Norada Real Estate Investments

The Return of Real Estate – Fortune Magazine

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This week’s issue of Fortune Magazine proclaims the “return of real estate”.  I didn’t think I would see an article like this from a mainstream publication so soon – especially from one of the most trusted financial magazines.  Could this mark the beginning of more good news to come?

“Forget stocks. Don’t bet on gold. After four years of plunging home prices, the most attractive asset class in America is housing,” writes Shawn Tully.

The article covers five trends as justification for improvement in the real estate market:

  1. The steady decline in prices which has been going on nationally since 2005 has finally hit a level where it costs less to own a house than to rent in many cities.
  2. The supply of renters has increased sharply in the recent past, which has already begun to cause rapid increases in rental rates.
  3. Home builders have held back on building new homes for several years, creating the conditions for a shortage of new homes when demand goes up just a little bit.
  4. Investors, responding to the big demand for rental units, are rapidly buying down the overhang of foreclosed homes which has dogged the market.
  5. Finally, the U.S. economy seems to be on the path to improvement, although we still struggle with high unemployment and weaker-than-normal consumer spending.

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Why You Should Buy a Rental Property

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It is an out-of-favor asset class that has attracted the attention of David Ackman, a hedge fund manager with a fondness for contrarian investments.  “The best investments we've made are the ones no one else would touch,” Ackman explains.  That's why he's so hot on Single Family Home Rental Property.  They are cheap, he says.  They are a buy.

Ackman argues that Single Family Home Rental Properties possess the identical investment attributes that strongly performing stocks typically possess.  Says Ackman:

We believe we've identified an investment with:

  1. A low valuation – The lowest valuation in at least a generation.
  2. Forced sellers – A large number of distressed transactions.
  3. Extremely attractive financing available – High loan-to-value, low-rate, fixed-rate, long-dated, non-recourse debt, pre-payable without penalty.
  4. Favorable long-term supply dynamics – Short-term oversupplied market, but long-term supply is controlled.
  5. Favorable long-term demand dynamics – Demographically driven demand growth.
  6. Out-of-favor – Currently, this is a somewhat shun asset class.

Ackman's bullish perspective flies in the face of the pervasive pessimism about home-buying. “Experts Say Housing is a Lousy Investment and it Always Will Be,” an August 2010 headline on Yahoo! Finance declared. “The US Housing Market is Headed for a Complete and Total Nightmare,” another financial news service predicted. And just last week, a CNNMoney.com headline warned: “Why Home Prices Could Fall Even More.”

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Mortgage Delinquencies Decline Across the U.S.

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According to a recent survey released by the Mortgage Bankers Association (MBA), the “latest delinquency numbers represent significant, across-the-board decreases in mortgage delinquency rates in the U.S.,” according to MBA’s chief economist, Jay Brinkmann[1]. In fact, total delinquencies (not including homes already in foreclosure) are at the lowest levels since the end of 2008, and mortgages with one payment past due alone are at their lowest level since 2007, which MBA marks as the “very beginning of the recession.”

Perhaps even more more promising: at the beginning of 2010 90-day-or-more delinquencies were at an all time high at the beginning of 2010 but have now fallen 28 percent, and 48 of the 50 states experienced a drop in this area.

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National Economic Outlook (February 2011)

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Although the economy has officially been out of recession for quite some time, those aspects of economic behavior most important to the real estate markets, namely, jobs and borrowing, have remained stuck in the ditch.  The latest data suggest, however, that consumers will soon be spending more.  Jobs are growing at a faster clip, and consumers have done much repair to their personal finances.

Since the end of 2008, consumers have cut 10 percent off their credit card debt, a very large amount that gets them back to where they were before the real estate boom.  With finances at pre-boom levels, consumers will be buying things again, although more cautiously this time around.

Renewed spending is showing up in the retail sector, where jobs at clothing stores were up 4 percent over last year, and jobs at restaurants were up 2 percent.

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Understanding Market Cycles

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In order to make profitable investments, it’s vital for you to understand the cycles of the real estate market because they directly affect the value of properties you may want to consider.

The first thing to understand that just like the weather has four seasons, so does the real estate market have four general cycles – an up market, a peak market, a down market, and a bottom market. In other words, just as temperatures fluctuate during spring, summer, fall and winter so do property prices in the residential real estate market go up and down in their cycles.

However, unlike weather seasons, market cycles tend to last longer – approximately seven to ten years. Keep in mind that these cycles are normal functions of dynamic markets and are affected by factors within those markets.

Now, let’s take a closer look at the four general markets and what goes on in each of them.

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Mortgage Overhaul and What it Means for You

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By the time you read this, the new 2,300 page financial reform bill is likely to be making the headlines. The Senate has already approved the new bill and President Obama is expected to sign it into law this week – despite the fact that many of the provisions related to specific regulations have yet to even be written. If that sounds faintly disturbing, don't worry, your concern is noted and shared by many experts throughout the nation. However, there are sweeping changes that are already apparent despite the lack of specific details.

Although broad in scope, home buyers and sellers are likely to be among the first impacted by the new provisions. They represent one of the most comprehensive – top to bottom changes to the finance, valuation, types of mortgage products offered and how lenders are compensated to take place in decades.  In fact, there are even new rules for that provide capital for the purchase of mortgages.

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National Economic Outlook (May 28, 2010)

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The two large questions on the minds of are: when will the economy recover? and when is a good time to reinvest in the housing market? We think the economy has reached the point where aggressive investors can find good opportunities in selected housing markets. Although the national economy will just be creeping along for another couple of years and home prices will be weak, some local markets have enough long-term potential to warrant taking investment chances.

The latest bad news for the housing market is that the fall in home prices in the last four quarters was worse than expected, showing weak demand for housing and competition for from vacant properties. Overall, home prices fell almost 7 percent, whereas the fall for the four quarters of 2009 was 5 percent. Although the biggest drops were in Florida, California and other markets out West, the effect was felt across the country. The good news is that rental vacancy rates seem to have stabilized most everywhere, and are falling in large markets like Atlanta, Chicago and Miami. On balance, we seem to be looking at a housing situation where the downside in some local markets has become quite small.

Even though the economy grew at a 3 percent rate in the first quarter, the job situation has not improved very much, indicating a much longer recovery period. Over a million jobs were lost in the last 12 months, many in construction and manufacturing. We expect job gains during the next year, but in lower-paying areas such as retail trade and health care. And the number of temporary workers will continue to grow.

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Housing Vacancies Reach New Record

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Housing and rental vacancies have hit unprecedented levels. Included in these record vacancy numbers are a plague of abandoned properties fated for demolition, and millions more homes being withheld from market. Of the more than 19 million empty homes recorded by the US Census, just under 2 million are up for sale, many of them in uninhabitable condition.

Even though the economy remains weak and the housing market, in particular, is still years from recovery, some news suggests that stronger growth can be expected as the year progresses.

A record 19.2 million U.S. homes are vacant, representing the highest number of residential properties that are vacant of all-time, according to the U.S. Census Bureau. The figure represents 14.5% of all the homes in America.

The dismal figure was issued as part of the Census Bureau homeownership quarterly survey for the first quarter of 2010. A total of 19,230,000 homes are vacant, according to the report. The same study shows that 10.6% of all in the nation are vacant, also an all-time record.

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Who Can You Trust?

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Our "favorite housing economist" Dr. Bob Shiller thinks the market (especially housing) is already overheated.  "We are in a very unusual circumstance," says Shiller, "because of the massive bailouts, the homebuyer tax credits, the Fed's purchase of mortgage-backed securities – and these things are coming to an end.  I don't trust the trend we have."

"So the question is, are we at risk for even more price increases, and another bubble?  I think we are at risk, but I'm not predicting it," says Shiller.  "I think it's more likely we don't do so well from here," Moneynews reported Shiller telling The Motley Fool.

So is that "a yes, a no, I know, or a maybe?"

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U.S. Housing Market Intelligence Report (April 2010)

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Categories are graded from A thru F:

Economic Growth:  D+
Spending remains high and income improved, but the unemployment level remains very high. Overall economic growth improved slightly this month, and the results for our economic growth metrics were generally positive. The revised fourth quarter GDP growth rate increased to 5.6%. The pace of job losses eased this month, and the number of mass layoff events is plummeting, but employment has still declined 1.7% year over year.

The unemployment rate was flat this month at 9.7%, but the broader measure of unemployment, the U-6, increased to 16.9%. The length of unemployment in the labor force increased to 31.2 weeks this month, reaching a record high level since the BLS began tracking the statistic in 1948. Personal income improved and has returned to positive year-over-year growth for the second time since December 2008, increasing by 2.0%. The CPI (all items) increased to 2.3% from one year ago, while the Core CPI (minus food and energy) dropped to 1.1%.

Leading Indicators:  C+

Overall leading indicators held relatively steady this month, but several individual metrics actually improved. The Leading Economic Index has increased for the past eleven consecutive months. The ECRI Leading Index – an indicator of future U.S. growth – increased 13.9% year-over-year, and has experienced positive year-over-year growth for the past 10 months. Stocks improved once again in March, and all four major indices have now experienced large positive year-over-year growth, ranging from +43% to +57%.

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