Above: RealtyTrac’s Worst Places to Buy a Foreclosure
Las Vegas? Phoenix? Stockton?
Are you kidding me?
Those are hallowed names in the history of America’s foreclosure nightmare, cities where subprime defaults set off the firestorms of foreclosures that brought the national housing economy to its knees.
They were the markets where modern-day residential investing was born. The perfect storm of a plentiful supply, affordability and rents driven up by families who had lost their homes created the first wave of REO-to-rental millionaires.
Today they are still centers in the residential investing movement, and the site of newly formed large scale investment operations like AZ Equity Partners and Waypoint are active. However, the geography of foreclosures has changed radically over the past year and now they are no longer at the top of the list to buy and rent out a foreclosure, they are at the bottom.
Last week RealtyTrac named those three markets to its top twenty list of Worst Places to Buy a Foreclosure in 2013. They join other former hot spots like Boise City, San Jose, Fresno, Bakersfield, Oxnard and Modesto who all share a common history. They were hot during the boom, prime territory for alternative loans and owners quickly went underwater. Last year California markets regained value with the help of extraordinarily low inventories and today, foreclosure activity is down and prices are up. Inventory, foreclosure prices, foreclosure activity and foreclosure discounts were the four measures RT used to rank best and worst markets.
The Worst Places list includes a group markets whose profile is virtually the opposite of the foreclosure hotbeds. These are McAllen TX, Ogden UT, Little Rock AR, Salt Lake City, Buffalo, Provo UT, Honolulu Austin and Knoxville. Most of these places never saw the boom driven by easy financing that drove housing prices through the roof and as a result, they didn’t experience the bust. Subprime financing was rare and foreclosures, except those driven by unemployment in cities like Buffalo, never amounted to much. These markets made RealtyTrac’s list of Worst Places to Buy a Foreclosure in part because there aren’t many of them. When there are fewer foreclosures to start with, it doesn’t take many to register a double digit decline or a shrinking of the foreclosure market share.
Only Part of the Story
Unfortunately, the RT ranking tells only part of the story, perhaps the least important part for the REO-to-rental investor. The ranking looks only at the acquisition side, not the income side, of the equation. Rents and cap rates are increasingly important to investors, especially as the supply of foreclosure victims declines and competition stiffens from a new wave of multifamily housing coming on line. Sacramento, Austin and San Jose are three of the hottest rental markets in the nation. Their rents are soaring because their economies are hot, which means they will continue to be hot. Do they really deserve to be on this list?
Would Phoenix, Vegas and Stockton be on this list if rents were included? Probably not. From all reports, rental demand is strong in those markets and investor/landlords are not only enjoying good cash flow but they are also experiencing appreciation in the value of their properties.
RealtyTrac can’t measure rents because it doesn’t have rental data. In fact, few people have good SFR rental data, which is a different category than multifamily. SFR rental data is as different from multifamily as single family homes are from condos. Because the business is dominated, or at least has been to date, by many small investor/landlords and small regional property managers, collecting good SFR data has not been easy. Zillow uses its AVM to provide rental values for individual properties, which is a reasonable substitute.