Real Estate Investment Outlook

Written by David Lereah

It is becoming increasingly clear that the U.S. economy is improving, creating a more favorable backdrop for residential real estate investment. Our nation’s economy is kicking into second gear; monthly job gains have exceeded 200,000 for three consecutive months, providing the necessary fuel to create modest economic growth. An improving economy translates into positive wage growth, boosting consumer confidence which in turn, boosts home buying.

Sales of existing homes registered 4.59 million annualized units in February, reflecting a housing recovery that began in mid-2011. Similarly, sales of new homes registered 313,000 annualized units in February, compared to 295,000 annualized units in July of last year. Home sales are firming as job growth has stepped up over the past half year. In addition, housing affordability remains high due to historic low mortgage rates, creating pent-up demand for homes. This provides a favorable long term outlook for future property values, creating opportunities for investors.

The current U.S. foreclosure situation has created unprecedented property acquisition opportunities. According to Realty Trac, about 800,000 properties went into the foreclosure process in 2011. I expect about 1 million residential properties will move from delinquency into REO in 2012, returning to levels experienced before the robo-signing slowdown. This should keep property values down for investors seeking discounts on foreclosures and short sales throughout most of this year. The combination of distressed property price discounts in the near term, relatively strong rent growth and improving property values (due to improving housing conditions) in the longer-term, bodes well for residential property investors.

Regionally, Florida’s housing situation represents one of the most favorable residential property investment markets in the nation. Many existing Florida homeowners possess underwater mortgages and have struggled to stay current on loan payments. This has generated a serious distress property sale situation in Florida- perhaps even worse than the dire foreclosure situations in Arizona and Nevada. In addition, Florida has a large backlog of foreclosures because the foreclosure process takes longer in Florida than it does in most other states.

Florida home values have plummeted almost 50 percent since the meteoric highs of the housing boom in the mid-2000s. Since Florida is a primary “destination” for baby boomers seeking retirement/vacation homes, the outlook for long-term property demand is favorable. Florida property values are projected to stay depressed or just modestly rise over the next year. However, when Florida’s foreclosure situation bottom’s out, relatively strong housing demand due to the state’s “destination” tag, is expected to raise home values over a longer-term investment horizon (5 years and greater).

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.