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The new normal
As the overall real estate market continues to recover across the U.S., there is now becoming a new normal for property investors. Compared with the last several years, investors need to be aware of several important changes in the marketplace. Understanding these changes is crucial to properly allocating your real estate investment dollars in the foreseeable future.
Inventories are stabilizing
As the foreclosure crisis slowly becomes a foreclosure way of doing business, and the overall volume of foreclosed properties continues to drop, the real estate market will respond by pricing rebounds. The less inventory, the more demand. This is simple, basic economic theory. Banks have been selling off their inventories of distressed properties to investors in record numbers over the last few years. And that huge glut of foreclosures has now been worked down to a manageable amount. Investors who bought them are now reaping the rewards of either flipping or holding them for rentals. This slow lessening of housing inventory nationwide will invariably tighten the overall marketplace.
Investment loans are getting costlier
Interest rates have remained at record lows for quite some time – almost three full years. That’s about to end. The Federal Reserve has indicated they may tick rates up slightly later this year, based on the continued slow but steady economic growth pattern exhibited in the U.S. last year. Rates should remain relatively low through the end of the year, on average between 3.5 to 4 percent. But the lowest rates have already come and gone. In addition, expect the credit markets to remain tight for property investors, making qualifying for a mortgage much more difficult.
The Ability To Repay Rule makes borrowing more difficult
As mentioned in one of my recent articles posted here, the Consumer Financial Protection Bureau instituted a new rule to make sure lenders prove that borrowers can actually repay the mortgage they’re applying for. Obviously, this was created to help protect the entire U.S. banking system, and avoid the collapse we came through over the last few years, as no-income mortgage lending was the norm – and got so many homeowners into hot water as they could not repay their loans. So now all lenders must verify all assets, income and debts of every borrower. In order to now qualify for a loan, the new norm here is that investors are obtaining mortgages from hard money lenders, with higher interest rates and much shorter terms, in record numbers.
As inventories level off, expect a construction boom
Records indicate that building permits for single family homes nationally are up about 25% from the past year alone. With the near-record low interest rates currently available, builders have been gambling on pent-up demand in the housing market. And it’s a demand that has been held back since 2007. New home prices have been rising faster than existing single family homes of late, and builders also want to take advantage of this trend. However, this expected larger supply of homes could keep prices down over the next year.
Valuations continue to level off
While a majority of local real estate markets saw increases in house prices over the last year of about 9 to 10 percent, due to shrinking inventories and low interest rates, this year should produce more modest gains. Economists feel these price increases will probably be in the 2 to 3 percent range. Naturally, everything is an average, so there will still be some areas of the country, like in the Northwest, which will continue to remain hot regarding price increases. But others will lag, and some major cities will continue to show little or no growth. These include cities like Denver, Atlanta and Chicago.
Investors continue to feed on distressed properties
As mentioned above, it’s getting harder to find great foreclosure deals these days, as the sheer supply of distressed properties plummets rapidly. Most large investors have gobbled up the best foreclosure deals. Real Estate Investment Trusts (REITs) enlarged their portfolios over the last two years, buying huge numbers of distressed properties, then fixing them up and renting them out en masse. Still too, many banks decided to hold a number of their foreclosures, add value to them by making minimal repairs, and have placed them back on the market with higher prices. But overall, as the inventory has declined, house prices have rebounded.
photos courtesy of reiwa.com.au, blogs.va.gov, legalrefinance.com, builderonline.com, vamortgageveterans.com, guardian.co_.uk, biz.thestar.com.my