Ask any group of people what drives the real estate market, and it's a given that you’ll get entirely different answers from each. One might say it’s simply price. Another might say it’s foreclosures. Yet another will argue it’s the loan market and the availability of capital. And another would argue it’s all local — what’s happening in Philly doesn’t play in Austin. And while there’s some truth to each argument, the fact remains that in many respects, real estate is no different than any other commodity, and simple economic principles are an overriding factor. It’s micro versus macro economics and basic supply and demand.
It's been said that all real estate is local, and there is a certain truth in that. Think back to that college econ 101 class (and you thought you'd never use that textbook stuff again!). We can look at our local area and micro economics and make generalizations about our market. Those generalizations can and do impact the decisions we make about real estate investing. For example, in my local market of Wilmington, North Carolina, there is a strong college and vacation rental demand, and the city attracts a lot of retirees. New companies are bringing in jobs. Of late, Wilmington has become a hub for tech development, while the film industry has experienced a major downturn. And then there’s the beach.
The point is, Wilmington investors know all of this, as do builders and developers. And we use that information to make decisions about where to buy, what to buy and what to sell. That can be called the microeconomics of investing.
But then there are the macro issues — those things that affect the broader market — and they can't be ignored. Their impact is huge in any market.
There’s still a void for the smaller, residential investor when it come to access to capital for investing, especially for long-term holds. Corelogic reports that while the numbers fluctuate year over year, cash sales account for 25–27% of sales. This is a macro issue. Lenders as a whole still haven’t recognized the value that investors can have in bringing back communities when we invest in homes and neighborhoods. But niche lenders have, and investors are finding the capital to do deals among private and hard money lenders. (Full disclosure: Our company supports a network of private and hard money lenders.)
Outside the investment world, there’s a more subversive factor at play. While first-time homebuying is in an upcycle, still many millennials aren’t taking the plunge. You might think that with government programs, still relatively low interest rates and decent housing stock, the numbers would be better. But millennials are facing huge student loan debt that makes saving for down payments tough. This is a generation that marries later and wants mobility to be able to go where the jobs are. This doesn’t play well for the home seller, but it can and has been a big boon for the rental market.
Then there are still the foreclosures. They are in every community, and their ongoing numbers impact the bigger market, in lending and in the buyer’s mindset as well. There’s still some hangover from the crash, and just about everyone you talk to knows about the house around the corner that’s been empty forever. No one lives there (so you think) and hasn’t for a long time. You assume it’s a foreclosure, but no one is stepping in to move the house from vacant to sold. This is commonly referred to as a zombie foreclosure: The owner left and maybe turned over the keys, but the bank hasn’t taken title or the responsibilities of ownership. As a result, the little things like securing the asset (can you say squatter?), maintaining the property and yard, and paying the taxes and HOA go unresolved. The home sits in limbo, and no one is responsible. This contributes to the foreclosure mess, along with the ongoing foreclosures as loan mod programs can’t fix a homeowner’s problem — too much house and too little money to pay for it.
So, yes, you have to attend to micro and macro issues and become your own real estate economist, able to recognize the issues that affect supply and demand for your product, whether it’s commercial space, land, flipped houses or residential rentals.
Despite what's happening, we can always find ways to make the most of the situations at hand. Where traditional loan sources have dried up, crowdfunding and private money deals are happening daily. Millennials aren’t buying en masse, but they are renting. And that DOA house on the corner? Innovative deal-makers are finding ways to move them into the market. It’s really a matter of knowing what’s going on and finding the best strategy to keep things moving with an eye on both micro and macro issues. It may not be easy, but the payoff can be worth the effort.
So what's going on in your market? Have you overcome some of the micro and macro challenges mentioned here? How did you do it, and what was the outcome? Real estate investors truly are an innovative crowd — whether you’re a seasoned investor with a couple of market cycles under your belt or a new investor with a fresh set of eyes, the opportunities are there when you dig a little deeper than the next person.
