- Investment Opportunities
- Investment Property
- Like New Houses with Positive Cashflow and Low Money Down
- Private Lending Opportunities
- Group Investments Real Estate Syndication Investment Opportunities
- Real Estate Investor Testimonials
- Video Series – Secrets of Hassle-Free Cashflow Real Estate Investing
- PART 1 – Secrets of Hassle-Free Chasflow Investing – Introduction
- PART 2 – Secrets of Hassle-Free Cashflow Investing – Learning real estate investing vocabulary
- PART 3 – Secrets of Hassle-Free Cashflow Real Estate Investing – Get Higher Returns with Less Invested
- PART 4 – Secrets of Hassle-Free Cashflow Investing – Getting From Where You Are To Where You Want to Be
- PART 5 – Secrets of Hassle-Free Cashflow Investing – taking the hassle out of your real estate investing with education experience and a team
- PART 6 – Secrets of Hassle-Free Cashflow Investing – Hassle-Free Cashflow Investing Formulas- Using Arbitrage To Increase Yield While Lowering Risk
- PART 7 – Secrets of Hassle-Free Cashflow Real Estate Investing – understanding leverage ratio
- PART 8 Calculating ROI using leverage ratio and arbitrage spread
- PART 9 – Into To Hassle-Free Cashflow Investing – Increasing Arbitrage Spread Magnifies ROI
- PART 10 – Intro to Hassle-Free Cashflow Investing – Property, Location, Team, Financing, and Expect
- PART 11 – Intro To Hassle-Free Cashflow Investing – How To Make Money With Real Estate Investing
- Part 12 – Living Life By Design
- Part 13 – Are Passive Investments in Real Estate Right for You?
- Video Series – Real Estate Math
- Lesson 1 – Calculating Return on Investment
- Lesson 2 – How and When to Use ROI (return on investment)
- Lesson 3: Calculating Gross Scheduled Income, Adjusted Gross Income, Net Operating Income
- Lesson 4: Calculating Operating Expenses
- Lesson 5: Calculating Capitalization Rate
- Lesson 6 – Calculating Interest Rate
- Video Series – Investor Financing
- Video Series – Real Estate Investing Webinars
- Secrets of Self-Storage Investing
- Real Estate Collection Agency Secrets For Improving Your Real Estate Profits
- Cash Management Strategies for Real Estate Investors
- Partnering for Profit
- Introduction to NNN Lease Commercial Real Estate Investing
- Cashflow Investing for Prosperity and Happiness
- Cashflow Investing Strategies for Recessionary and Inflationary Times
- Creating Your Life By Design
- Keys to Successful Property Management
- Tackling Success: From the NFL to Professional Investor With Professional Athlete Terrence Robinson
- Strategies for Protecting Your Income and Wealth from Rising Inflation
- Video Series – Tax / Accounting / Self-Directed IRA
- A Real Estate Investor’s Comparison of IRA, ROTH IRA, and 401(k)
- Tax Planning Strategies For Cashflow Real Estate Investors
- Year End Tax Strategies for Business Owners and Real Estate Investors
- Using A Self-Directed IRA to Create Hassle-Free Cashflow
- The Ultimate Tax SmackDown Event: Solo(k) versus IRA
- Back to Basics Bookkeeping For Real Estate Investors and Business Owners
- Using A Self-Directed IRA When Your Income is High But Your Balance Is Low
- Taxmaggedon: tax strategies to Protect Yourself From Tomorrow’s Taxes!
- Creating Powerful Retirement Accounts for Business Owners & Real Estate Investors
- Falling in Love with Real Estate Bookkeeping
- Real Estate Investor Tax Deductions and Investing Strategies
- Video Series – Real Estate Investing FAQs
- Texas Cashflow Real Estate Investing
- Video Series – Secrets of Hassle-Free Cashflow Real Estate Investing
- Hassle-Free Cashflow Investing Secrets
- Hassle-Free Cashflow Lending Secrets
- How to Avoid UDFI Taxes When Investing in Real Estate with your IRA
- Eight Best Kept Secrets About Investing with your IRA
- A Guide to 1031 Exchanges
- Top 20 Things Every Business Owner Needs to Know
- Recordkeeping: Keep the Receipt or Lose the Deduction
- Managing Your Properties with QuickBooks
- Powerful Cash Management Strategies
- 17 Steps to a Successful Joint Venture
- Get a Fast Fifteen Points on Your Credit Report
- 12 Warning Signs You’re Headed For A Lawsuit With Your Partner
- choosing entity type
- 8 Steps to a Payment Agreement
- Negotiate Better Lender Terms
- Foreclosure Process
- Contact Us
- David Campbell – Founder / Investment Strategist
- Jim Thylin – Investor Relations / Business Development
- Shayna Young – Investor Relations
- Rob Kippel – Real Estate Investing Strategist
- Kate McFaul – Executive Assistant
- Tamsyn Campbell – Chief Financial and Operations Officer
- Marc Avery – Infusionsoft Consultant
- Jeffrey Lerman – Attorney
- Sean Farson – Insurance
- Wayne Sanford – Credit Repair
- Amanda Han – Keystone CPA
- COX Premier – Property Management
- Exeter 1031 Exchange Services
- Renee Daggett – Bookkeeping
- Kaaren Hall – uDirect IRA
- Northwest Registered Agent
- real estate investor financing
Want to know how to predict real estate prices ?
Every investor wants to know how to predict real estate prices and the process is not as mysterious as it may appear
While I focus on investing for cash flow, loan amortization, and tax benefits, I also appreciate the warm and fuzzy feeling you get as a investor when your real estate values climb! So, what are the things I look for when figuring out how to predict real estate prices?
Prices are a result of supply, demand, AND capacity to pay.
Let’s look at these factors one at a time:
Demand for real estate is driven by population growth which is fueled by job growth. In resort and retirement communities, you might see high demand and price growth even when the local job market is stagnant because the money to fund real estate purchases in resort areas was earned somewhere else and imported.
Real estate supply is restricted by (1) availability of land, (2) geographic boundaries such as water and mountains, (3) political boundaries such as permit fees, restricted density policies, and (4) economic boundaries such as availability of development capital and the ability to build and sell new properties at a profit.
No matter how desirable or limited in supply something is, the price of the thing will be dictated by how many people can afford to buy it. Affluent communities have more expensive restaurants than the poor communities. Although the desire for food and supply of food to both of these neighborhoods might be the same, the prices in these two neighborhoods can be wildly different based on capacity to pay. For example a can of Coke could be $1 in a poor neighborhood and $3 in an affluent neighborhood. The main thing driving price differences in this illustration is capacity to pay.
Last week,my five year old son and I made blueberry muffins together. When they were done he proudly exclaimed, “Come buy blueberry muffins! Only THIRTY DOLLARS each!!!” I asked him why his muffins were so expensive. Without hesitating he said, “Because people around here have a lot of money!” Even at five years old, he’s paying attention to his dad’s lessons on economics!
As a real estate investor, I am attracted to affordable housing markets because it means the price of housing has the ability to increase in price. Just because something is affordable doesn’t mean it will go up in price, it just means it can go up in price. For prices to rise, the other variables of supply and demand must also be working in your favor. However, if something is unaffordable for the majority of people who want to buy it, that’s a pretty strong indicator that the price could be in a bubble and may soon come down to more affordable levels.
The ratio between median income and median home price is an effective way to gauge the affordability of housing in a particular market.
Median Home Price / Median Income = Affordability Ratio
Using data from Q3 2013, the San Francisco – Oakland MSA has a median home price of $705,000 and a median income of $76,300. That means the median home price is 9.2 times higher than the median income; it would require 9.2 years of median income to buy a median priced house. In terms of a monthly housing payment (Principal, Interest, Taxes, Insurance, and HOA dues), a median home in the San Francisco-Oakland MSA requires ~70% of the median income. That’s not sustainable. Either income must go up or housing prices must come down. I would bet on the former.
In Rockford, Illinois, the median home price is $88,900 and the median income is $51,500 which means the median home price is 1.7 times higher than the median income. To put it in other terms, residents of Rockford use a mere 13% of their household income for housing. WOW, that’s affordable!
Lenders don’t know how to predict real estate prices, but they know how to predict what borrowers are likely to pay and which are not. Lenders know that when you use a lower percentage of your income for housing, their loans are less likely to go into default. For example, FHA requires its borrowers to use no more than 31% of their gross income for housing and no more than 43% of their income for total debt service including housing and other loans. It seems pretty crazy for someone in California to use 70% of their income for housing!
I’ve traveled to both San Francisco and Rockford and I can tell you without hesitation there is more demand and less supply of housing in San Francisco, CA than Rockford, IL.
If you want to know how to predict real estate prices, there is a great equalizer in this supply and demand equation. CAPACITY TO PAY. Someone earning the median income and living on their parents’ couch in Rockford can save up all their pennies for 1.7 years and pay cash for a median level home in Rockford. Now, I’m not saying run out and buy real estate in Rockford because it’s amazingly affordable. (Remember, if you want to know how to predict real estate prices you also need the combination of supply and demand to create upward price movement.) However, I am saying San Francisco-Oakland prices are back into bubble territory and are poised for a downward price correction. If you’re thinking of buying a home in the San Francisco Bay Area because you think home prices will continue to go up, just ask yourself “Who can afford to pay more than 70% of their gross income to buy this house?” That’s right: NO ONE!
A housing price to income ratio less than 3 is very affordable, from 3 to 4 is moderately affordable, 4 to 5 is moderately unaffordable, and over 5 is severely unaffordable. Here’s an example of these ratios based on a $100,000 house whose PITI is $7500/year and using variable median incomes to illustrate my point.
If the median home price is more than five times the median income, those buyers will be required to use too much of their income for housing and will not qualify for mortgages. This affordability ratio can be comfortably higher in resort and second home areas because the income is imported from outside the metro where the property is located. However, if you are looking for rental property in a typical metro, properties with affordability ratios over 5 are overvalued based on the measure of capacity to pay.
One of the things I notice on this list is that the major metros in Texas rank remarkably well in terms of affordability: Austin 3.7, San Antonio 3.3, Houston 3.3, Dallas-Fort Worth 3.1 This healthy price to income affordability ratio is one of the things driving employers to bring jobs and people to Texas. The population of the DFW metro is booming and that is why I am focused on building affordable new homes and owning affordable rental properties in that metro. Let me know if you’d like to add some affordable Texas real estate to your portfolio as I would be happy to help.
If you would like to improve your odds knowing how to predict real estate prices, look for these three indicators of success: increasing demand (jobs), limited supply, and an affordability ratio below 5. Click this link if you want to use these criteria to see how to predict real estate prices in Dallas Texas.
To your success,
David Campbell – professional investor / founder of Hassle-Free Cashflow Investing
866-931-9149 ext 1
All rights reserved. This article “How To Predict Real Estate Prices” may not be reprinted without permission.