Milwaukee Market Update June 2020 - why the market is so hot

[Marcus Auerbach]

It feels like it was just a few weeks ago when the US got hit by the pandemic, states were going into shut down and we all got worried if we are going to see rents come in on April 1st. Evictions were suspended and newer investors pulled out of deals or asking for advise here on BP. Is the real estate market going to crash? Are we going to see home prices drop? For a while I was a little nervous too; heck - Grand Cardone was in trouble (or was he.)

Anyway, fast forward to June: rents have come in almost better than usual and the market did not crash, just to the contrary. Covid19 has had a very short lived effect on Buyers, after about 2 weeks in lock-down, we saw activity levels increase slowly at first, but furiously in the last weeks. Seller's on the other had have been more shaken by Covid: after all, selling a home means a bunch of strangers come right in you bedroom. So the unexpected result is that we are seeing an inventory squeeze and prices are being pushed up way over asking by multiple offers.

[Marcus Auerbach]

Originally posted by @Justin Schaefer:

It seems to me like all of this is highly artificial though, don't you think?  The Government has pumped so much money in to the economy lately, and that money is about to slow down, and once it does don't you think a lot of the "hotness" we see now is going to go away very quickly?  

And don't you think that the banks are probably irresponsibly lending again, and that there's going to be a whole lot of people with new, probably overpriced homes that they just purchased, can't afford the payments on because they might have just lost their jobs or their companies folded, and are suddenly finding themselves underwater just like 08 again?  That wouldn't be an entirely bad thing for us investors, we might be able to get lots of nice properties for very little money.

Following some of the indicators of economic health that J. Scott talks about, the US GDP for Q1 absolutely shot down through the floor, and all it takes is 2 quarters of negative GDP before we have a full blown recession according to J.  Do you think it's going to go back in to the black that quickly?  I mean, I suppose it's possible for a little while longer, but...?  

I must admit, to a certain extent I kinda want you see the economy go down for a while simply because I'm a newbie, and prices are so freaking high on everything right now, I'd have to get really really lucky otherwise I'd never be able to make any money.  I've seen duplexes in mediocre communities going for over 280,300K+ the past few weeks.  That's like 2008 prices from what I remember.  I do realize that that's a double edges sword though. Anyway.... just some thoughts.

 Hi Justin, interesting questions! Those are the slides that I usually have to cut out of my monthly video (you can find it on my BP profile page), so here is what I would say to them specifically.

Things will NOT go back to full normal quickly; we have already entered the recovery phase as shown in the June 5th improved unemplyment numbers and we will probably see a swift recovery in Q3 quickly up to 90% of where we used to be. I believe the last 10% will be tough and either take a long time or we may never get back there.

The real estate market is NOT fueled by stimulus money! I can tell you from the data I have as well as looking our buyer clients; buying a property is always based on life plan decisions, not on a stimulus check. Most of the stimulus money went to either businesses or tenants. Even the money that went to businesses like the PPP ended eventually up with tenants (and home owners), but not with buyers. Nobody who is depending on stimulus money or does not feel job security is currently buying. The demand is orgamic and from the 85% who have NOT lost their job.

Lending standards are much tighter that in 2008; in fact banks were quick to raise the bar in April and we have seen the average FICO jump from the low 700s to almost 750! Lending standards were so absurd before 2008, watch the movie The big short. One of the institutes I receive monthly updates looks very closly into housing debt and credit, HELOC utilization, equity, lending standards etc - with 2008 as the bench mark, all indicators are deep green.

I am however concerned about goverment debt and the 6 trillion dollars we have "printed" - this may not go without consequences, probably increased inflation, which hurts anyone with savings and benefits anyone with cashflowing mortgage debt. In the most extreme scenario which I can't totally exclude we may see a currency and debt reset, it would not be the first time in human history.

Finally, the reson why Milwaukee real estate values are bound to go up is the cost of new construction. Most 2019 new construction in the metro area was between 400k and 700k, the majority over 500k. I have dabbled in new construction and it is physically impossible to build new in Milwaukee for under 400k; I have tried. The cost of land, labor and materials are too high. If you go 30 minutes north you can bring it down into the mid 300's. So anything we have, urban and suburban in the 100 to 300k range, is bound to level against the cost of new construction. Currently we have a 30% + gap between new and existing housing. It may not surprise you that pre 2008 the gap was just over 10%, that's where the housing bubble developed - people would just build new, it was so cheap. This gap will narrow, driven by demand and the fact that we have zero new supply.