Instead of being worried about real estate and where the market may or may not go, we as investors should remain focused on finding good deals and buying right.
Of course, while we are doing this an eye should be kept on key indicators. Real estate markets don’t turn on a dime. They are like a ship changing course. You can see the bow start to point a new direction well ahead of the destination.
Plus, it is my opinion that the real estate market is a lagging market. As in, you will see other assets, such as stocks turn before real estate. This isn’t fool proof, but I am much more confident in a real estate market when stocks are going up as opposed to when they are going down.
This has a lot to do with the “wealth effect.”
When stocks are high and your 401(k) is worth a million plus you feel wealthy and are willing to spend and upgrade to that bigger house for instance. When your portfolio is getting wrecked, well you aren’t exactly feeling wealthy and ready to go on a spreading spree.
With all this said, let’s still keep are eye on the prize. The real estate market and the indicators to watch.
Worried about Real Estate? Three Indicators to Watch
1.) Mortgage Delinquencies
I’m all for people catching up on their mortgage payments. Losing a home is not something I wish on anyone. Unfortunately there will always be a percentage of delinquent loans that do not get current and end up in foreclosure.
A mortgage is delinquent once a monthly payment is late. However, most lenders don’t report a mortgage delinquent until they are atleast 30 days passed due. It is a number worth keeping an eye on because once a borrower falls behind one month, catching up becomes more and more difficult.
If the number of delinquencies goes up, you can expect the number of foreclosures to increase by a percentage of that.
Furthermore, with the foreclosure moratoriums on fannie and freddie backed loans lasting till December a backlog of foreclosures is likely being created.
A broad stroke of the data shows delinquencies rose for 30 days, 90 days and 120 days throughout the nation in the second quarter, according to data by CoreLogic. I’d expect the third quarter to show the same when that data is available.
Evictions have an impact on the real estate market too. Landlords still need to pay mortgages and that is usually done with income the property produces. From 2000 to 2016 the average annual amount of evictions in 3.6 million, according to data from the Evictions Lab at Princeton University.
It will be interesting to see what the numbers look like now that statewide moratoriums are being lifted and with the CDC guideline expiring at year’s end, assuming it does not get extended.
3.) Foreclosure Rate
In the end, this one is a the result of the first two. It is also the most important of the three because it is the outcome that has the actual impact on the market. Foreclosures lead to additional supply as these properties become available.
A supply shortage is one of the biggest issues of the current market. Maybe issue isn’t the correct word as it is also a main driver of price appreciation of late.
Supply and Demand. The most basic economic principle.
We certainly have a supply issue, which means demand remains strong because of that. The turning of this tide is where you generally get your change in the market.
What is the Catalyst to Change
Anything from a large wave of foreclosures, to an increase in interest rates or people getting priced out by ever inflating prices could cause a swing in the supply and demand dynamic.
More supply doesn’t have to be the reason the market turns, it could be a drastic decline in demand, which then turns lack of supply into sufficient supply.
Either way, watching this pendulum swing is prudent over the next year or two as the aftermath of COVID plays out once all the moratoriums have been lifted and the free market can do its thing.
Like I always say, buy right and don’t overleverage. This holds true in every market!