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With Low Interest Rates and Political Uncertainty, Investors Should Consider Real Estate Now

On 5/10, Steve Hovland, director of research for HomeUnion was a guest on Market Wrap with Moe Ansari, where he discussed policy issues, supply and demand issues and investment trends impacting the real estate sector.

Here’s the full podcast and below are excerpts from the interview.

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Moe Ansari: According to a recent article on CNBC.com, most U.S housing markets have not fully recovered from their heights (before the most recent recession). Let’s take out San Francisco-San Jose and Palo Alto. But if you take a look at the rest of the country, Arizona, and Las Vegas, for example, they haven’t reached new highs.

Ansari: What is your view? Is this good news or bad news for real estate investors?

Steve Hovland: I think it’s good news. It means the market is behaving how it should be. Previous highs were based largely on speculation and free money. Today’s capital is cheap but the underwriting standards have tightened significantly. People can only afford to buy a house that they can pay for. Because of that, demand and supply are balanced with this recovery. If prices aren’t as high as they were during the peak it’s because the market is behaving cautiously, and we like to see markets that behave cautiously.

Ansari: According to a new report from Trulia, home prices will not fully recover until 2025. Do you agree with that? What opportunities does that present for real estate markets now?

Hovland: I don’t think it’s going to take until 2025 to recover because there are supply-side challenges right now in the housing market. We are not building enough homes and there’s no indication that we are going to amp up construction activity over the next few years. Home prices will continue to rise as demand and wages rise. We are not going to take that long to get up there. The housing market has a very solid footing, and demand is sufficient to keep pushing prices higher.

Ansari: A recent poll on your blog – HomeUnion.com – states that Trump’s tax reform could be a mixed blessing for real estate investors. Could you give us an idea why?
Hovland:
It is a mixed blessing for real estate investors. For the housing market in general, fewer people are going to use the mortgage interest deduction, and instead use the new double standard deduction. This could make housing diminish in demand for homebuyers. However, that makes renting better for investors. So, investors will be able to purchase properties and put renters in them more easily.

The thing that we are really watching and one of the things that are very important to the housing market and investment market in general when it comes to real estate is the 1031 like-kind exchange. That (law) keeps the market liquid. It enables the investor to delay taking capital gains until they liquidate that property, so they can trade up into bigger and better properties. It enables new investors to enter the market and investors to trade up and continue to build their portfolios without being punished with that capital gains for that investment. That has been on the radar of both the House and Senate over the past few years. We believe it would be a very bad thing if they take the 1031 exchange away.

Ansari: If we get tax reform, it will be a while from now. So, should real estate investors take the wait and see approach or get in now?
Hovland:
No, real estate investors should be moving very quickly right now. There are a few things impacting the real estate investment market, and that’s bringing a lot of investors into the market. The Fed is not in any hurry to raise interest rates. So, leverage is still very attractive. And chairwoman Yellen has said on a couple of different occasions that this cycle Fed interest rates won’t go as high as they have in the past so investors that have cash in relatively liquid investments and they’re hoping for the bond market to come back to more historical norms. They’re starting to see that that’s not going to happen. Therefore, they’re more apt to buy real estate, which produces better returns but is less liquidity.

Plus, it’s the spring buying season. I think people do their taxes and they figure out that they need more deductions somewhere, so we see real estate investors jump right back into the market after tax season. It’s the same with home buyers in general. And we are seeing more wealth preservation on our platform. While a lot of investors are still seeking yield, a bigger percentage of our investors are looking for wealth preservation. They want to park their money in a real estate property that manages itself, takes care of itself, produces enough income to fix itself and let a renter pay down that mortgage over time and build up equity in that property with appreciation.

Ansari: Tell the listeners the three top real estate markets, according to your research.
Hovland: It’s really up to the goals of the individual real estate investors. If it’s me, I like Houston. Houston is back on solid footing. They had a little trouble there when energy prices collapsed. Orlando is a great market right now. It attracts the most tourists in the country, and it set a record last year in terms of visitors. New tourism jobs tend to create a lot of renter households. Atlanta is a great market, just because it has something for everybody. Buyers can invest in Midtown or Buckhead (on the higher end), or they can chase some yields further out into the suburbs with low to moderate entry prices.

Listen to the entire interview here: http://marketwrapwithmoe.libsyn.com/the-latest-on-the-real-estate-market.

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