WIFI Research Brief: Retail Sales Increase in Home- Related Products | Still Large but Diminishing Shadow Inventory

home inventoryThe third quarter of 2012 started on a positive note with the US retail sales increasing by 0.8% in July. US industrial production, as reported by NAHB, rose 0.6% in July. Key sectors related to homes – furniture and home furnishings, and building materials and garden supplies registered gains. Resonating with these gains, HomeDepot reported 12% increase in its second quarter earnings. Home prices continue to post modest gains. According to National Association of Realtors, the national median existing single family home price was $181,500 in the second quarter of 2012 compared to $169,100 in the second quarter of 2011. The median existing home prices increased in 100 out of 147 metropolitan areas.

Housing Starts or New Construction fell by 1.1% in July. MarketWatch reports that single family housing starts is at 502,000, a decrease of 6.5% from that of June figure, but new building permits for single family homes increased by 4.5% to a rate of 513,000 in July.

The Wall Street Journal published a comprehensive article on Shadow Inventory, the homes that are potential foreclosures. While there is a concern that a shadow inventory of roughly 3.25 million mortgages can potentially hurt home prices, the increased demand from the first time buyers and investors and lower vacancy rates will ensure that the market is not cluttered with vacant homes.

Moreover, as the article points out, no real estate phenomenon is a nationwide phenomenon, and it is important to focus on what applies to sub markets. HomeUnion thoroughly researches and encourages its investors to examine markets at the zip code and neighborhood level.

According to NAHB, 73.8% of all new and existing homes sold in the second quarter were affordable to families earning the national median income of $65,000. Why should the investors be concerned with housing affordability index? While investment in single-family homes for cash flow from rental income is the appropriate “buy-hold” strategy, we cannot rule out situations wherein the investor might want to sell a home. The markets with high affordability index require the least amount of income to purchase a median priced home. This figure, hence, points to a relative ease with which the home can also be sold in the market. HomeUnion cash flow zones figure in the high housing affordability index markets. For example, Chicago and Atlanta are among the top 10 metropolitan areas with the highest affordability index.

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