Whatever you want to say about the toddling real estate recovery, it’s certainly not boring. Even though it’s so young that it’s still in diapers, it’s surprising the experts as it delights and disappoints simultaneously.
After several false starts, the recovery looks to be real this time and the longest real estate depression in the nation’s history is beginning to end. Some are now even talking about the real estate recovery outpacing the overall national economic recovery, which may or may not be a good thing. It is important to note, though, that the housing recovery is still very fragile and an economic shock generated by the European debt situation, for example, could abort it.
Fundamental changes are underway in real estate markets nationwide, but not at the same pace everywhere, Nor has it arrived in every market. Real estate, of course, is stubbornly local and what’s going on in one place may not yet exist in another.
The Game is Changing
As discounts shrink, distress sale inventories dry up and competition stiffens in markets like Phoenix and Las Vegas that have been the center of real estate investing, many investors are worriedly asking what the future holds. The game is changing, and with it the strategies to succeed. But the rules are the same. Buy low, control costs, generate cash flow, and sell at a good profit.
The recovery is not a place but a process. A pattern is emerging in markets at different stages of the process and it’s possible to understand and anticipate what will occur elsewhere. For example, in its July market report released yesterday, Clear Capital described how strengthening fundamentals are finally allowing prices in some markets, especially in the West, to move beyond stability and into a seemingly sustainable growth mode.
“Housing gains in the West continued to lead the nation, and more importantly, for the second month in a row, the price rebound has broken out of the low price tier segments into higher priced homes. As the pool of buyers expands, the West continues to position for the next phase of recovery,” said Dr. Alex Villacorta, Clear Capital’s Director of Research and Analytics.
In other words, recovery is beginning in the lowest price tier and working its way up. Mid and top tier price segments in the West reported yearly gains in July of 5.0 percent and 2.7 percent, respectively. These gains indicate the buyer pool in the West has expanded beyond the segment focused on investment opportunities in low tier homes, to the owner occupied segment purchasing higher priced residences.
Limited Bandwith for Investors?
Villacorta sees the expansion of the recovery as bad news for investors. “Ultimately, the investment sector has limited bandwidth. While they’ve helped to jumpstart a recovery in many markets across the country, it isn’t realistic to expect sustainable growth from this segment alone. A more robust recovery will require a revival in demand across price tiers and buyer pools, as is starting to happen in the West, and will be tested over the next several months,” said the Clear Capital report.
Not everyone agrees with Villacorta that the investor market share will decline. “Looking forward, the outlook for our nation’s housing markets is brighter than it has been for some time, but the housing recovery will proceed at a slow pace. The upward trend in existing and new home sales over the past six months has been modest relative to the plummet in sales between 2005 and 2009. Downside risks for housing are lessening, but high gas prices, troubles in the euro zone, and the potential for rising mortgage interest rates still muddy the outlook. In summary, 2012 offers favorable investment opportunities to investors seeking competitive annual returns (rents) and significant price gains over a longer term time horizon,” wrote economist David Lereah in March.
Moreover, many experts see markets on the rebound as good candidates for both investment or owner-occupants because the near term outlook for appreciation is better that it has been in years. For example, Pro Teck Valuation Services’ August Home Value Forecast Update explores which hard-hit metros may be the next Phoenix, AZ?markets where bargains are still available but prices are poised to take off.
Is Sacramento the New Phoenix?
“Two previously hard-hit metro areas that stand out are Orange County (Santa Ana) and Sacramento, California,” said Tom O’Grady, CEO of Pro Teck. “Sacramento is particularly interesting because like in Phoenix, home prices overshot on the downside after the market peak in 2006. All nine of Sacramento’s market-based indicators are exhibiting positive changes from a year ago. For example, the number of active listings is down 39.21 percent, months of remaining housing inventory down to 3.65 months and foreclosure sales down 52.79 percent.”
To help predict the longer-term cyclical turning points of real estate markets, Home Value Forecast partner Collateral Analytics previously developed a Leading Real Estate Index (LREI) for all Core Based Statistical Areas (CBSA) in the U.S. This Leading Index is based on a number of fundamental factors that drive real estate markets, such as employment growth, home sales activity, the unemployment rate, housing affordability index, new building permits, etc. The LREI is a “diffusion index” that measures how many components of the LREI are moving in a positive direction at any point in time. The LREI passing up through a value of 50 is a good precursor of a pending increase in home prices while a move down through 50 is a signal of flat or declining prices.
“Sacramento’s LREI has been climbing over the past two years and recently shot up to a value of 50, which means that half of its components are moving in a positive direction relative to their historical performances and that further home price appreciation is expected,” added O’Grady. “Another important factor supporting home prices in Sacramento is affordability. This month’s Home Value Forecast shows that Sacramento’s housing affordability index is at its highest level in years. Also, in many areas of the Sacramento market, we are seeing nearly every ZIP code classified as “good” or “normal” according to our most recent Market Condition scoring system, which is in contrast to the weakness in the market a year ago.”
This month’s Home Value Forecast update also includes a listing of the 10 best and 10 worst performing metros as ranked by our market condition ranking model. The rankings are run for the single family home markets in the top 200 CBSAs on a monthly basis to highlight the best and worst metros with regard to a number of leading real estate market indicators, including: sales and listing activity and prices, MRI, days on market, sold-to-list price ratio and foreclosure and REO activity.
“Our market of interest this month, Sacramento, is one of four California metros in the top 10,” said Michael Sklarz, Principal of Collateral Analytics and contributing author to Home Value Forecast. “New additions this month include Seattle, WA, Richmond, VA, and Grand Rapids, MI. All of these markets have experienced significant declines in active listing counts over the past year. This has led to most of these markets currently having balanced or tight markets based on their remaining months of housing inventory.”
Photo: Casey Serin