to the subject property. For example if the subject property is identical to a recently sold property next door with the exception of a two car garage the property next door contains, we will place a value to the 2 car garage then deduct it from the home’s sale price to provide an apples to apples comparison.
In addition to recent historic sales comparables, we will take elements of a traditional appraisal approach through evaluating these comparables along with replacement cost, and an income approach. The replacement cost will take into account what the cost will be to rebuild an identical replica of the subject property. If the cost to acquire land and build a new identical home in a comparable location is cheaper than the cost of acquiring the subject property, the subject property is likely overpriced because the market tends to prefer a newer product. Being able to understand and quantify this replacement cost comes from being in market with an understanding of current market residential construction costs. The income approach is more or less beneficial depending on the situation as it provides a valuation based on potential or existing rental income for a property. If a property is really considered an owner – occupant home based on its appearance and a high percentage of resident home ownership within the neighborhood, this valuation will be less emphasized. If the property is cash flowing through a rental or is located in a neighborhood with a higher likelihood to be a rental location than this valuation method will be more emphasized.
Although much of this information is informative, it can very much be a reflection of the past, so we need to track other greater market data to advise as to what is coming. We do not have a crystal ball, however we can prepare ourselves based on the data which is accessible to use. Residential housing may be its own niche market, but it is driven by other markets. If unemployment is high and consumers are skittish on spending, your sales performance will suffer. In particular, consumer sentiment and an ability to obtain mortgages set the foundation for a successful housing market paired with the right balance of supply and demand. Starting with supply and demand – if more housing product is available, you have to compete with more homes to pin down a purchaser, therefore pricing may be stagnant or worse, falling. If less housing product is available, buyers have to compete amongst themselves to purchase a home, pushing demand and prices higher together. These basic data points are easy to track, however anticipating and preparing for these events is the difference maker.
Consumer confidence and market confidence are unquestionably valuable. Buyers have to be confident the purchases they are making and the long term commitments tied to the modern 30 year mortgage are right ones. Without this confidence, prices free fall. What fuels this confidence? A variety of items, most notably a sense of certainty. Certainty is driven by confidence in leadership (also known as who is in political and federal banking offices), job security (meaning a low unemployment rate), and outside elements such as a stable inflation, a strong stock market, and favorable international policy. While the stock market may be an outside item completely separate from the real estate market, it displays a sign of consumer confidence and is a key market indicator as to the upcoming performance of the real estate market.
We can learn a lot from history. Market indicators provide us specific statistics to follow to study this history. With the United States housing market contributing approximately five percent of the country’s gross domestic product (GDP), we have to look at this market as a very influenced item by national market trends. A few obvious market trends tied to the upcoming success of a residential real estate market include residential construction activity, construction spending, housing inventory, home sales statistics, state reports, and new housing starts. Less obvious trends include home mortgage rates (particularly 30-year fixed rates), contribution of residential investment to GDP growth, discretionary spending, lender faults, and unemployment rates locally as well as nationally. Remember certain events are easily predictable that a change is coming – positively or negatively. If a new president will definitely be coming into office, there is an uncertainty due to the unknown of a future President’s stance, style and economic approach. Sellers looking to play the safe game may take the deals in front of them knowing some positive or negative disruption is ahead on the horizon.
Another item of significant significance is the lending market. Only a small percentage of properties trade in cash. Few people have a capability to purchase in one hundred percent cash and even fewer prefer to do so. As a result, there is an over-reliance on an active and reasonable lending market to support home sales. If you cannot get a loan, it will be nearly impossible to purchase a home for a typical consumer. We saw this recently as a result of the Great Recession, where the foundation of the lending system was broker, resulting in a period of time where the government and lenders had to re-establish that foundation, during the time in which it was extremely difficult to obtain a loan and for many impossible. This situation led to a crash in the real estate market as buyers could not gain the capital they needed from bank loans to fund their purchases. At the time, General Electric could barely obtain a loan, much less the typical lower or middle class consumer who were incredibly reliant on the lending market.
Having a crystal ball is not possible and if real estate investing was easy everyone would do it, however tracking a marketing obvious economic indicators will allow us to be as informed as possible as a team, providing for the best service quality from Yellowtail as any service provided by a competing firm.