Real estate has always been an attractive investment since
it appreciates in value over time with the added benefit of positive monthly
cash flow. Investors can buy low and sell high while making profit along the
way. This has never been more true than now as the global financial crisis
that briefly shook the nation's confidence in housing has since yielded one of
the
most lucrative real estate investment climates in
history. There are six major contributing factors that can help explain
why:
1. Home Prices are Rising
The Federal Housing Finance Agency (FHFA)
recently released its
House Price Index which shows that year-over-year national
home prices rose 4.7% from August 2011. Home values have reached the same level
as in June 2004 and are just 15.9% below the peak prices experienced in
April 2007.
2. Housing is More Affordable
Home ownership is becoming
more affordable than renting at an increasing rate.
Historically low mortgage rates coupled with rising rents has now made it
cheaper to own than rent in most markets. Because
the majority of home buyers make their buying decision based on the
amount of the monthly mortgage payment, interest rates are an
even larger factor than home prices.
As an example, in
1992 a $1,500 mortgage payment would permit a buyer to purchase a $175,000 home.
Yet at today's
unprecedentedly low interest rates a $305,000
house would yield the same $1,500 monthly payment. That's an astonishing 75%
increase in buying power! Accordingly, the
Wall Street Journal graphic below illustrates how the monthly
mortgage payments for the median priced home are trending lower than the average
rent levels in the majority of U.S. cities now.
3. Households are
Growing
The formation of
United States households is increasing home buyer demand at a rapid pace again.
In the wake of the Great Recession from 2006 to 2011, a relatively low average
of 570,000 households were added per year across the country. But the year of
2012 is on pace to add over 1 million new households, which
is more in line with the normal U.S. population growth rate of 1.2 million
households per year.
4. Less Distressed
Sales
The inventory of
foreclosures for sale in 2012 is down in most areas of the
country. As shown in the graphic below,
RealtyTrac reports that
forclosure starts are down 16% from the previous year and are are 55% lower than
the peak levels reached in 2009.
CoreLogic has also reported that U.S. forclosure filings have
steadily dropped for 3 consecutive quarters throughout 2012. Since foreclosed
houses are typically sold below market value, foreclosure sales have
kept comparable home prices artificially low in recent years. Now most local
markets have stabilized and have seen significant appreciation in values
again.
5. Rents are
Rising
Purchasing a home is
looking more affordable to owner-occupants and increasingly attractive to
investors as rents continue to rise across the nation. Rents rose 4.1% over the
course of 2012 and will continue to rise at a rate of more than 4% per year
through 2015 according to the
National Association of Realtors and market researcher
Reis.
According to
Deutsche Bank housing analysts,
the average cost to rent has traditionally been 10% lower than the cost of
homeownership. However, Deutsche Bank's research showed that by 2012
the national cost to rent was almost 15% higher than the cost of owning a
home.
6. Housing Inventory
is Low
The amount of new
homes for sale is at its
lowest level in 50 years as home builders virtually halted
construction over the past 3 years due to a poor economic climate. Inventories
of
existing homes for sale are at a 10 year low, and are sharply
down over the past year. This scarcity of available homes has pushed buyer
demand into competitive bidding situations and has significantly reduced
foreclosure discounts.
History has seen
very few years where housing demand has leaped so far ahead of supply like it
has over the course of just one year. Will we all refer to 2012 as the year we
should've invested in real estate?
