Housing Recovery, 2013 Style. Acceptance versus Resignation.
According to the Wall Street Journal, even though mortgage rates are at low, and sales are at the same level as 2007, mortgage lending is at half the velocity today as it was in 2007.
Yes we are in recovery, but it’s a bit strange and I would like to talk about why. It’s not just that 35% of all sales are now cash versus a 15% cash to finance ratio in 2007. (That’s that national average, my guess is that the Southwest Florida home purchases are more than 50% cash). There are a number of factors in play in our recovery.
Recovery in the housing market has a multiplier effect that certainly is a huge player in the general economy including an uptick in appliances, furniture, electronics, building, and general employment. We indeed are a more real estate driven economy than say, the rust belt.
Here is Florida we watch housing starts like Detroit watches numbers of cars produced. We watch housing inventory like the farm belt watches corn and soy bean production. Today our housing inventory is down, our building permits are up, prices are on the rise, and rents are on the rise. Why?
Many of the homes that are being bought for cash are being bought to live in, but certainly many of the homes are also being purchased by investors, not just to flip, but to build a portfolio for the rental income. Investors today are hungry for returns. Those that have cash are shy of the financial markets and are looking to rental income to get those yields they cannot get elsewhere. It’s not just the street smart real estate investor buying, fixing up and renting; there are big players in our markets assembling large portfolios of rental properties, from Canada, Great Britain, and of course some U.S. based fund groups.
These groups are buying because they can get very low interest rates – interest rates that were meant to attract the individual home buyer – and the returns on rental property are attractive today.
Net returns of over 10% are attractive. I have to admit I was skeptical when I heard groups like Blackstone building large portfolios of homes. I thought they were paying too much for the houses. But the individual guys were looking for much higher returns than they were.
Companies like Blackstone have the benefit of economies of scale for management and repairs, and the asset play (profit when they sell) is a great kicker for their investors. A small guy might want over 20% return. The big money needs less. And it’s a good thing because they have millions to place.
Resignation versus Acceptance.
Investors and home owners alike have gone through the resignation phase in our economy and are now in the acceptance phase.
The resignation phase was the phase that had the attitude, “It doesn’t matter what I do, the market is out of control and I am resigned to the consequences.”
In the acceptance phase we put the facts on the table, we deal with them, we accept them, and we move forward. We get it. We get the consequences, we understand them, and we want to take control.”
To my friends, clients, and associates, we are in the acceptance phase, “moving to the take control again” phase. I believe this feeling is a large reason for the recovery, if not THE largest. We are now accustomed to gas prices where they are, unemployment where it is, government ineptitude, and we already have our belt tight. We are looking around saying, “Ok, let’s get back to business.”
My attitude is up, not looking back, not down, but up. I believe many others feel the same way. We have our cards, let’s play.
We are in recovery because it’s about time (resignation versus acceptance); interest rates are low thanks to Federal mortgage and bond purchases; pent up demand from baby boomers; large investor pools buying; and previous owners who were foreclosed on are now entering the market again. But what’s next? Where will we go from here?
The investors buying today are not the over-leveraged-bubble-causing investors of 2005, so I do not fear another bubble. These rental owners will cash out as they see prices allowing a sale with an attractive capital gain and rates on more traditional investments become attractive again, encouraging that sale, and calling for those funds. But being a landlord is certainly not management free and this will wear on many landlords. But there will be no dumping of rental inventory. It will be gradual and not for a few years.
I am looking forward to the balance of this decade for growth in my personal real estate portfolio. I believe we can all make money in real estate again and I personally am buying rental properties as I am able to. I believe low interest rates will be here for a while, but also believe that the return to high interest rates will happen suddenly, as will inflation. I want to own real estate when that happens, not cash.
As always, I enjoy your comments and questions.
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