Waiting on the sidelines?

Question

I was looking at some historical data from Zillow on DFW home values and found some interesting stuff. I'm still a noobie analyzing properties, but after looking around these last couple of months I've decided to delay my first property purchase until at least 2021. Just wondering if the more experienced investors in Texas are also doing the same.

Findings: From 2000-2007 Median home values in DFW increased from ~160k to ~195k, and then proceeded to drop around 2-3% every year before bottoming out at ~170k in 2011/2012. If you look at the decrease from just top (2007) to bottom (2011) then the drop in value is only ~12%.

Not Terrible.

However, if you look at it from another perspective and see how much of the value add that was destroyed during that time, it is actually around 70% --> (195-170k)/(195k-160k).

In other words, 70% of the home value appreciation in that 7 year period (from 2000-2007) was wiped out during the Great Recession.

Median Home Values have almost doubled since 2012 in DFW, and this is especially true for homes under 300k. Not saying the situation is apples to apples, but forbearance and unemployment are about to be both in double figures which is unprecedented. Despite how robust our economy in DFW may seem, the data shows that we aren't completely in the clear. I just saw a report of around 13% unemployment in the DFW area in addition to a wave of bankruptcies that were filed for major retail players. Other industries including airline, energy, and auto are also at risk but I guess these negatives may be offset if more companies and people begin moving here from higher cost of living areas. Zillow and Redfin also predict a conservative drop in prices of around 2-3% for the next 12 months.

Yet despite all this news, home prices are going up due to low interest rates and low inventory. Wow.

DFW Bankruptcies Link: https://www.bizjournals.com/dallas/news/2020/05/23/bankruptcies-texas.html
Unofficial Unemployment Rate as of 5/22/2020: https://apps.texastribune.org/features/2020/texas-unemployment/

Conn G. · Answer

The best time to grow a tree was 20 years ago. The second best time is now. Sure, a property present value will decrease in a recession, however, the financing portion will also become stricter. I'm in a similar boat as you (looking to purchase first property). However, I realized that if the numbers work, then I shouldn't shy away from a great deal.

Bruce Lynn · Answer

The 2007-2008 trouble was very very different than the trouble you see today. One of the issues then in DFW area was no equity. Crazy financing that has very much changed over the past 10 years. For example back then we had no doc loans or stated income, and lots of other crazy things like 105% mortgages, interest only loans, loans with no escrows. People gave up easily with no equity. This time around they will fight harder to save their homes as they don't want to loose the equity. There are a lot of other dynamics in the market but that is one. In my personal business I have also seen a big change in buyers. Especially around the couple of years before 2007-2008, buyer would often stretch their limits to the fullest. Not every buyer, but many. I heard plenty say things like, "I deserve the house of my dreams." Now I hear more people say things like....we've been through the struggles and we don't want to be there again. We'll buy what we can afford on one salary in case one of us looses their job.I also think lenders and government don't want to see a repeat of what happened then, so they will be more creative and more willing to rework the loans or avoid foreclosures as much as they can.I also think it will depend on price range. I've been saying for 2-3 years we will see some issues in some parts of town in the 750K+ price range. Resales will be tougher. I think price appreciation will suffer in some areas.Sub 400K now and more as you move down the price curve, there seems to still be strong demand. Super strong demand. I don't see that changing, even over the next year or two.One thing that is tough to know is interest rates and where they will go. People always focus on prices, but interests rates make a huge difference for most people. If we get inflation and interest rates rise even 1% what does that do to mortgage payments?

Jordan Moorhead · Answer

@David Y Mei I'm under contract on one right now. I invest for cashflow and hope for future appreciation. I don't think this current recession is going to cause a huge decline in home prices myself.

Erion Shehaj · Answer

@David Y Mei You are factually correct - at the macro level... But I would point out that we, as individual investors operate at the MICRO.. not Macro Level One of the biggest advantages of investing in real estate is the fact that the real estate market is INEFFICIENT. You can have two identical properties, one here and the other on the street over. One could sell for 15% less than the other. Why? Because the real estate market is not efficient. The reasons why a seller is willing to take less are personal. Often they have nothing to do with the market as a whole. Whether the market as a whole is favorable or unfavorable is really none of your business. You could get a terrible deal in a very favorable market and a fantastic deal in an unfavorable one. Personally I'm not postponing my acquisitions in this market. I'm tightening up my underwriting, tuning up my assumptions and taking advantage of an inefficient market.

David Y M. · Answer

@Bruce Lynn You are right about equity. I was looking at a recent article from Forbes saying 40% of homes don't have a mortgage. I assume Texas data would be somewhere about 50% homes - but I feel like that is representative of mainly people who have lived here 5+ years. I would like to see data on people who have bought homes recently in the last two years. It seems like first time home buyers are most at risk, so that is why I have put a pause on buying. I really hope it won't be terrible, but those unemployment and forbearance numbers are just insane especially for FHA and VA loans. The main worry that I have is that Dallas and Austin have just grown at such a rapid pace in the last decade. I found this article - " house price expectations were less exuberant in the early to mid 2000s, as Texans recalled the significant correction in the late 1980s that followed the mid-1980s oil price bust." which partially explained our softer hit from the GFC. Our economy is more diversified now, but you can also argue that many of those industries are also at risk.Case Study of Texas during GFC: https://www.dallasfed.org/-/media/documents/research/swe/2013/swe1303b.pdfTexas Mortgages 2017: https://www.recenter.tamu.edu/articles/tierra-grande/Eye-on-Texas-Mortgage-DebtForbes Link: https://www.forbes.com/sites/brendarichardson/2019/07/26/nearly-40-of-homes-in-the-us-are-free-and-clear-of-a-mortgage/#7d17770c47c2

David Y M. · Answer

@Conn Gerrard I suppose that is true. As long as a property cash flows well, even a 5% decrease in rents won't really put you negative, and if you house hack it's also a hedge for vacancy/rent collection troubles. However, I'd rather be cautious and just wait it out. I was initially trying to find a place before my lease expired, but it also pressured me to act with haste This is simply my perspective, and would also like to hear those who are more experienced, and see what they are doing. Anything worth buying is going to have a bidding war right now due to the low inventory. At least that's what I'm experiencing in my target markets.