The housing market continues to move solidly in some respects and less desirably in others. It’s an interesting environment – investors will need to decide which factors should weigh more heavily in their investment decisions.
Do Election Maps Also Reflect an Economic Divide?
The split between pricey urban and coastal areas and more affordable inland regions seems to be widening, and investment winners and losers often seem to be based largely on geography.
Average U.S. home prices rose 5.6% in the 12 months through October 2016, according to a survey of most of the U.S.’s largest metropolitan areas. On average, prices in the reviewed areas had plummeted 27% from their peak 2006 heights, and adjusted for inflation are still 15% below that peak.
Yet much of the spoils have been concentrated on the high end. Homes in zip codes where the median value is in the $500,000 to $1 million range are up 103% since 2000; but in regions where homes are in the $100,000-150,000 range, that period’s appreciation is only 24%.
This translates roughly to an urban vs rural divide. Urban areas have recently benefited from influxes of younger workers seeking high-paying jobs – and those areas’ land-use restrictions also constrict supply and drive up prices. Rural areas, on the other hand, have seen flat housing demand, with little new supply and more people leaving for larger cities and coastal regions.
House Flipping and Teardowns Are Still Going Strong
House flipping remains a lively market. The number of investors who flipped a house in the first nine months of 2016 reached the highest level since 2007. Flipping investors are seeing average profits of approx. $61,000, according to RealtyTrac and ATTOM Data solutions. Rising home prices, the relatively limited supply of housing, low interest rats, and increased demand from institutional investors are all helping to drive this market.
Some observers worry that such activity is a sign of a frothy market – but others believe that the reality is more nuanced. “While the macro trends of low housing inventory and rising home prices are favorable for flippers, they are also a double-edged sword, attracting more competition and reducing the availability of deals — particularly in the most fundamentally sound local markets,” said Daren Blomquist of RealtyTrac. “This is chasing some investors into markets and neighborhoods that may be less fundamentally sound but also offer more value-add opportunities for flippers in the form of aging housing inventory.”
The renovations of aging homes – or even their complete replacement — is where many flippers and developers are focusing their efforts. “A lot of the [older] homes have outlived their usefulness,” said Rob Fisher, founder of Fisher Custom Homes in Northern Virginia. Across the country, teardowns represented almost 8% of single-family housing starts, according to the National Association of Home Builders. The East Coast’s Boston – Washington corridor, with its older housing stock, is a particularly popular region for replacement projects, since many suburban neighborhoods are already established and may feature well-regarded schools.
But Many Millennials Continue to Live with Parents
One reason that some observers believe that the market is not yet peaking is that homeownership rates remain historically low, especially among young people. Despite a rebounding economy and recent job growth, almost 40% of persons between the ages of 18 and 34 are doubling up with parents or other family members, the largest percentage since 1940, according to real estate tracker Trulia.
Analysts point to rising rents in many cities and tough mortgage-lending standards as the culprit, making it difficult for younger Americans to strike out on their own. “I don’t think those are challenges that are going to keep young households permanently out of the housing market, but it may keep their homeownership rate near historic lows for likely the indefinite future,” said Ralph McLaughlin, Trulia’s chief economist.
And Luxury Apartments Seem Overbuilt
2016 saw some concern that there might be too much new supply of high-end apartments – and 2017 can likely bear out those concerns. Landlords of upscale properties across the U.S. are bracing for rough conditions in 2017 that will likely force them to slash rents and offer deep concessions as a glut of supply brings a seven-year luxury-apartment boom to an end. More than 50,000 new units were rented by tenants in the fourth quarter in the U.S., but that demand was overwhelmed by the 88,000 new units that were completed in the quarter, the most since the mid-1980s, according to MPF Research, a division of RealPage Inc. that tracks the U.S. apartment market.
Most of the new construction in recent years has been on the high end. Of 189,100 multifamily rental units completed between the fourth quarter of 2015 and the third quarter of 2016 in 54 U.S. metropolitan areas, 84% were in the luxury category, according to CoStar Group Inc., a real-estate research firm. The firm defines luxury buildings as those that command rents in the top 20% of the market. Renters would need to make at least $75,000 a year to afford 88% of those units, according to CoStar.
The flattening of rents in 2017 could shift the financial equation back toward renting, posing potential challenges to the housing market. Rents in San Francisco, New York, Houston and San Jose, Calif., all declined about 1% year-to-year in 2016, according to MPF.
The sluggishness is expected to spread across the U.S., hitting markets from Nashville, Tenn., and Dallas to Los Angeles and Atlanta. And in some of the country’s more expensive markets, the slowdown at the top end is showing signs of trickling down to more average-priced apartments. “We’re just being really selective,” said John Cannon, a senior vice president at Pinnacle Financial Partners, a Nashville-based financial-services company that has increased its focus on multifamily lending in the last couple of years. “Multifamily has a large number of units on the ground that they really have to demonstrate some absorption.”