The Houston Association of Realtors recently released the Houston real estate market statistics for February. In a nutshell, sales were up almost 16% year over year and February was the ninth consecutive month of increasing home sales. But you don’t have to read a bunch of data to know that the real estate market is very different this year compared to previous years since the 2008 recession.
Phenomena that had been all but forgotten since 2005 or so are coming back. Multiple buyers competing for the same properties causing bidding wars and driving up prices are becoming commonplace. Where listings would stay on the market six months to a year with no activity just a short time ago, now sales are happening in weeks not months. And this isn’t just an isolated local situation either: Real estate agents all across the country are gleefully reporting the same turn of the tide in their markets. Inventories keep shrinking: There used to be 7-10 months of inventory available on the market and now all of a sudden there’s 3-6.
Now, let’s be clear about one thing. During the recession in Houston, there were declining sales for over two years! Nine months of recovering numbers is a good start but that’s where it stops. We need to see if there will be continued strength in the market through the busy spring and summer seasons before we can call this a bona fide recovery. But at this point, at least in the Houston real estate market, it’s a matter of when versus if. It may take longer to reach a full bloom recovery than the numbers show at the moment but we will get there soon.
So what are the implications of a real estate market recovery on real estate investors? What do they need to look out for as they adapt from a stagnant market to a competitive one? How does the duration of low interest rates play into their overall strategy in the next 24-36 months?
More competition from owner occupants will make it harder to locate properties
If you are an investor that’s been actively pursuing properties in the first quarter of 2012, you have seen this implication with your own eyes. As more owner occupants get off the fence and start competing with investors for the same foreclosures, short sales and distressed properties, it will become even harder to be the winning bidder. Many distressed properties are government owned or administered and as such carry exclusive “first look” periods for owner occupants that eliminate a real estate investor from even competing for a set time. Besides that, owner occupants are looking for great deals as well – meaning homes priced below fair market value – but a good deal to an owner occupant doesn’t have to have as much built in equity as you need when you’re an equity investor. For example, if a home is worth $120,000 and priced at $90,000, the asking price is probably the highest price that would make sense to an investor whereas the owner occupant might be happy even at $100,000 or $105,000. So, competing under those conditions will be very difficult for real estate investors.
Cash investors seeking yield are entering the market in thousands
Not only do investors face stiff competition from more confident owner occupants, but also from fellow investors that are cash buyers and seeking strong returns on that investment. The banks and institutions that hold these properties largely prefer cash offers because they’re guaranteed to close and close quickly. There are no financing contingencies, no loans falling through, no complications. In the event that you have two equal offers – a cash and a financed one – the cash offer will always win the bidding. And cash buyers have an edge in this fight: Generally equity takes a secondary role since what they are looking for is primarily, yield.
Interest rates are only here for a limited time
Competition and the fight to acquire properties has always been a part of the game for real estate investors to some degree. Therefore the prospect of missing out on the acquisition of properties isn’t new either. Except that it’s more complicated that when you throw interest rates into the mix. A few weeks back, one of our clients locked a 4.25% interest rate on an investment property. Your rate may vary somewhat but that doesn’t obscure the fact that interest rates are a major factor in changing the fundamental numbers and the investing landscape. The problem is they’re only here to stay for a limited time. Bernanke said the FED will probably keep the rates at the same level through 2014. But that’s assuming that there won’t be an acceleration in recovery and a rise in inflation. Predicting the future isn’t part of my skills set, but I can tell you this much: The damage caused to your real estate portfolio’s returns by your inability to add quality assets to it in a favorable interest rate landscape will be much higher than the equity dollars you’re supposedly leaving on the table.
Continued strength in rental market and rising rents
While there is justified skepticism about the presence and strength of a recovery in home sales, the rental market has been bullish for the better part of three years. In the latest report from HAR, rental properties were up 21% over the same period in 2011. Meanwhile, from the trenches we can report that the average days on market in quality locations are usually under 30 with Landlords typically getting 100% of asking. In addition, properties that would rent for $1000-1100 in 2006 are renting for over $1350 every day of the week. This matters because you can choose to look at this from two different perspectives. The shortsighted view that looks at the short term metric of initial equity and nothing else. Or the birds eye view that sees increasing rents as a counterbalance that overcomes the former strategy’s returns over the long run.
Smart real estate investors have to think strategically and adapt to the coming change. Why would you choose to compete in an impossible landscape and settle for inferior left overs on purpose? It may take you 5-10 bids and the tens of hours wasted before what I’m telling you truly sinks in. And you’re more than welcome to go down that ride to see for yourself. But if you want to get about your business and add some crucial pieces to your portfolio in a favorable interest rate and rental market environment, instead of fighting the usual suspects for overpriced properties, listen up. Don’t participate and refuse to fish in the same river as everyone. Initial equity does not matter in a solid long term strategy despite what you may have been told. Quality does. Call my cell at 713-922-2702 and I will show you a different way to invest, to build wealth and retire. A way that’s based on a well thought out Blueprint and doesn’t involve fighting with newbies for overpriced inferior properties.