07-08-22 Tech in Real Estate | Don't Count on a Housing Market Crash
This is going to give you these three topics a good understanding of where we currently sit within the housing market, as well how technology can shake the industry up.
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Welcome to the tech and real estate news podcast where we dive deep on recent trends in real estate and tech. I'm your host, Ariel Herrera, your fellow data scientists and real estate investor. Today we're going to be covering three topics. First, don't get your hopes up for a housing market crash. Second, five myths about technology, the real estate industry must bust. And third house flipping spikes across us in the first quarter of 2022. But profits drop. This is going to give you these three topics a good understanding of where we currently sit within the housing market, as well how technology can shake the industry up. Alright, let's get started. The first news source that I came across was a video on YouTube called Don't get your hopes up for a marketing crash. And this video does a great job to actually throw historical information from the 70s and 80s. And explain why we shouldn't expect a housing market crash within prices. So the first reason they have here is inflationary times, recession and stock market crashes are not indicative of a housing market crash. Plenty of recessions historically, have had housing continued to go up in price, especially during high inflation, which we have right now. This occurred in the 1970s inflation cooled after an increase in interest rates when they were up to 10%. The s&p 500 had a decrease. So the stock market fell by housing median sales price continued to increase. And you could see here on the chart, there's a chart of median sales price between 1970 to 1980. And during that period of the stock market crash, there were still an increase within housing. The second reason why you shouldn't get your hopes up for a housing market crash are rising mortgage rates. And you might be thinking, well, rates are increasing, buyers are going to be backing out because less of them can afford a house. So of course, there's going to be less demand and ultimately more houses sitting on the inventory and prices going down. While the issue here is that there's already a very low supply, we are missing about three to 5 million homes across the US an increase in mortgage rates will definitely wipe out buyers potentially 50% of buyers won't be able to afford houses. However, our supply would just go back to pre pandemic levels as well. Interest rates are still historically low and less than the inflation rate. So right now, interest rates are around five to 6%. If you're purchasing a property, however, inflation is at 8%. So because inflation is higher, it really just becomes irrelevant for buyers say who are buying with all cash because they need to protect their cash from inflation, such as institutional investors, so they're still going to be purchasing properties. Regardless, this means that even though we may see traditional buyers first time homeowners move up buyers backing out of the market, I doubt we're going to see the big banks and other institutional investors back out as well. Now the third reason to not get our hopes up for our housing market crash is because there's no fundamental crisis back in oh eight. A big reason for the crash was because people could not afford pay the mortgage on their properties as well properties were not worth the amount that they purchased the property for. There was a lot of unqualified buyers. But that's no longer the issue. We've had many regulations since to make sure that home buying is a lot more strict as well, the video goes on to bring in some information of Texas. So in quarter one of 2022, Texas had a median household income increased to 110k. And what they're trying to insinuate within the video is that we're seeing those who are purchasing properties to be more white collar than blue collar and have higher paying jobs. Therefore, when a recession hits white collar are usually the last to actually get fired, and usually have higher amount of savings. So the likelihood of people losing their jobs not being able to afford their properties is of lower probability. Therefore, we don't expect there to be a large decrease in prices because there's no underlying issue of unqualified buyers within the housing market. The second article five myths about technology the real estate industry must bust was written by entrepreneur and the audience was more for property managers. However, I
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still think it's really useful to understand what are some pain points and reasons that real estate professionals might not want to include technology. So the first myth is it's too expensive. The industry's excuse for not adopting technology Is that doing so will be too expensive, considering cost of the device and installation. However, technology has significantly advanced to the point that it cost a fraction of the price to manufacture devices now than in the past. So for example, adding in sensors, that's the Internet of Things, smart locks, intercoms, all this has become a lot more simple, sleeker, and affordable. So it really shouldn't be a barrier to start using these technologies. Myth number two, my staff will feel replace, and this goes wide across industries, not just for real estate, but property management itself has one of the highest employee turnover rates, people in the sector feel burnout at a faster rate than in other industries. And a major source of this burnout has to do with mundane, time consuming tasks, so things are very repetitive. Therefore, if you can actually implement technology and remove spending hours on these simple tasks like entering tenant information in a database, processing, package deliveries, etc, you're going to allow your staff to focus on more meaningful tasks and building relationships with tenants landlords to combat this burnout. Reason number three, the devices are too complicated to install and use. This is irrelevant since a lot of these property management software's are actually able to be used handheld on your phone, you don't need wired lines and such like 20 years ago. Reason number four, to not use technology is a lead to easy data breaches. So with advanced technology like blockchain around the corner, the opposite is actually true. Using technology such as storing important information in the cloud is one of the best ways to safeguard it. Technologies like the blockchain ensure accurate, safe and fast real estate transactions. The last myth here is the industry simply doesn't need technology, and the reality is completely false. As we witnessed during the pandemic technology was our lifeline, including in real estate. For instance, technology has enabled the mass work from home shift, contactless deliveries and building entry and even health screenings upon entering buildings. Simply put, now's the time for real estate to adopt technology on a larger scale. The last article here is geared towards house flipping, and Adam did a study to show that house flipping profits have decreased over the last several quarters. And this is really interesting because house flippers are a big part that drive the economy house flippers remodel homes that first time homebuyers can usually get their first properties at a lower cost. It also employs many people from contractors, painters, and other hardware installers. There's also a lot of inventory that is purchased in order to do house flipping too. So the way Adam analyze this data was to look at sales D data to see when a property was purchased. And then when it was sold within a 12 month timeframe with a return of about 20 to 33%. Rick sharga The Executive Vice President of the market intelligence for Adam stated, the good news for fix and flippers is that demand remains strong from prospective homebuyers, as evidenced by this quarters report, which shows that one out of every 10 homes sold during q1 was a flip. The bad news is that rising mortgage interest rates are beginning to slow down home price appreciation rates and buyers have become more selective and less willing to outbid other buyers for properties they're invested in. This is having a predictable impact on profit margins for investors. So I definitely agree here with Rick in that higher mortgage interest rates are going to slow down home price appreciation, making it harder for flippers. What isn't mentioned here is that a lot of flippers when they purchase these properties, all cash, they use hard money lending, so someone else is giving them a loan. And in this case, if interest rates continuously going up, it's going to be harder to make a return on that investment.
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So I think understanding house flipping and what the returns look like whether you are a house flipper or not is important to understand if they're going to continue to be a major part of the economy. If they don't, that could definitely lead to a recession. So for upcoming content, I have a three part series coming out how to analyze a real estate market with Redfin data. Redfin data is free, it's available to download. And it gives some really good stats around median home sales price, median days on market inventory, year over year and more. So I'm going to show in a three part series how to analyze a market with the data and how to extract the data using Python as the file is a little bit hard to open up since there's so many rows of data. And the third part we're We're going to use Tableau to bring it to life. And for the weekend plans this weekend, I have my mom coming down from Jersey, we have a family event, and then I'll be flying off to Portland, Oregon. Really excited to be there for the first time and looking to get some hiking in. If you haven't already, please join the Facebook group tech in real estate. That's where I'll be posting all these news articles throughout the week before releasing it on the platform. And it's a good way to ask questions about data analytics and real estate, not just straight to me but to the whole community as well. Thanks so much for watching and have a great weekend.