2014-01-08 / Business News

Real estate’s new normal is good news for everyone

MONEY & INVESTING
jeannetteSHOWALTER, CFA

In May 2012, the headline for this column was “National housing study reports the worst is over.” And ain’t that the wonderful truth?

The title referenced a then-recent study; “A credible, nonprofit think tank group has released a comprehensive report on the state of the U.S. housing industry that indicates the worst is over. The Demand Group is forecasting a turn in U.S. housing after six years of steady declines and after a loss of value of some $7 trillion in that asset class.” The 18-month-old study is worthy of reading if just to understand the basis for the correct forecast.

In fact, since May 2012, the U.S. housing market has seen significant improvement in prices. In Florida, the turnaround is very clear. New residential construction abounds on the Florida west and east coasts, in the form of new builds by homeowners and speculative builds by developers, investors and contractors.

Most buyers want to know the future before they make any new residential real estate investments. While the future is not knowable, there are some tea leaves that would suggest that residential real estate can continue upward and that will, in turn, continue to grow the economy.

There are many factors that impact residential housing prices.

1. As the total U.S. population grows, more households are formed. Unless they are incredibly hard pressed, children will exite the parental home and establish their owno home. While there is stagnation in growth of the U.S. population, there remains pent-up demand for housing by households formed post-2008.

2. As prices rise, the investment aspect of home ownership becomes increasingly more attractive to those looking for investment opportunities. Most investors are not capable of buying into a falling market and cannot predict when the bottom is in place, so they wait for the market turn and evidence of a meaningful price recovery or stabilization.

3. As prices rise and the economy is improving, the banks become less squeamish about lending and credit terms become less stringent. They are also able to lend at higher interest rates. Some might think that rising interest rates dampen demand, but often buyers fear even higher interest rates one year or two years out. For example, the recent rate rise did not dampen housing sales: “According to Freddie Mac, a 30-year, conventional, fixed-rate mortgage rose to 4.26 percent in November from 4.19 percent in October; the rate was 3.35 percent in November 2012” (National Association of Realtors).

4. And in Florida, we also benefit from follow the leader behavior. Northerners move to Florida, then their friends come to visit and like it here, then one of the spouses begins to bug the other that they, too, need to buy now before prices rise even more, etc. No doubt, there are some snowbirds soon returning who are lamenting not having purchased last year — or lamenting having sold too low. They might be surprised by the rise in sale and rental prices since the end of last (snowbird) season. There’s a pretty good chance that those folks will pull the trigger this year as they face relatively tight inventory levels. Per the National Association of Realtors, the total national housing inventory at the end of November was 2.1 million existing homes available for sale; this represents a 5.1-month supply at the current sales pace. This unsold inventory of 2.1 million homes is slightly more homes than a year ago.

5. Buyers are influenced by the rent versus buy comparison and, per Trulia’s online real estate research (most recent report of September 2013), it is still cheaper to buy a home than rent, even after the rise in mortgage rates. “Homeownership remains cheaper than renting nationally and in all of the 100 largest metro areas. But rising mortgage rates have narrowed the gap between the cost of buying and the cost of renting. The 30-year fixed rate is now 4.80 percent, compared with 3.75 percent one year ago (according to the Mortgage Bankers Association). This jump in rates has raised the cost of buying relative to renting. As a result, buying is 35 percent cheaper than renting today, versus being 45 percent cheaper than renting one year ago.” Specifically, in the South Florida markets, buying was cheaper than renting in Miami (36 percent); Fort Lauderdale (47 percent); West Palm Beach (52 percent); and Fort Myers/Cape Coral (46 percent).

6. The stock market has been robust in the past several years and exceeded prior highs. Most individual investors do not like to sell their losers but are more inclined to sell their winners. At this point, most equity investors are back to even or if heavy into technology or NASDAQ stocks, they have money falling out of their pockets and they are willing to reallocate to real estate.

Residential real estate is somewhat a self-fulfilling prophesy; a residential housing recovery provides meaningful GDP growth in that related expenditures are made: furniture, appliances, carpet, lighting, landscaping.

It would seem that there is room for continued improvement in the housing market. That’s good news for South Florida, which is very real estate intensive and sensitive. ¦

— Jeannette Showalter, CFA is a commodities broker with Worldwide Futures Systems. Find her on Facebook at Jeannette Showalter, CFA.

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