In a Wall Street Journal article from March 27, 2017, by Laura Kusisto, as well as in a few blog entries on WSJ, the point is made that homeownership in the US is at a historic low. At 63.7% homeownership, it is the lowest such number for the past 48 years!
The reasons given for it include more strict lending practices following the recession. Perhaps another issue is that the recession is still fresh enough to have taken the belief away that your home will “always appreciate “ in value and will serve not only as a residence but as a major lifelong investment. Some people may no longer think so.
Add to that the natural desire of people to be free to move at will, and we have only 63.7% of homeowners in the US as of the 4th quarter of 2016.
As investors, of course, we are quite familiar with the powerful financial effect owning houses can have on our future, especially if we finance them with the incomprehensible 30-year fixed loans still available, and at still super low rates.
Having 63.7% homeownership percentage means, of course, that a full 36.3% of the population are renters! That is about 117,000,000 people!
Those of us who know the value and power of investing in houses and holding them as rentals can only look at this statistic as a positive – obviously, these renters need a place to rent and we will have a larger renter pool available for our homes. Sure some single people may want to rent an apartment, but families usually prefer renting a single-family home.
Coupling this data regarding the highest number of renters available to us in nearly 50 years, with the still-low interest rates available on 30-year fixed rate loans, means this is an excellent time to stock up on single-family homes as investments.
Interest rates are on the way up. The fed keeps reminding us they will continue to raise rates. Having a period of such low rates (despite the small “Trump Bump” we experienced recently), makes it a special time to buy and hold.
If you are under the FNMA allotted 10 loans per person (20 per married couple if they buy separately), it is high time for you to go out there and purchase brand-new single-family homes in good areas, finance them using these great 30-year fixed rate loans, which will never ever keep up with inflation (thus they will get eroded by inflation as to their real dollar value). The homes will be managed by local property managers we use ourselves in the various cities in which we invest.
We will discuss this as well as many other important topics for investors, at our quarterly ICG 1-Day Expo near the San Francisco Airport on Saturday, May 20th. We will have experts lecturing on important topics, lenders, market teams from the best markets in the U.S., and lots of Q&A, networking, and learning. Just send us an email at email@example.com. Just put in in the subject line, “Saw your blog on homeownership” and list your name and those of your guests. We will confirm! See you on May 20th.
Since 2012 there has been significant home price appreciation in many U.S. metropolitan areas. Some markets reached levels of unaffordability and continued on a tear until recently. Markets such as San Francisco, New York City and parts of Miami have reached unprecedented highs, accompanied with worries about social clustering, lack of affordability, and the need for long commutes for “regular” (most) people.
In the markets we are interested in and are investing in, there are more diverse scenarios. In the Phoenix and Las Vegas metropolitan areas, prices have indeed gone up quite a bit since 2012 (Phoenix over 100% and Las Vegas almost 100%). In these two metropolitan areas, affordability is still not an issue. Prices started going up from an exaggerated low point that was the knee-jerk reaction to the Big Crash. Even at today’s prices in Phoenix and Las Vegas, affordability is still not an issue. Most buyers are homeowners and they can use the amazing FHA loan with a 3.5% down payment and the lowest possible interest rate, which makes them less price sensitive.
For investors, Phoenix and Las Vegas are less interesting to buy in at this time, as rents have not moved up very much while prices essentially doubled since 2012. Cash flows are nowhere to be found (and investors can’t use the special FHA loan).
The Texas markets have started their ascent around 2013. In the major metro areas in Texas, prices went up significantly (around 40% in many cases). This is not as extreme as in Phoenix but enough to make investing in the major TX markets less attractive, especially with the high property tax in the state of Texas.
Florida is a bit of a mixed bag. Expensive properties in Miami Beach are through the roof. Parts of Orlando are up about 50%. However, areas in the larger metro area may still be appealing for investment, such as Winter Haven and perhaps Deltona. Tampa is up about 40% but further areas like Zephyrhills are only starting to roar.
In Jacksonville, there has been some price appreciation but in the areas, we primarily look at, prices are still attractive. Partly this is due to foreclosed homes still hitting the market in an AS-IS condition, pulling comparable sales down. The foreclosed properties showing up in the market is an All-Florida phenomenon, as Florida is a judicial foreclosure state and well-defended foreclosures can last many years.
Oklahoma City has been relatively stable with so-far modest price appreciation. It is close to Dallas and the prices are much more affordable, rents are similar, and property taxes are 40% as much! It is a market that is appropriate for investing in at this time. The large oil reserves in the South Central Oklahoma Oil Province (SCOOP) area, which is not far from Oklahoma City, may bode well for future economic upturn (despite the city already being a strong economic market).
While the most expensive metro area prices are beginning to sag somewhat, investors interested in the range of $100K-$200K can still find appropriate places to buy. Couple that with the still super-low interest rates (get 30-year fixed rate loans – inflation starts eroding them from day 1 so the latter years are almost meaningless in terms of the real buying power of the dollar), and you get an excellent combination for the savvy long term real estate investor in the right markets.
Feel free to contact us to discuss. I delight in talking about these subjects. firstname.lastname@example.org
We will discuss in further detail, including having market teams talk about these and other issues, as well as expert speakers on important investment subjects, during our ICG 1-Day Expo on Saturday, December 3rd. Everyone mentioning this blog can attend for free (email us at email@example.com). These events have been very useful to the attendees, and I learn a lot every time as well. The event is near the San Francisco Airport and starts at 10:00 AM so people can fly in from Los Angeles, San Diego, Seattle, and Portland and so on.
Looking forward to seeing you!
Up until the beginning of 2012 there were some states that lead the way as far as investor interest: California, Nevada, Arizona and Florida. That interest on the part of investors was justified, as these four states were the most clearly noticeable examples of recession housing prices. These four states were the “poster children” for extreme housing price collapse.
During 2012 and 2013 all four states exhibited strong housing price appreciation. Phoenix led everyone with a 70% jump. Las Vegas wasn’t far behind and California process improved rapidly. Florida prices went up but the uptick was tempered by far slower judicial foreclosure processes in Florida, as opposed to the quick and efficient trustee sale in the other three states.
Now, in the middle of 2014, Florida prices have improved quite a bit and yet, due to the slow foreclosure process, which creates a steady trickle of supply into the marketplace, Florida is still a place where investors look to buy. However buying in Arizona, Nevada and California has slowed significantly for now.Other states, which have not experienced such extreme price swings, are now becoming attractive investor destinations.
A prime example is Oklahoma City, with low unemployment and the benefit of the oil & gas industries. Rents are high and property taxes are low. Similarly, other “middle of the country” markets in states like Kansas and Missouri are starting to attract more buyers, as is the state of Texas (with a strong economy, high rents, but also very high property taxes and insurance rates) and states like Ohio.Overall it is possible that soon the effects of the recession will no longer be dominant and marketplace demand by investor will revert to parameters before 2008.
Some of these new markets will be present at our Real Estate 1-Day Expo this Saturday near the San Francisco Airport (see details at www.icgre.com). Call us (415-927-7504) or email us (firstname.lastname@example.org) and mention this blog entry and receive my book, for free, with registration at www.icgre.com.
In a recent article written by Kenneth Harney in the Los Angeles Times, we learn that four million homeowners are no longer “underwater” on their loans. As many of us know, a good number of these homes may be investor-owned. Obviously, this is good news for the economy at large.
It is also good news for real estate investors — if someone is in the process of foreclosure, rising prices lower the deficiency exposure for the individual (this is true for homeowners as well as investors, of course). In addition, investors with clean credit can use the rising equity to refinance and get the great rates that can be obtained today, and in many cases improve their cash flow (possibly) quite significantly.
Needless to say, in some of the markets investors may even begin to think about selling and if they bought in 2009-2011, they may already realize nice gains. Most investors are more interested in keeping the homes, as appreciation is likely to occur in markets that really overshot down during the recession (like in Arizona, Nevada, and Florida, which are specifically mentioned in the article as still carrying a lot of underwater properties). Nevertheless, the rising prices create a sense of success (not to be trifled with) and in some cases, more options and room to maneuver assets.
Here is the article:
4 million homeowners climb out of negative equity
More owners transitioned from negative equity into positive territory last year, a good sign for the economy overall. But many remain underwater on their mortgages.
By Kenneth R. Harney
March 16, 2014, 5:00 a.m.
WASHINGTON — The economy may be growing at a frustratingly slow pace, but one piece of it is booming: American homeowners’ equity holdings — the market value of their houses minus their mortgage debts — soared by nearly $2.1 trillion last year to $10 trillion.
Big numbers, you say, and hard to grasp. But look at it this way: Thanks to rising prices and equity levels, about 4 million owners around the country last year were able to climb out of the financial tar pit of the housing bust — negative equity.
Negative equity gums up people’s lives and the real estate marketplace as a whole. It makes it difficult or impossible for many owners to refinance out of a higher-cost mortgage into a more affordable one. It makes it painful to sell — you’ve got to bring cash to the table to pay off what you still owe to the bank. Plus almost no one wants to lend you money, at least not at reasonable interest rates secured by your real estate, when you’re deeply underwater. So you’re likely to spend less and invest less, and you’re probably not going to buy another house. Nor will potential new buyers be able to purchase yours.
So when 4 million owners manage to transition out of negative equity into positive territory, that’s significant news not just for them personally, but for the economy overall.
Two statistical studies released this month offered a glimpse of where the country is in terms of homeowner equity, seven years after real estate began to tumble and crash. The first was theFederal Reserve‘s quarterly “flow of funds” report. Among many other segments of the economy it toted up, the Fed found that homeowner equity has rebounded to its highest level in eight years — though it’s still not quite back to the $12 trillion it was during the hyperinflationary high point of the housing boom in 2005.
The second study, from real estate analytics firm CoreLogic, focused on the flip side — the impressive shrinkage of negative equity. According to researchers, nearly 43 million owners with mortgage debt have positive equity. Roughly 6.5 million owners are still in negative equity positions, however, down from more than 10 million a year ago and 12 million in 2009.
Who are they and where are they? Not surprisingly, they are heavily concentrated in areas that saw the wildest price run-ups, the heaviest use of toxic loan products and the steepest plunges during the crash. In Nevada, 30.4% of all owners with mortgages are underwater. In Florida, the percentage is 28.1%, and in Arizona, it’s 21.5%. Still, all three areas have improved sharply over the last two years.
Although non-costal California markets suffered some of the most dramatic declines in property values during the bust, researchers found that the state as a whole is nowhere near the top of the latest negative equity list. With 12.6% of mortgaged homes underwater, California has a lower overall negative rate than the national average (13.3%), and has relatively fewer underwater homes than Maryland (ranked 10th worst in the country with a negative equity rate of 16.2%), Ohio (19%), Illinois (18.7%), Rhode Island (18.3%) and Michigan (18%).
Among the best markets if you’re measuring for positive equity: Texas, where just 3.9% of owners are in negative positions, Alaska (4.2%), New York (6.3%), Oklahoma (6.4%) and the District of Columbia (6.5%.) Higher-priced houses generally have lower rates of negative equity compared with houses in lower-priced areas, many of which saw construction booms for entry-level, low- and moderate-cost homes in the suburbs of major cities during the boom years. Just 8% of mortgaged homes worth more than $200,000 have negative equity, compared with 19% of homes under $200,000.
Having positive equity is one thing, but do you have adequate equity? Or are you, as CoreLogic refers to the phenomenon, “under-equitied”? Researchers define under-equity as mortgage debt that is in excess of 80% of your home’s resale value
This is important in practical terms, they say, because having less than 20% equity makes it more difficult for you to pursue potentially helpful financial options, such as refinancing your primary home loan or obtaining an equity credit line. About 21% of all mortgaged homes nationwide are currently in this situation, and 1.6 million owners have less than 5% equity.
Some of the markets that had gone down significantly have registered great price improvements, especially between Q1 2012 to Q3 2013. Phoenix led the pack followed closely by Las Vegas and many California cities. Florida has provided steady appreciation but did not go crazy (most likely due to the slow judicial foreclosure process which modulates home supply into the market and helps avoid spikes).
It is important to bear in mind though, that even in Phoenix and Las Vegas the prices, even after appreciation, are still low. In most cases, the prices reflect just a small premium to construction costs and are certainly very far from the peak (although that is a somewhat nebulous standard). This would be the time to remember that real estate is a classic investment, especially when powered by a 30-year fixed-rate loan.
It is now almost a consensus that interest rates will rise (most say significantly) in the next few years. Needless to say, anyone who has the ability to qualify for a good low-interest-rate 30-year fixed rate loan should get one! These are 100% inflation-proof. In fact, once you have these loans inflation becomes your “best friend” by eroding the loan since the loan is not inflation-adjusted.
Florida still supplies a steady diet of below-construction-cost homes. That would be a place to explore purchasing. However, the power of getting a fixed low rate becomes such that as long as you buy in a decent market with decent demographics, it is not bad to “get moving” and do it.
New homes by builders are still not that popular among investors but in some markets, they are not that much above the used-home fray AND they provide a certain peace of mind related to their very newness, warranties and so on. Many builders help out with the loan in some way (buy down the rate for example) so that may add to the attractiveness.
All in all 2014 should be a year to be active and purchase, especially if a 30-year loan can be had.
Should you go for a somewhat lower rate on a 15-year loan? I believe the 30-year loan provides important extra flexibility. You can always choose to pay a 30-year loan in 15 (or 14 or any other number you choose), but you cannot go the other way. You also retain the flexibility to revert back to the 30-year amortization schedule if cash flow becomes tight.
In an article in the Wall Street Journal by Nick Timiraos on January 7, 2014 an attempt at predicting various scenarios for housing at large in the U.S. for the year is made. Of course, the 5 points are general. I personally believe (and am actually seeing) that markets that are still reflecting post-recession pricing (like Florida) and where houses can easily be bought under bare construction costs AND the future demographics are promising – should show a far more bullish trend this year versus other markets. Here is what Mr. Timiraos says:
“For housing, it was a tale of two halves in 2013. During the first half, unusually low supplies of homes and low rates spurred bidding wars, pushing prices up sharply. During the second half, the frenzy cooled amid a sudden spike in interest rates. While more markets are now reporting increases in inventory, the number of homes for sale remains quite low.”
The bull case for 2014 goes something like this: those low inventories will support rising prices. Below-average levels of household formation, the argument goes, must ultimately pick up, boosting construction. Mortgage rates, while higher, are still historically low. Credit standards will stop getting tighter and might loosen as home prices rise. Finally, mortgage delinquencies are dropping. While some states still have elevated foreclosure inventories, the worst of the distressed-housing problem is in the rear-view mirror.
The bear case, meanwhile, says that the recovery is a mirage built on the back of the Federal Reserve’s stimulus that has done little more than inflate asset values, including home prices. Record low-interest rates, the argument goes, unleashed demand from both borrowers and all-cash investors seeking returns on something—anything—with a decent return. These investors built large rental-home companies that remain untested at scale. How can first-time buyers take the baton from investors at a time when prices are up almost 20% in two years and when interest rates are rising?
Other problems loom: Mortgage rates could jump, choking off housing demand and curbing new construction that remains mired at 50-year lows. Investors could unload their homes if the rental-home thing doesn’t pan out. And don’t look for much help from mortgage lenders that face a cocktail of new regulations, which could keep credit standards stiff.
So which view will carry the year? Here are five wild cards to watch this year:
(WSJ: 7 Jan 2014 By Nick Timiraos)
1. WILL INVENTORY RISE?
Prices have risen largely because of shortages of homes for sale. While there is growing evidence that inventories hit bottom last year and that some markets are moving back in favor of buyers, the number of homes for sale remains relatively tight still. Foreclosure-related listings have plunged, and traditional buyers haven’t flocked to list homes—at least not yet. New construction, meanwhile, won’t be back to normal historical levels for years. The consensus view is that price growth continues at a somewhat slower pace, but that consensus view could be wrong—for the third year in a row—if there aren’t more homes for sale.
2. WHERE IS THE HOME-CONSTRUCTION RECOVERY?
While home prices have recovered strongly, new construction activity hasn’t. Part of this may have to do with the fact that home prices are still too low to justify construction, particularly given land, labor, and materials costs. For smaller builders, credit may also be harder to come by. Some economists say new-home demand could remain muted because many move-up buyers don’t have enough equity to “trade up” to that new home. Key issues to watch here: What happens to household formation, and do builders begin to throttle back price gains in favor of selling more homes in 2014?
3. WHAT HAPPENS TO MORTGAGE CREDIT?
Lenders could begin to ease certain “overlays”—or additional credit and documentation checks—that have been imposed over the past few years. Mortgage insurance companies are getting more comfortable insuring loans with down payments of just 5%. So don’t be surprised if, at the margins, it gets a little easier to get a mortgage—especially if you have lots of money in the bank.
Even if it gets easier to get a loan—by no means a given—borrowing costs and fees could rise. Banks also face new mortgage regulations that could keep most of them cautious. Borrowers with more volatile or harder-to-document incomes, including the self-employed or those who make a lot of money on commissions, bonuses, or tips, could continue to face tough sledding.
4. WHAT WILL INVESTORS DO WITH THEIR HOMES?
A handful of institutional investors have purchased tens of thousands of homes that are being rented out. These homes tend to be concentrated in a few of the regions that have been hardest-hit by foreclosures over the past five years. Investor purchases played key roles in stabilizing prices, especially because investors were wolfing up homes at a time when supplies were already dwindling. A key question now is what happens after the initial rush to invest subsides. More lenders and investors are extending debt financing to some of these property owners, which should help boost returns. Can owners perfect the expense management associated with maintaining and leasing tens of thousands of individual homes? Can owners perfect the expense management associated with maintaining and leasing tens of thousands of individual homes?
5. WHEN DOES HOUSING HIT A TIPPING POINT ON AFFORDABILITY?
Rising home prices are a double-edged sword, especially in pricier coastal markets such as San Francisco and Los Angeles. On the one hand, rising prices are giving many homeowners equity in their homes again—an extremely positive development to the extent it means these borrowers are less at risk of foreclosure.
But price inflation is making housing less affordable. This will be a bigger problem if cash buyers retreat from the market in 2014 and/or if interest rates rise in a meaningful way. Consider: In Los Angeles, prices have jumped by nearly 30% in the past two years, to a median of $448,900 in the third quarter. Assuming a 20% down payment, the monthly payment of principal and interest on the median-priced home has jumped from $1,255 in the third quarter of 2011 to $1,823 in 2013—a 45% increase.
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