Stop thinking big picture and starting thinking micro markets

Being a real estate blogger and research enthusiast, I have had the privilege of watching news reports, reading blogs and articles on a range of topics. Within the last two years, my efforts have been concentrated on the real estate industry, from a business professional viewpoint and natural intrigue to better understand the factors which influence Washington’s housing market.

Through my readings a theme arises over and over which is rarely discussed; analyzing the housing market based on micro economical factors to gain a clearer understanding of what is really happening. The majority of the news reports, blogs and articles focus in on national statistics to apply generalities to many different regions.

In my opinion, the limited analysis and little attention given to micro market factors create ambiguity and confusion for the consumer.

Back in February, I posted thoughts on how the media exaggerates and hypes up “housing booms” and “bubble busts” to gain ratings, Real estate bubble…how funny. These media reports tend to change month to month which are largely dependent on professionals basing opinions using national statistics. How many times, while watching the local news, do we hear housing information based on national statistics? Quite often if recollection is correct.

National statistics will suffice if a report is based on the economic health of nation but that same information gives none or little value when applied to localized markets.

As an example, Western Washington, and more specifically, Snohomish and King County have very different market conditions and economical factors that influence consumer buying behavior, for sake of space only the unemployment rate will be analyzed.

The unemployment rate is more comprehensive that what the surface statistic of 4.4 says. Washington has international and governmental industries throughout the Puget Sound region that supply tens of thousands of jobs giving consumers a high level of economic confidence. Boeing, Microsoft and the United States Military, when compiled, make up a major segment of Washington’s consumer base.

Recently, Boeing has been conducting rapid hires largely due to orders of the 787, Microsoft continues to be a world leader in technology innovation and software distribution which operate the majority of PCs, both business and personal, and the United States Military has 9 bases across the state, Navy (being the largest with 6 ports), Air Force and Army. To include one “what if” statement; what if the biotech and domestic/international trade and transport industries were included in the work force analysis? All this equates to a very large population having the option and purchasing power to sell, invest or grow their real estate portfolio.

Washington’s micro market is very strong and self sustaining due to the excellent employment opportunities across multitude of industries which will not be exiting the region in the immediate future. It may be asked “well…how does this fuel the local real estate market?”.

It goes back to consumer confidence. Economic theory says if consumers have confidence in job security then they are more apt to spend more and save less. Vise versa if consumer confidence is down then they are more apt to save and plan for the possibility of job loss which results in a decline economic market.

Just a moment ago a report came across Fox News on the national housing marketing where market experts said the real estate market is crashing but from my research it just does not add up. Washington is a special state in that national averages can not be applied to accurately forecast the real estate market due micro market factors fueling economic prosperity

Real Estate Vs Stocks

Many posts have been written in response to this CNNMoney article Stocks Vs Real Estate. Stocks come out the winner in this article - obviously written by a non-real estate investor (I don’t consider a homeowner a real estate investor in the same sense one is a stock market investor). I also don’t regard people who buy real estate on hopes it will appreciate rapidly as investors - these are more properly called speculators.

Here’s the list and my comments:

1. Performance - yes stocks win, but the price is risk. The author ignores this very important fact. Individual stocks are a high risk gamble because of No.5 on this list. Mutual funds can reduce this risk, but year to year it remains high. What if you invested between 1965 and 1982?
2. Leverage - hands down winner for real estate here
3. Cost - certainly real estate has higher transaction costs
4. Taxes- the author only mentions the advantages of home ownership. She ignores the extraordinary tax advantages of having your own business. You can also use a self-directed IRA to grow your real estate investments tax free. A double win for real estate here.
5. Transparency - a big win for real estate. I don’t have a clue what is going on in the company I work for, much less the Enron’s and WorldComm’s of the world. You can hire inspectors to check out your property pretty easily.
6. Effort - if you are a real stock investor, you need to do a lot of homework to investigate the companies you are investing in. She ignores this small caveat
7. Volatility - real estate is much less volatile. Not everyone lives in California.
8. Diversification - yes you can diversify in real estate without being Donald Trump. Single family homes, duplexes, different geographical areas, different demographics (why not invest in property geared to baby boomers or first time buyers?)

I only count 2-3 clear cut winners for stocks. In addition, I think there are a couple of other advantages for real estate.

1. The inefficiencies in the real estate market allow you to buy below market value. You cannot do this in the stock market very well.
2. You have control over your real estates value. I can’t do much to change the direction of the companies I invest in.
3. You can pull money out of real estate tax free by refinancing.

I still invest in stocks, but in my mind real estate is the better investment.

Are You an Undercover Real Estate Investor?

Is there anyone in your town that doesn’t know that you buy houses? If so, you aren’t doing as well at marketing as you should be. I hear investors saying all the time that they aren’t getting seller calls and subsequently aren’t getting the leads they need to find deals. I say step up the marketing and the sellers will call. Not only that but if you are shouting to the world that you buy problem properties, eventually you will be known for what you do and sellers will call you strictly on your reputation. THAT is cost effective marketing.

I was in Home Depot a few weeks ago and passed a couple of guys in an aisle. As I walked by, I overheard one say, “That is the house man”. Now I had never seen either of those guys and have no idea who they are but that experience lets me know that I must be doing my job at letting the world know my business is buying houses. There are many ways to let the world know what you do. Some ways are cheap and some are more expensive. You are going to have to try many things and get a feel for what produces for you best in your area. I have tried many kinds of marketing techniques and have come back to a few that constantly produce enough results for me to buy the 2 or 3 houses I want to buy every single month.