In a Wall Street Journal article from August 19th by Josh Mitchell, it is reported that housing starts are sharply up for the year and have seen a strong uptick in July. Housing starts bode well for a general housing recovery. We have already begun to go back to our old buying style of buying new homes from developers in Oklahoma City.
I am relatively sure in the coming months we will be seeing more attractive opportunities in buying brand new products in other markets as well. It took a long time for the builders to be able to put out a competitive product for real estate investors, as they played a serious “second fiddle” to existing homes, which were priced well below what they could offer.
We are pleased to see the trend as it was always our opinion that a prudent and safe real estate investment certainly includes brand-new homes with a builder’s warranty, with a fixed-rate 30-year loan paid off by the tenant and eroded steadily by inflation (as it is not pegged to the cost of living). This mode of real estate investment serves as the foundation of building a solid financial future and achieving long-term life goals of a solid retirement and sending our kids to college.
Builders have the ability to offer the buyers many “goodies” at a cost to them- that is much lower than the retail cost (an example might be a covered patio which costs $6K but only costs the builder $2K to build). This can create an attractive package for the investor.
We will have builders and new properties available at our upcoming 1-Day Real Estate Expo near SFO on Saturday, September 13th. I am looking forward to seeing you.
I am enclosing the full WSJ article for convenience:
U.S. Housing Starts Up Sharply in July – Renewed Strength in Housing Market Could Boost Economy
By Josh Mitchell
Updated Aug. 19, 2014 11:03 a.m. ET .
WASHINGTON—Home construction surged in July, a sign that renewed strength in the housing market could boost the economy in coming months.
Housing starts climbed almost 16% last month to an annual rate of 1.093 million units, the Commerce Department said Tuesday. That marked the highest level of construction since November, driven by a pronounced rise in new apartments.
Home construction rose 22% in the year through July, and a rise in applications for building permits last month suggests further gains this year. That could ease concerns at the Federal Reserve of a weak housing sector weighing on economic growth this year.
”With housing starts up 22% over the last year, the Fed’s concern about a ‘slow’ recovery in the housing market looks misplaced to us,” Economist John Ryding of RDQ Economics said in a note to clients. But details within Tuesday’s report raised questions about whether the construction gains will be sustained. Last month’s rise appeared to be due partly to a rebound in construction in the South after rainy weather caused delays earlier this summer.
Such rebounds are typically temporary. Also, the bulk of the increase was due to surging apartment construction, a volatile category that can mask underlying strength in the market. And it’s unclear whether the housing market will be able to maintain momentum if mortgages rates rise, as many economists expect them to as the Federal Reserve moves toward raising its benchmark short-term interest rates from near zero.
Amid the prospect of higher costs and weak income growth, Fannie Mae’s economics group downgraded its forecast for home sales and construction on Monday. It now expects construction of 1.43 million single-family units this year and next combined, down from an earlier forecast of 1.61 million units.
A measure of affordability, which takes into account interest rates, home prices and median household income, hit its lowest level in six years in June. That reflects a run-up in home prices.
Interest rates have fallen back to year-ago levels in recent weeks after rising late last year. The average rate on a conventional 30-year mortgage stood at 4.12% last week, down from 4.53% in the first week of the year, according to Freddie Mac.
But overall the report boosted hopes of a stronger housing recovery. In July, applications for building permits, a construction bellwether, climbed 8.1% to a 1.052 million rate. That suggests construction could pick up further in coming months. Sales of previously owned homes have picked up in recent months, buoyed by historically low interest rates, mild weather, and stronger job growth in the U.S. But sales of new homes have moved sideways. The latest pickup in home construction could signal builders are gaining confidence that overall sales will rise as the broader economy gains momentum.
From a year ago, home construction was up 21.7%. The home-construction market has steadily recovered from the depths of the recession but has yet to regain its strength from the levels that preceded the boom years in the 2000s.
At the height of the housing boom in 2005, just over 2 million homes were built. After the crash, housing starts fell to 554,000 in 2009, during the recession. Tuesday’s report showed that starts on single-family homes, which reflects the bulk of the market, climbed 8.3% in July from June.
Construction of multifamily units—mostly condominiums and apartments–rose 33% to a pace of 423,000 units, the highest level since January 2006. That category is more volatile. Other recent signs point to a strengthening housing sector.
A measure of home builder optimism rose two points to a reading of 55 this month, the National Association of Home Builders said Monday. Existing-home sales rose in June to the highest level since October, the National Association of Realtors said last month. The trade group is expected to release July’s data Thursday.
Write to Josh Mitchell at firstname.lastname@example.org
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.
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.
ICG uses single-family home investments, bought in advantageous locations and the best U.S. markets. We enable you to enjoy the clout that comes from purchasing a multitude of houses, even if you only buy one.
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