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Three Forces Driving Real Estate Sales and Prices

Posted on 08. Jan, 2013 by Marc Courtenay in Real Estate

An investor friend of mine called recently to ask if I could recommend some competent property managers in our area. Fortunately I knew of several so I gave him the names plus the pros and cons of each one (my way of being helpful and objective).

In the course of our conversation he told me that mid-range houses were being snapped up by income-oriented investors the same day they were put on the market for sale. His agent told him that rogue speculators and investment syndicates (similar to Real Estate Investment Trusts) were on the prowl.

The modus operandi and objective of these investors involves using government and Federal Reserve incentives and very low interest rates to buy houses, fix them up and rent them out. Then in time, as the property develops a rental history with positive cash flow, they’ll put them back on the market with the hope of selling them for a profit, using the money to search for more houses.

My colleague Lou Basenese, the Chief Investment Strategist at “Wall Street Daily” had 3 more reasons that speak to the ongoing recovery in the housing market, especially the houses that can be purchased and used as rentals.

He called the first big driver “Affordability”: He wrote, “Mortgage rates haven’t been this low ever. Median home prices are back to late 1970s levels. And that’s driven the mortgage-to-rent ratio down to a record low (under 0.70). In other words, there’s never been a more affordable time to buy a house. And a gradually improving labor market promises to encourage more and more Americans to take advantage of the once-in-a-lifetime bargains. Especially since banks are bound to start loosening their overly tight borrowing requirements, in the words of Fed Chairman Ben Bernanke. Sounds like a direct order to me.”

I agree with Lou that the Fed has given lenders a virtual mandate to start lending. I just refinanced my house for 10 years at 2.99%. The second reason he gave for the boom in mid-range housing sales is demand and under-investment.  In Lou’s words, “While the number of households has increased by over one million in the last year, housing starts were actually the lowest in 52 years in 2008, 2009, 2010 and 2011.”

In a number of regions in the country there’s a growing shortage of affordable rental houses. As I’ve stated in past articles, there are more couples and families who can’t qualify to buy a house than ever. They are the new wave of renters who will be the property managers’ new residents.

The last reason Lou offered as well as a colorful chart, has to do with “Momentum”. This is a powerful notion worth understanding. “Real estate tracker Zillow (Z) reported that prices bottomed out for 71% of U.S. housing markets by the end of the third quarter 2012. Many markets are now witnessing price increases. And the one thing I know about rising prices? They encourage even more increases. Or as Joshua Steiner and Robert Belsky of Hedgeye put it, “Housing is highly auto-correlated. Strength in prices will feed back into strengthening demand, which will further reinforce prices.” “The good news is, even after the latest price increases, we’re still nowhere near the peak levels. So there’s still plenty of room for even more price momentum to take hold [see the chart below].”

The housing market is definitely recovering. The statistics and anecdotal evidence is mounting. Let your clients and owners know and ask them if they’d like to increase the number of units they own as well as their net income. The answer will probably be yes, so get ready to offer them solutions.

Tags: economy, Real Estate