Housing Market Predictions for 2013

Unprecedented Times
Who doesn’t want to know the future? Those aware of the real estate market today know that we live in unprecedented times. In 2008, there were 24 months of housing inventory nationwide. Anyone who wanted to buy a home had so much choice they could name their price. It was a buyer’s market nationwide. Cash buyers ruled the day.

As late as 2010, there were still months long supplies of homes on the market. Then something started to shift. Days on market numbers started to shrink to levels not seen since periods of speculative real estate buying. Today, in some markets there is only a 30 day supply. How could this transformation of the market occur in such a short time?

Housing is Hot in Many Markets
In past market cycles, a rise in interest rates usually accompanies low inventory. We are convinced this will happen again. In fact, housing prices are going up in many markets nationally even without employment improvement. It is defying all precursors. Why, you ask? Here are some reasons:

Interest rates today are the lowest in recorded history. This spurs buying and demand for housing.

REO agents have 1/100th of the inventory from just months ago. The REO supply is down 35% in California and other markets.

There are two forces that the economy has been struggling with:
1) How to raise the price of homes; and 2) How to forgive trillions of dollars in bad debt.

Currently, rental rates are on the rise in California. In fact, it is $3760 a year cheaper to buy in California than it is to rent. The trend is the same nationwide. 

Because interest rates are so low, people are willing to over pay for a house because even $50,000 more in the purchase price does not add much to a monthly payment.

People are moving to real estate as an investment and competing with each other for the opportunity. Even regular home buyers are competing against investors for housing.

The supply of homes is down to below 2.7 months, further spurring price increases.

The policies in place that drove the DOM down are the same policies that will drive the prices up.

The economy is solving the bad debt problem from the ground up. There is no government agency capable of curing all the defaults.

Debt is being forgiven through short sales which pay t
he home owner an incentive. Also loan modifications are increasingly being used.

Equity sales now comprise 63% of sales. REOs 11%. Short sales 24%.
The shadow inventory sold by FHA stipulates that you can’t foreclose on more than 50% of what you buy in bulk. This means that many loan modifications are keeping weaker buyers in their homes rather than bringing those homes onto the market.

Citibank is starting a lease-back program which is a sign that even banks have figured out that housing is getting hotter and the ability to provide housing is an income generator for them.

Yet while all these economic forces are driving down the housing supply and driving up prices, subdivision creation is way down.

While not hot yet, buying lots by construction companies is forecast to be big in the future to provide housing for an increasing supply of aspiring home buyers.

Buyers, Buyers Everywhere
Take a look at the market today. Buyers are everywhere. Investor cash buyers comprise up to 25% of buyers today. Other buyers are foreclosed homeowners from 3 years ago who can now get an FHA loan.

It is projected that a consumer today can raise a 720 credit score in only 9 months after a foreclosure. The pool of home buyers who have struggled in the past has changed the FICO averages and made it easier to raise one’s score above other consumers. And as many “new” buyers are being created, prices are being driven up further.

Add to this the generation of 20- and 30-somethings who had to move back into their parents homes after college to survive the downturn who are getting tired of living with mom and dad. You can bet that as soon as they can move out, they will, further putting pressure on housing supply.
With all the new buyers coming into the market, we have to ask, “Where’s the inventory going to come from?”

Will it come from?:

• REOs: No, the banks are not moving forward with foreclosures and instead are approving more short sales when it is in their self-interest. In fact, 40% of loans that are in foreclosure have been in that state for 2 years or more. Banks have benefitted by delaying foreclosures because prices have risen to cover more of their loans.
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• Private owners with equity: There are not enough of them to meet the demand.
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• Short sales: Not all banks are willing to do a short sale and are instead “sitting on them” waiting for appreciation to cover their loan.
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• Investor flips: Investors are holding their properties in hope of appreciation.
• New construction: This is years away because building lots are not being prepared.

Trustee sale: Bidders are paying 92 cents on the dollar. They are buying to hold so these houses are not going back to the market.
In short, there are not many forces in effect to bring more houses to the market to meet demand.

And big buyers like Carrington, Waypoint and others are coming into the single family market to buy up rental inventory. They target single family homes <270 days on the market, 1-4000 SF, built in 1970 or newer, 2-5 bedrooms, 2 bathrooms. They are buying from investors, MLS, trustee sales, bulk loans, and bulk house purchases.

Demand is Up, Supply is Down
We have to stop and think, “What happens when the supply is shorter than the demand?” We are predicting a 20% increase in prices in California and in the more popular markets nationwide.

What happens when prices increase?
    Those with negative equity make their payments.
    The number of move up buyers increases.
    The interest of first time buyers is spurred.
    Eventually prices rise to the point of making new construction profitable again.

    When housing improves, construction employment improves, which leads to better employment figures overall.

    As construction jobs return, migration occurs into markets with higher employment.

    New construction jobs add to the tax base which begins to solve municipal debt problems.

Eventually speculation in housing comes back.
Lending guidelines with FHA have actually supported rising property prices because only 3% of buyers today are approved for FHA loans. These are the cream of the crop buyers who can afford higher priced homes, which drives up prices.
  
 Yet we are far from an affordability breaking point. In fact, as prices rise, they act as an accelerant for even higher prices as panic ensues to buy a house before prices rise even more.

What Should Investors Do To Profit?
The “subject to” strategy is hot right now as an investor buying a house subject to the existing financing can get a loan with a low interest rate in an appreciating market. Appreciation is largely a function of the underlying land. Did you know that 95% of the price increase on a house is from the lot itself?
This bodes well for land owners and those who have the foresight to put land under control and wait until land values rise until construction companies who may have sold out just a few years ago come calling to buy land again to supply needed housing.

Investors would be wise to look for lots where building was intense in the past and then it stopped in the market downturn in 2007. Those lots are very cheap right now. Someone else has already divided up the land to get it ready to build. These are also called, “in-fill” lots.

Summary
In summary, housing prices are going up in California (and in many markets across the US) because of stricter lending requirements, investors buying up real estate, low interest rates, the banks holding back REOs in favor of short sales, hedge funds entering the real estate market, “new” buyers coming into the market, and FHA guidelines which put only the most capable buyers on the market.

Because of the increase in interest in real estate, and the increasing need for new housing, though land is cheap now, that will soon change. Those who have the prescience to anticipate the future boom in land development would be wise to find ways to control buildable lots that will skyrocket in value from their market bottom.

As well, investors who want to benefit should find property they can buy “subject to” the existing loan and then seller finance or lease option the property with a low interest loan in place because buyers will pay a premium with bank financing difficult for many.

In short, those who read the signs of the market can benefit greatly by using smart investment strategies that work in today’s market.  

(This article adapted from a Bruce Norris speech in November 2012)
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Brian Netzel has been a real estate and note investor since 1982 when he bought his first rental property on his public school teacher salary. He is now focusing on turn-around projects using distressed assets nationwide.
Brian Netzel is the acquisition manager for the private equity firm Inspired Capital Partners and the founder of SmartMoneyVision.com and RealEstateNoteInvestor.com which train investors to apply smart strategies that work in today’s real estate market.