Riding the Investor Wave

Housing affordability conditions are among the best they have ever been but exceptionally tight lending criteria have made it difficult for buyers to take advantage of such attractive affordability

Palm Coast, FL – October 17, 2011 – Interest rates continue at historic lows. Home prices in many markets are more affordable than ever. Indeed, housing affordability conditions are among the best they have ever been. So why aren’t more people buying homes? One reason is exceptionally tight lending criteria have made it difficult for any buyers to take advantage of such attractive affordability.

Lawrence Yun - NARFor investors with cash, though, the situation is providing them with a golden opportunity. The investor share of home purchases has been creeping up. Investors accounted for 18 percent of home purchase activity in July; the share reached 22 percent in August. (The first-time homebuyer share fell after the homebuyer tax credit expired last year, and investors stepped in to fill much of the gap). Obtaining a mortgage for a non-primary, non-owner-occupied home is even more difficult than obtaining other types of loans. Consequently, a significant share of investors is purchasing properties via all-cash transactions. All-cash purchases represented 30 percent of all home sales transactions across the country and accounted for over half of the sales in hard-hit regions like Las Vegas and Miami.

At the same time, higher rents are also attracting investors to the market. Property management has its own challenges and isn’t for everyone. But for those investors who have the capacity to either hire a property manager or manage a property themselves, the attractive rates of return from rising rental income is a strong lure. Rents rose at a better than 3 percent annualized rate in the third quarter of 2011, according to government data, and private data sources suggest even faster rent growth. Nor is there any reason to believe this rent growth will cool given the favorable demographics of a rising number of young adults over the next 20 years, a high number of “foreclosed” homeowners who cannot buy in the near term, and the very low construction rate of apartment buildings. If annual rent gains remain near 3.5 percent, rents will double in 20 years. If the rents rise 5 percent a year, rents will have doubled in 14 years.

In addition to strong returns on rental property, investors can anticipate solid home price appreciation over the long haul. Using 2000 as a “normal” year in which the market saw neither a bubble nor a bust, the metrics on home prices in relation to consumer prices imply a 14 percent undervaluation. The metrics on home prices in relation to rental rates imply a 20 percent undervaluation. The metrics on home prices in relation to income imply neither an overvaluation nor an undervaluation.

Given that the housing bubble has virtually deflated, the future path for home prices path should follow the future path for rent growth. That means home prices could also double in 14 to 20 years, though it is unclear as to when home prices will begin to catch up with rents. But long-term investors are sure to catch some if not most of the upward ride.

©National Association of Realtors® reprinted with permission

Toby’s Commentary: 53.7% of single-family Flager County homes reported sold through MLS during the third quarter of 2011 were cash sales. 69.5% of Flagler condominium sales reported during the same period were cash.

3 replies
  1. Luis Gonzalez
    Luis Gonzalez says:

    Who benefits

    Reading your article "riding the investor wave" adds to my frustration on whats going on with the housing market and who actually benefits from this. Banks refuse to lend, even after they received gov’t money. Rates and prices are low and only cash buyers are able to buy. The working stiff can’t buy because of ridiculously tight bank regulations leaving only the wealthy and corporatations with cash on hand to take advantage of the down market, which will reflect on everyone for a generation. Hard workers who are hovering looking for a break, won’t get it because these situations are reserved for the wealthy and corporate world.

  2. Mark Hofmann
    Mark Hofmann says:

    Bank Lending

    "Banks refuse to lend, even after they got government money". When I read inaccurate statements like these I get frustrated over the misinformation present in the American media. First, the "banks", some of which did not need federal TARP funds, were forced to accept government money. By the way they all paid it back. Second, the Dodd / Frank bill requires banks to have exorbitant amounts of reserves on hand to cover possible mortgage defaults. That is why banks are sitting on so much cash, and it appears they are not lending.

  3. Steve Sachs
    Steve Sachs says:

    Improvement of home sales

    Besides being an Eye Dr. for 46 years, I was also a Real Estate Broker for 21 Years. When I read comments about increased sales, most of which are cash, it actually puts credence to the fact that mostly the wealthy are buying properties to rent out for income. The vast majority of middle income people are unable to buy a home because either they can’t get a LOAN and/or they are struggling to just maintain what they presently have. In the past, homes were the single best investment one could make. Today, that applies only to the very wealthy that have the cash to buy outright (which means they have NO DEBT SERVICE)…..thus they are getting a decent return on their investment. THIS ONLY PROVES ONT THING, THE WEALTHY GET WEALTHIER WHILE THE POOR GET POORER….AT THE SAME TIME MIDDLE INCOME IS STAGNANT AND HAS ACTUALLY DECREASED BY 7% OVER THE PAST DECADE.
    Home values will continue to go down while the wealthy will continue to take
    advantage of declining values, foreclosures and short sales. YEAH FOR THE TOP 5% OF THE WEALTHY IN OUR COUNTRY. [a little sarcasm].

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