Real estate is not a quick money-making scheme, rather, it is an investment which gains value over time, like a collectible. But today’s investors are acting impatiently, making quick decisions without considering all of the factors driving today’s market, which will ultimately determine the success of their investments.
Closer to home, domestic investors are fleeing California’s major metros to areas with lower home prices and higher returns on investment (ROI). Not a single California metro area made the top ten for domestic investor homebuying in 2020, according to CoreLogic.
In the beginning half of the last decade, California was widely known to be an investor paradise after the Great Recession when countless foreclosures and real estate owned (REO) properties were sold at discount prices. In 2011, the top eight metro areas with the highest investor activity were all in California, including:
- Los Angeles;
- San Jose;
- San Diego;
- San Francisco;
- Sacramento;
- Oxnard;
- Stockton; and
- Riverside, according to CoreLogic.
In the early 2010’s, real estate in California was a free-for-fall. Post-Great Recession, investors devoured ample real estate in a recovering market with low prices and very low interest rates.
The surge of investors rapidly declined in 2020 as investors shifted their attention away from pricey California to metro areas found in the South and Southwest where the cost of housing is relatively low.
Despite general assumptions, California’s rapid decline in domestic investor presence wasn’t caused by the 2020 recession, but by ever-increasing home prices in California’s metro areas.
Today’s investors are seeking areas outside of California with lower home prices, where they can get more bang for their buck. But is it even wise to invest right now? For an answer, it depends on what kind of investor is asking.
Two different types of investors participate in our market – flippers and long-term buy-to-let investors. Flippers invest in real estate to make fast, short-term money while long-term buy-to-let investors invest in property specifically for the purpose of holding and renting it out over the course of several years.
In 2021, as home prices scream to a peak without the support of market fundamentals, flippers betting on a short-term profit are dancing on the edge of a rapidly crumbling cliff.
Real estate is a collectible
Investors who continue to buy property in 2021 are taking a risk since they may only be paying attention to home prices, which have skyrocketed over the past year. These flippers are riding market momentum alone and betting on a quick profit. In California, the average annual increase for low-tier home prices was 21% higher than a year earlier, while mid-tier home prices were 22% higher and high-tier prices were 24% higher.
Instead of paying attention solely to these shockingly high annual price increases, investors need to be aware of different factors that influence our current market, and consequently their ROI.
Job growth is the most important stabilizing factor for the housing market. As of July 2021, jobs in California are 1.3 million or 7.4% below the pre-recession December 2019 peak. Without a steady job, people can’t qualify to rent an apartment or buy a house. Long-term job losses and high levels of 90+ day mortgage delinquencies are expected to put downward pressure on high home prices going into 2022, which will make 2023 the more opportune time to buy for first-time homebuyers and investors.
Infrastructure forms the basis of housing markets, and our nation’s infrastructure is crumbling. Recovery depends on the success of our infrastructure bill, which has yet to pass the House. The housing market in 2022-2023 will depend on how fast jobs are created, and without a boost from government employment programs, the return of these lost jobs will be slower.
Lastly, the Fed has signaled it will gradually decrease its mortgage-backed bond (MBB) purchases heading into 2022. When the Fed begins its bond taper, this will lift the lid on interest rates, allowing them to rise and accordingly, put downward pressure on buyer purchasing power and home prices.
Investors: 2021 remains a hold phase for real estate. If you are already own property, you may choose to sell, but it’s certainly not a prudent time to buy. Investor purchases are best made at the bottom of a pricing cycle, expected to occur around 2024.
For now, don’t try to make fast, short-term money by betting on real estate.