The Real Estate Recession is Over, But What Happens Now?

Reading the popular literature and talking to fellow agents, I hear that the wave of foreclosures has not yet hit its crest, and that real estate values are not out of the woods, yet.

I just can't match the talk with the reality, at least around Coachella Valley multifamily. Properties in good areas (high household net worth, low crime statistics, and good schools) are on the market for five percent cap rates, which is exactly where they were in 2006, just before the Global Financial Crisis. How can that be?

Expectations drive sellers and buyers more than actual facts, and sellers believe that they'll get their price. With multifamily, prices have rebounded, already, based on current economics.

So, what could change? Well, the better question is, what won't change? The global economy has tolerated the U.S. federal deficit for many years, but that could change, particularly with the ham-handed Republican/Democrat bungling leading to government shutdowns. China is a teetering economy, with a weak banking system. Europe and Japan have aging populations with little future growth.  The possibility of another economic crisis is, in my view, greater than the likelihood of business as usual. I don't see how interest rates can stay so low, considering the rate of inflation and risk inherent in investment. In other words, interest rates should probably be seven percent.

Multifamily properties rely on simple arithmetic for their values. Rents, less vacancy and expenses, produce a "net operating income". The market provides a "cap rate", or a measure of what investors are paying for future cash flow.  The cost of financing the purchase comes out of the NOI, leaving net cash. Change these numbers, even a little, and the values of multifamily investment property change a lot.