Finding the best markets for apartment deals is always top-of-mind for the apartment wholesaler. Life is easier, deals go through. But … there’s a crash coming in the real estate market.
Soon. And everything will change.
In fact, it’s overdue, it should have happened already. Since 2000 the money printers at the US Federal Reserve have been injecting liquidity into the economy, artificially inflating real estate prices, really kicking into high gear in 2009 with QE (“quantitative easing”) to stave off the market correction that is trying earnestly to happen.
Where are we today?
If you need a sign, 220 Central Park South, an apartment in NYC is selling for $250M, and has a buyer. Think about that for a second. It is more than double the previous most expensive NYC apartment sale. It may be a signal the run-up in prices that has been going unabated since 2009 is nearing it’s end.
Market tops are always hard to pick. Everyone is used to how things are, and no-one wants them to end. But here we are at the tippy tip top of this real estate bubble market. Prices are incredible, and there is simply no connection to any fundamental economic forces related to demand that would cause house prices to increase further.
The “only” thing keeping real estate prices where they are is the determination of the Federal Reserve Bank to keep interest rates artificially low by printing money.
Before too long, that won’t work either … and down we go!
So when prices do plummet, where do you want to be buying (apartment buildings)?
Where the demand is, of course. But where is that?
Well, bubble prices have already started an exodus from overpriced cities and rental markets to more affordable areas.
Who is moving and where are they moving to? United Van Lines gives us some insight.
Retirees are continuing to move to the Mountain and Pacific West. The Western U.S. is represented on the high-inbound list by Oregon (67 percent), Idaho (65 percent), Washington (58 percent), Nevada (58 percent) and Arizona (57 percent). Of moves to Oregon, the highest ranking Western state, a new job or company transfer (53 percent) and retirement (19 percent) led the reasons for most inbound moves.
The Southern states also saw a high number of people moving in with 53 percent of total moves being inbound. United Van Lines found the top reasons for moving south included company transfer/new job, retirement and proximity to family.
The Northeast continues to experience a moving deficit with New Jersey (63 percent outbound), New York (63 percent) and Connecticut (60 percent) making the list of top outbound states for the second consecutive year. Pennsylvania (56 percent) also joined the top outbound list this year.
Pretty interesting! So according to United Van Lines moving statistics, the top 10 states people are moving to are:
Moving In: The top inbound states of 2016 were:
- South Dakota
- South Carolina
- District of Columbia
- North Carolina
… and the top 10 states people are moving away from are:
Moving Out: The top outbound states for 2016 were:
- New Jersey
- New York
- West Virginia
So, knowing the states where there is currently increasing demand for housing is probably good enough information by itself. Just contact a broker in Souix Falls, SD, Charlotte, NC, or Cour d’Alene, ID, and you will have deals with plenty of buyers.
But there is a huge, once in a generation real estate market crash looming. If you recall, in 2008 there were deals everywhere, and it stayed that way for 18 months, until Fed Chairman Bernanke decided to halt the natural market process of deleveraging that was under way, and opened the money printing spigot with QE. The natural clearing out of all the bad loans, the expungement of all of the bad decisions, bad judgement, bone-headed greed, and the death of the companies that made them, that takes place when a market is allowed to take it’s natural course … was interrupted. So prices came down only 34% off their 2007 peaks, instead of being allowed to fall as far as they needed to before being met by countervailing demand.
So in 2017, or 2018, whenever the downturn begins, the correction in prices will be roughly “twice” the 2008 decline. Take a look at the Standard and Poor’s Case Schiller US 10 City Index, with levels drawn at where prices were when the current bubble began, courtesy of Harry Dent and Dent Research.
As Harry Dent points out in Real Estate: The Downside Risk in 20 Major U.S. Cities:
You’ll notice this bubble had started to burst with a 34% crash during the subprime crisis, then ticked back up when the Fed and central banks around the world decided to inject our markets full of crack (read, quantitative easing).
So when this bubble bursts, for the final time this round, we’re looking at returning to either the 2000 or 1996 levels – 1996 being the worst scenario.
OK, so depending on where you believe the Bubble began, in 1996, when Greenspan abandoned his Sound Money beliefs and fired up the printing press to counter the Mexican Peso Crisis, or in 2000, where the trifecta of Glass-Steagall repeal, derivatives unregulated by Mega-Bozo Treasury Secretary Larry Summers, and Greenspan responding to the Tech Bubble burst by stepping up the money printing further, all came together, where prices stop falling in the coming crash will be at one of these two levels.
But this chart is showing data on house prices.
Apartment building prices rise and fall in a reciprocal relationship to house prices. When house prices fall because fewer people are able to buy them, multifamily prices rise because there is increased demand for units. People have to live somewhere. If they can’t buy a house, they have to rent.
So bearing this in mind, it would be useful to know which cities are set to see the biggest declines in house prices, and see if any of those cities are in states people are moving to.
The combination would give an apartment wholesaler some pretty healthy markets to work in. Plenty of deals, mainly REOs, and plenty of buyers, investors happy to center their investment activity on rental markets with rising demand.
According to Dent Research the following cities are set to see the biggest declines in value.
Of these cities, Washington D.C., Portland, Seattle, Phoenix, Las Vegas, and Charlotte are also in the Top 10 Inbound States noted by United Van Lines above.
At some point in the coming 24 months there will be a sudden, wrenching, value-destroying real estate market crash. When that happens, these are the six markets that, in my humble opinion, will provide both the biggest opportunities, and the best market environment for wholesaling apartment buildings.
Plenty of rock bottom price deals, and plenty of serious cash buyers.
OK. So what now?
Baron Jacob Rothschild commented, “I made my fortune while selling always a little too early.”
Meaning, selling ‘near’ the top is good enough, while having stores of cash to buy at the market bottom is essential. If you own property you don’t plan on holding for the rest of your life, now would be a good time to dispose of it, convert it to cash at peak value.
After a full deleveraging, home prices won’t be returning to 2007 highs, probably ever. Deflation is what lies ahead, not inflation. And in a deflationary environment, cash, and things that produce cashflow are what hold value.
I like the lump sums of cash that come from wholesaling apartment buildings. I also like the cashflow that comes from owning Class C apartment buildings.
How about you?