Norada Real Estate Investments

National Economic Outlook (August 2011)

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Jobs, jobs, jobs! That's what we'll hear from now on through the 2012 election, and rightly so. Although they claim otherwise, Wall Street and the Big Banks are not the essential, indispensable, must-be-bailed-out part of the national economy: it's people with jobs.  Those people account for 70 percent of the economy (the government is 20 percent).

As we've already seen, those people aren't spending very much money these days, needing no more time-share condos, full-size SUVs, leather furniture, and flat-screen TVs. Which means there are fewer jobs for the people who were making those things a few years ago.

The national economy grew at a modest annual rate of 1.3 percent in the second quarter of this year, better than the 0.4 percent of the first quarter, but there is some cause for anxiety: personal spending was flat in the second quarter, after growing between 2 and 3 percent in 2010.

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What Determines the Market?

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Most people think of the real estate market as something that's measured like the stock market—bearish or bullish. In real estate, the common expressions for a bull market are “up,” “strong,” “good,” “hot,” and “seller's.” A bearish market is described as “soft,” “bad,” “down,” or “buyer's.” On a daily basis, you'll hear the media use these expressions to describe the real estate market based on facts and figures, most of which are confusing to the average investor.

Let's discuss each of the categories for the numbers you may be hearing and see how they affect the market and, more importantly, your investing strategies.

Most people think of the real estate market as something that's measured like the stock market — bearish or bullish. In real estate, the common expressions for a bull market are “up,” “strong,” “good,” “hot,” and “seller’s.” A bearish market is described as “soft,” “bad,” “down,” or “buyer’s.” On a daily basis, you'll hear the media use these expressions to describe the real estate market based on facts and figures, most of which are confusing to the average investor. Let's discuss each of the categories for the numbers you may be hearing and see how they affect the market and, more importantly, your investing strategies.

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U.S. Housing Market Intelligence Report (June 2011)

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Categories are graded from A thru F:

Economic Growth: D+
Trends were mixed this month, as a few metrics ticked up while the majority ticked down, resulting in a drop from C- last month to D+ this month for overall economic growth.  The employment market improved once again this month, (albeit at a less than stellar pace) and Y-O-Y employment growth has now been positive for nine consecutive months.

Payrolls expanded by 54,000 in May, the smallest gain since September 2010 when 29,000 jobs were lost, while the unemployment rate increased marginally from 9% to 9.1%.  The government continues to slash jobs (29,000 this month), and has now eliminated roughly 850,000 jobs over the last 12 months.  In addition, the average length of unemployment increased to 39.7 weeks (a new record high), and the labor force percentage of those unemployed over 27 weeks rose to 4%.  While still down Y-O-Y, mass layoffs have been trending up over the last several months, rising again this month.

The rate of inflation (both full and core) continued to increase this month, maintaining its steady upward trend that began in Spring/Summer 2010.

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Strategies to Benefit from Inflation

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The only “hedge” against inflation that we are aware of that works consistently over time, in any market, and any economy is real estate. Well bought real estate can stand the scrutiny of analyses, using historic or current data, by investing using borrowed money.

To be clear, the ability of real estate to provide a real hedge against inflation only works if you get a mortgage to acquire the property. If you use your own cash, then this capital will be ravaged by the same inflation, and in a similar manner, as if you had purchased anything else.

Although we argue strenuously that there are other benefits of investing in real estate. However, the greater the proportion of the purchase price that is funded using borrowed money, the greater the inflation-beating benefits to you.

And this is where we come to one of those great benefits of real estate that is easy to miss. Since real estate prices are subject to inflation, by borrowing the purchase price (or a large proportion of it) you can largely beat inflation, and real estate is also about the only asset class against which banks and financial institutions will let you borrow money in the first place. It's a marriage made in heaven!

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National Economic Outlook (June 2011)

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With presidential elections coming up next year, and Osama Bin Laden now dead, we're going to be hearing a lot of political talk about the old Bill Clinton mantra,“It's the economy, stupid.” So, let's look at the basics.

“The economy” means jobs. From the high point of the expansion that ended in 2007, to the low point of the recession in early 2010, the economy lost about 9 million jobs. Almost 2 million of those jobs have been recovered and the economy is adding new ones at a rate of 1.5 million a year, but even if this rate improves, that's only another 2 million before election time, still leaving us down 5 million jobs from where we were.

The culprit, of course, is ourselves. Instead of freely spending money like we did, we've been putting it in the bank, an extra $400 billion a year. That equals a lot of jobs, even if some of them are in China. In the long run this is a good thing because we had gone over our eyeballs in debt, but in the short run it means the economy will grow only slowly.

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Three Strategies for Surviving in a Slow Market

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Don’t buy into all the doom and gloom stories from the media. Learn how to profit from them. Many investors continue to be very successful in the real estate business by following the philosophy, Don’t be afraid to be a “purple snowflake.” So try these strategies. You can make a great deal of money in a down market if you stand out, show that you are unique, and most importantly, set yourself apart from your competition by being “a purple snowflake!”

Strategy #1: Ride the Downturn — Don’t Sell

Yes, don’t sell. Good times or bad, my advice is always to hold on to a property if you can. Your wealth will come from holding on to real estate, not selling it. How serious is the problem really? Let’s say the home you live in, your rental property, or the property you bought as a “fix and flip” goes down in value. Well, if you weren’t planning to sell right away, would it matter? Hang on until the market comes back. Look at the historical records of the property value where you live and that will reassure you. Realty-Trac or First American Data Solutions provides this data, or you can ask your local real estate professional for help. Historically, a real estate market will always come back.

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Double Dip Has Come and Gone

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The S&P/Case Shiller Home Price Indices reported Tuesday are, as usual, so far behind the curve that not only did they miss the “double dip” that has come and gone, it will be at least July or August before it reports an apparent upturn in prices in March and April. S&P's view of the data was dour. “There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing, ” said S&P's David Blitzer. “The 20-City Composite is within a hair's breadth of a double dip.”

There's just one problem with that. Other price indicators that are not constructed with the Case Shiller's large built in lag, passed the 2009-2010 low months ago. The FHFA (the Federal Agency that runs Fannie and Freddie) price index showed a low in March 2010 that was broken in June 2010 and never looked back. That index is now 5.6% below the March 2010 low. Zillow.com's proprietary value model never even bounced. It shows a year over year decline of 8.2% as of February. Zillow's listing price index shows a low of $200,000 in November 2009, followed by a flat period lasting 6 months. As of March 31, that index stood at $187,500, down 6.25% from the 2009-2010 low for data.

The Case Shiller Indices for February held slightly above the January level (not seasonally adjusted). I follow their 10 City Index due to its longer history. It was at 153.70 in February versus 152.70 in January. These levels are still above the low of 150.44 set in April 2009.

The Case Shiller index showed a recovery in prices in 2009-10 only because of the weird methodology it uses.  [Read more…]

U.S. Housing Market Intelligence Report (April 2011)

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Categories are graded from A thru F:

Economic Growth:  C-
Economic growth trends were mixed this month, as several key metrics ticked up while others ticked down.  The employment market improved once again as year-over-year employment growth has now been positive for seven consecutive months, and unemployment now stands at its lowest level since March 2009.

In addition, retail sales improved this month, while real GDP for the fourth quarter was revised slightly higher to 3.1%. On the downside, the rate of inflation (both full and core) continues to increase, while the average length of unemployment increased to an all-time high, currently at 39 weeks.

Affordability:  D+
Affordability has rarely been better for entry-level buyers, and rarely worse for move-up and move-down buyers, who need to extract equity from their existing home.  As such, we continue to grade our overall affordability indicator at a D+.  After increasing every quarter from Q1-2009 through Q2-2010, owner equity declined for the second consecutive quarter in Q4-2010; a reflection of the continued downward pressure on home prices.

Mortgage rates remain near historical lows, and home prices have dropped from unrealistic boom levels to entirely sustainable levels, with some markets like Las Vegas well into “over-correction” territory.  Our housing-cost-to-income ratio remains low, now at 22.4%, and our JBREC Affordability index stands at a remarkable 0.0, which is the highest possible rating for affordability.  The median home price-to-income ratio has declined to 2.8, which is less than the long-term historical norm and near a level conducive to market health.

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The Return of Real Estate – Fortune Magazine

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This week’s issue of Fortune Magazine proclaims the “return of real estate”.  I didn’t think I would see an article like this from a mainstream publication so soon – especially from one of the most trusted financial magazines.  Could this mark the beginning of more good news to come?

“Forget stocks. Don’t bet on gold. After four years of plunging home prices, the most attractive asset class in America is housing,” writes Shawn Tully.

The article covers five trends as justification for improvement in the real estate market:

  1. The steady decline in prices which has been going on nationally since 2005 has finally hit a level where it costs less to own a house than to rent in many cities.
  2. The supply of renters has increased sharply in the recent past, which has already begun to cause rapid increases in rental rates.
  3. Home builders have held back on building new homes for several years, creating the conditions for a shortage of new homes when demand goes up just a little bit.
  4. Investors, responding to the big demand for rental units, are rapidly buying down the overhang of foreclosed homes which has dogged the market.
  5. Finally, the U.S. economy seems to be on the path to improvement, although we still struggle with high unemployment and weaker-than-normal consumer spending.

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Why You Should Buy a Rental Property

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It is an out-of-favor asset class that has attracted the attention of David Ackman, a hedge fund manager with a fondness for contrarian investments.  “The best investments we've made are the ones no one else would touch,” Ackman explains.  That's why he's so hot on Single Family Home Rental Property.  They are cheap, he says.  They are a buy.

Ackman argues that Single Family Home Rental Properties possess the identical investment attributes that strongly performing stocks typically possess.  Says Ackman:

We believe we've identified an investment with:

  1. A low valuation – The lowest valuation in at least a generation.
  2. Forced sellers – A large number of distressed transactions.
  3. Extremely attractive financing available – High loan-to-value, low-rate, fixed-rate, long-dated, non-recourse debt, pre-payable without penalty.
  4. Favorable long-term supply dynamics – Short-term oversupplied market, but long-term supply is controlled.
  5. Favorable long-term demand dynamics – Demographically driven demand growth.
  6. Out-of-favor – Currently, this is a somewhat shun asset class.

Ackman's bullish perspective flies in the face of the pervasive pessimism about home-buying. “Experts Say Housing is a Lousy Investment and it Always Will Be,” an August 2010 headline on Yahoo! Finance declared. “The US Housing Market is Headed for a Complete and Total Nightmare,” another financial news service predicted. And just last week, a CNNMoney.com headline warned: “Why Home Prices Could Fall Even More.”

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Norada Real Estate Investments 30251 Golden Lantern, Suite E-261 Laguna Niguel, CA 92677

(949) 218-6668
(800) 611-3060
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