Why This is the Time to Invest in Real Estate

time to investLast year when home prices rose and foreclosures grew scarcer, the market share of homes that investors purchased slipped from 23 to 16.6 percent.i  To many real estate professionals and journalists who weren’t close to the investment business, it seemed as though the millions of investors who entered real estate during the housing depression were on their way out.

In fact, nothing could be farther from the truth.  Investors are riding the wave of a sea change in the way Americans live and their prospects are growing brighter by the day.

A New Normal

A new “Rentorship” Society is evolving.  Owner-occupied homeownership rates are dropping, and at least one economist, Stan Humphries at Zillow, projects homeownership rates will fall to their lowest point in nearly two decades this year.  By choice or necessity, millions of American families that a generation ago would have been ideal candidates for home ownership now never plan to own a home… and their numbers are growing.

For several years the rental web site Apartments.com has surveyed a wide range of renters.  In 2014, they found a dramatic increase among the growing number of renters who once owned their own homes and rent by choice or necessity.  Close to half of all renters (44.1 percent) previously owned a home, up from 35.1 percent in 2013 and 33.6 percent in 2012.ii

Below are the top five reasons former homeowners are choosing to rent in 2014 compared to the 2013 survey. *Data courtesy of Reis, Inc.

  • Can’t afford homeownership anymore: 21.5 percent;
  • Renting offers flexibility in choosing where to live: 15 percent;
  • They lost home due to foreclosure or divorce: 13 percent;
  • They rent because they relocated for employment: 12.4 percent; and
  • Renting is more affordable: 10.4 percent.

The “Rentorship Society”, as it is called, is translating into profits and opportunity for investors in single family homes.  Nationwide, landlords raised rents by an average of 0.8% to $1,083 a month in the fourth quarter last year.  Rents climbed 3.2% for all of 2013.  The national apartment vacancy rate fell to 4.1% in the fourth quarter from 4.6% in the year-earlier quarter and well below the 8% peak at the end of 2009, according to a Reis Inc. report.

Moreover, the future is as bright as the present.  A recent analysisiii by Moody’s Celia Chen predicts that the economy will continue to improve in 2014.  However, due to rising home prices and increasing interest rates, most consumers will remain priced out of the housing market, which means they will continue to rent.  Many younger people will likely move out of home and become renters as their employment prospects improve.  Thus, demand for rental properties is forecast to increase.  These factors, according to the report, “will persist, providing good returns to investors in the REO-to-rent market.”

The report also examines current REO-to-rental markets where home values are elevated and investors are likely to find a decent supply of REO properties.  It points out that most of the hot markets have already been tapped out – cities such as Los Angeles; Riverside, Calif.; Sacramento, Calif.; Phoenix; Las Vegas; and Atlanta, which were hotbeds of REO-to-rental activity in 2012 and early 2013, have al-ready worked off a good chunk of their REO inventory.  The key now is for investors to identify areas with strong home price appreciation and cash-flow positive, those with favorable economic conditions (primarily the job market) for renters.

“Now that the low-hanging fruit has been picked, investors are turning to other markets that still suffer from large inventories and where house prices remain well-below peak,” Chen wrote.  “Florida metro areas, for example, still have elevated foreclosure rates because of their judicial foreclosure process.  Tampa, Jacksonville and Lakeland are examples of metro areas that still have a substantial overhang of distressed homes, yet have good prospects in terms of job, household and house price growth.”

There are now 43 million renter households, or 35 percent of all U.S. households, the highest rate in over a decade for all age groups, according to Harvard’s Joint Center for Housing Studies; 4 million more renters today than there were in 2007.  With the bar to homeownership rising in the form of tough lending standards, rising down payments and rising prices, there’s no reason to believe rental demand will subside.  Booming West Coast markets like Seattle, San Francisco, San Jose and Oakland-East Bay are seeing rents rise 6 percent or more despite the new rental inventory.

Another housing expert, columnist Peter Miller, summarized the year ahead in a recent column on RealtyTrac.

“While the number of foreclosures offered for purchase continues to decline, many units remain available — and they routinely sell at a discount.  Combine discount pricing with rising tenant demand and 2014 looks like it will be an attractive year for investors in many markets,” Miller wrote.iv

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iCampbell-Inside Mortgage Finance Surveys

iiReal Estate Economy Watch. http://www.realestateeconomywatch.com/2014/01/nearly-half-of-all-renters-are-ex-homeowners/

iiihttps://www.moodys.com/newsandevents/topics/us-fiscal-outlook/-/007020/4294961901/4294965962/0/0/-/0/-/-/-/-/-/-/-/en/global/pdf/rra?WT.mc_id=home_EC_USFiscalOutlook

ivhttp://www.realtytrac.com/Content/news-and-opinion/will-real-estate-investing-slow-in-2014-7969

 

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