I recently attended an outdoor wedding reception that had all the makings of an epic event. The hosts paid careful attention to detail and meticulously planned each facet of the evening. Even though I don’t profess to know anything about decorating, the theme and decorations caught my eye. The menu offered some of the best dishes I’ve tasted anywhere—in restaurants or in my own kitchen. And, when the music kicked in, no one sat motionless at their tables, staring blankly into a cocktail glass. I even caught the hired help busting a move to the sounds of a band that knew exactly which tunes would pull everyone on the dance floor. Then, the thunderstorms came. Ouch.
Our suits and dresses were dampened but our spirits weren’t. I felt bad for the hosts. They did their part to create wondrous memories for their daughter and new son-in-law, but some conditions just couldn’t be controlled. I liken the situation to my real estate investing venture. I can pick the perfect location for my homes, pay a below-market price, find reliable contractors to make repairs, and then my return on investment gets nicked or boosted by powerful forces. Real estate market trends in Michigan have been favorable as of late. However, I don’t take my eye off larger economic forces that could impact my returns more quickly than I can react.
The Big Picture: Michigan Real Estate Market Trends
Obviously, I keep my eye on political and economic happenings in the Great Lake State but in order to realize success in my business pursuits, my purview also extends to the national and global level. I’ve worked hard to construct a successful real estate portfolio and, like my wedding friends, I don’t like to leave anything to chance. Granted, I can’t influence what takes place in Lansing or Washington, D.C., but I can make contingency plans should the unexpected occur. Here are some of the big-picture items I monitor, starting around the world and panning into the state level.
What do oil prices have to do with real estate in Michigan, you might ask? Potentially, a lot. Anyone who follows the news on a daily or even casual basis knows the world’s top oil producers can be quite finicky. These countries in the Mideast or Central America can cut back on production for any number of reasons. Less supply means higher prices and in Michigan, rising heating oil and gasoline prices can put a halt to home buying demand that the Wolverine State has been witnessing. First-time home buyers or current owners looking to upgrade might think twice before pulling the trigger on a purchase.
This unpredictability cuts both ways for me. If I’ve held a property for a number of years and look to unload it, decreasing demand will lessen the asking price I’m able to command. This cuts into my return on investment (ROI) and I don’t relish that thought. On the other side of the equation, falling prices could simultaneously lower my acquisition prices when I’m looking to buy-and-hold or flip a property. Consequently, I follow global events in distant places such as Venezuela and Saudi Arabia because I need to plan accordingly. If energy prices spike, I will concentrate my efforts on the buy side and hold off on selling rentals in my portfolio.
Under certain circumstances, I don’t lose sight of fixed 15- and 30-year and variable mortgage rates in Michigan. When I purchase rental properties, my main focus falls on cap rates or the net income I receive after the monthly house, utility and tax payments have been made. The higher that cap rate runs, the happier I get with my ROI. Naturally, lower interest rates translate into lower payments on my end of a longer-term buy and hold. When I’m flipping homes, rates become less of a concern because traditional banks don’t entertain short-term deals. Rather, in these situations, I turn to private hard money lenders who understand the nature of buying, renovating, and selling houses, and price those deals accordingly.
Currently, in areas such as Ann Arbor and Detroit, buyers can lock in rates that register around 4.3% for a 30-year loan and 3.7% for a 15-year term. Those rates still favor buyers and hence, coupled with a stable economy, lower mortgage payments continue to prop up demand for homes in Michigan. I’m also aware of the trend that interest rates have undergone in the past year. Rates have ticked up since 2017 as the Federal Reserve Bank has gradually increased the rates that banks charge for overnight loans to other banks—and those decisions raise mortgage rate across the board. Nonetheless, borrowed money is still cheap and those hikes haven’t weakened demand in the state. I haven’t had an issue finding buyers for my listed properties.
Moving away from the global and national impact that market trends have on the Michigan real estate market, let’s examine the economy between Copper Harbor and Coldwater. The Battle Creek market is much different than markets in San Diego or New York City and it’s wise to know all markets within the nation don’t move in lockstep. I read about escalating prices in California but I realize that geography, labor markets, and population growth in Michigan differ from those on the West Coast. However, a recent spate of buying activity has Detroit rivaling growth rates in some of the hotter markets across the United States.
In fact, some reports place Motown in the top-20 real estate markets when days to market drives the ranking. Realtors advise clients to tour their dream homes as quickly as possible because houses frequently sell on the first or second showing. Finding reasonably priced homes poses no issue in Western Michigan, for example, where median values sit around $200,000. To remain competitive, buyers are often encouraged to make cash offers or waive inspections if they really want to land that deal. These scenarios bode well for me when I put a property on the block.
The Job Market
It makes little sense to purchase, sell, and lease homes in a state where a lack of economic opportunity prevents me from finding adequately situated buyers and renters. Undoubtedly there existed tough times for me and most real estate investors when the financial crisis of 2009 struck. Fortunately, I adopt a long-term view of the market and that virtue allows me to withstand the inevitable ups and downs of the state’s economy. Any investor who stuck it out through the trying times has been rewarded for their patience through 2018.
The Federal Reserve takes an interesting view of unemployment rates. A market is considered at full employment when it reaches a level of 5% of the populace who don’t hold jobs. Michigan’s rate has crept under that level as of early 2018. At this rate, employers begin to compete for workers and that phenomenon begins to increase salaries and hourly wages. It’s important to note that rosier job pictures haven’t been painted evenly across the state. The prospects for a living wage aren’t as great in towns such as Flint as they are in Grand Rapids. Thus, while I’m optimistic about job opportunities for my prospective Michigan buyers, I’m still very selective about where I buy homes due to this uneven distribution of prosperity.
Ah, the T-word—often escalating to a point where the best-laid plans of mice and real estate investors alike do indeed go awry. At the federal level, new tax policy will negatively impact the statuses of numerous luxury owners. Deductions for mortgage interest have been capped at the $750,000 debt level and that limitation will render some high-valued homes unaffordable. On the buy side, I dabble in the luxury market and the new laws may create some opportunity when upscale owners look to sell quickly.
After the IRS gets its chunk, the state of Michigan is next in line to collect its share. While the state ranks high in terms of the dollar impact on an individual’s earnings, tax rates take less of a toll on real estate investors. The Tax Foundation ranks Michigan as the 12th-most optimal state in which to operate a business. Property taxes make up one component of the measure that has stayed relatively flat since 2015. Once again, there exists a duality. Personal state income and sales taxes, if increased, could hinder the demand that has encompassed the Michigan real estate market since 2009. All other factors remaining equal, however, the state still figures as a great place to buy and sell homes in the current environment.
Much of Michigan’s favorable business climate hinges greatly on the economic weather reports in adjacent states. In Illinois, residents are scrambling to move to nearby locales and, in order to minimize disruption to their everyday lives, Michigan stands out as a top destination. That migration of hundreds of thousands of citizens from Illinois spells a boon for Michigan. This, of course, will create more competition among home buyers and drive prices higher. In fact, I am already seeing this with my investment houses.
With more people chasing fewer homes, the end result has led to price increases, and in many markets that upward spiral has been notable. With all the positive data being reported in select Michigan markets, the one question I ask is: Can that growth be sustained? Over the long haul, I’m banking on the idea that stability in the overall Michigan economic arena will continue to support price appreciation. In the near term, I’m striking while the iron is hot by looking far and wide for appealing deals on distressed properties in blossoming markets. In essence, my approach is two-fold: flip properties quickly while demand drives the bus and buy-and-hold for income until my predesignated price points are reached.
Weathering the Storms of the Michigan Real Estate Market
As I was reminded at the recent wedding reception, even with careful planning you should always keep an eye on the skyline and be prepared. I’ve been an investor almost as long as I’ve been married. Both my marriage and my real estate investing career have seen their share of storms, but my fondest memories in the midst of all the hopes and anxieties that life offers have turned out to be the people and conversations that fueled a great time.
I still feel strongly that it is a great time to invest in Michigan real estate—but you will want connections with others to really enjoy what the market has to offer. I found those connections with my network of HomeVestors® franchisees and my mentor Development Agent. As an independently owned and operated HomeVestors® franchisee myself, I have reached out to my Development Agent and my regional franchisee network many times over the years when clouds roll in during a deal. With their advice and support, I made the best of it—and, more often than not, came out on top. Looking back, I wouldn’t trade those rainy days or relationships for anything.
If you are looking for a business relationship that will stand the test of time, contact HomeVestors today.