You may not be able to control the market. But you can control your knowledge of it. The more you know, the more opportunities you have to gain an edge.
“Trends nationwide certainly can have a trickle-down effect to where you’re investing,” states Nathan Trunfio, President of Direct Lending Partners. “You can gather insights from those real estate market trends and use it to make good investing decisions.”
To help folks understand what’s happening at the macro level, we’ve been busy creating a video series on market updates for real estate investing. In the series, we cover all the important details, from the impact of interest rates to housing price growth.
In this article, we’ll dissect the real estate market trends we’re seeing in Q1 and explain what that means for your investment business.
The current economic environment and real estate market trends
In short, the current outlook is favorable.
As you’ve probably heard, the U.S. unemployment rate has fallen to a 50-year low at 3.5%. Furthermore, job growth remains solid: data from the Bureau of Labor and Statistics shows nearly 10 full years of continuous growth. The strong labor market has led to good income growth. By the time the fiscal year ended in January 2020, average hourly earnings had increased by 3.1%.
That’s impressive! But what does good employment data mean for real estate investors?
A healthy job market typically equates to positive real estate market trends. As Trunfio says, “All of those positive things related to employment support the strength of the economy and have led to some of the housing appreciation trends that we’ve been seeing.”
You also can’t forget about interest rates. In 2020, Federal Reserve interest rates are expected to remain around 1.5–2.75%.
“With lower interest rates, consumers can buy more and buy at a higher price,” Trunfio affirms. “This generates an opportunity for real estate investors. You can enjoy the appreciation of your assets, sell properties at a premium, and source capital more affordably.”
Going forward, continue to stay up-to-date on macroeconomic data and study its effects on the housing market. Your research and analysis will help you discover ways to leverage real estate market trends to your advantage.
Market trend #1: Rising home values and home sale profits
Let’s take a look at recent home prices and sales data:
Home prices increased by 3.7% in 2019, according to CoreLogic. The property data firm predicts a rise of 5.3% in 2020.
According to Attom Data Solutions, average U.S. home seller profits hit $65,500 in 2019—a 13-year high and a significant increase from $58,100 in 2018 and $50,027 in 2017.
Both raw profits and ROI have improved nationwide for home sellers over the past eight years.
“While the rise in housing prices may have some worried about a bubble, the strength of the economy and underlying data paints a rosier picture. We view the market very positively,” states Trunfio.
All across the nation, folks have benefited from housing appreciation. According to Zillow, the recovery added an overall $11.3 trillion in U.S. housing value over the past decade. Certain markets, such as Southern California and the San Francisco Bay Area, enjoyed massive growth in home values. In terms of states, the Texas real estate market added the most value.
Investors in the home flipping and rehab market have taken advantage of this appreciation. Even in cases where rehab budgets ran a little higher than expected, fix-and-flip investors still profited in the 2010s.
“Good appreciation numbers have helped flippers across the country, especially on the disposition side of investments,” says Trunfio. “However, it’s made it harder on the acquisition. But with all real estate market trends, you have to know the data and how it relates to your investment strategy. That will help you stay ahead of the curve.”
Market trend #2: Low inventory and declining foreclosures
Why has inventory become so constrained for real estate investors?
First, people are staying in their homes longer. A late 2019 Wall Street Journal article reported homeowners now remain in their residences for an average of 13 years—five years longer than they did in 2010.
That’s a pretty big increase.
Second, foreclosures—a key source of inventory for investors—have dropped significantly in recent years. According to Attom Data Solutions, there were only 493,066 foreclosure filings in 2019. That’s a 21% decline from 2018 and an 81% decline from the peak of almost 2.9 million in 2010.
That’s a huge drop. But that’s not necessarily good news if you want to discover a dream deal.
“It’s important to have perspective here,” advises Trunfio. “Foreclosures have been lower, which is good for the economy. It really is. It means more people can afford their mortgages. It also means the mortgage lending environment has become smarter with their credit policies. Unfortunately for investors, a good portion of inventory comes from foreclosures. That means you must search elsewhere for deals.”
Given all this data on low inventory, you may think: Should I just sit on the sidelines?
The answer is no! You can still find great deals!
“Be creative and try other routes, like a direct-to-seller approach and doing cash transactions for homes in lower price ranges,” says Trunfio. “Also, real estate market trends do show positive signs for inventory, especially in the South as the population increases.”
Indeed, inventory may not be as big of an issue in the coming years. In December 2019, U.S. housing construction soared 16.9% from the previous year, a sign that more inventory will soon be available to investors.
At Direct Lending Partners, for instance, we provide many real estate loans to investors in Central Florida. We’re seeing hundreds of new construction projects and have provided loans to investors looking to build-to-rent and build-to-sell.
Market trend #3: Growing rentership and the rise of the fix-and-hold strategy
Home flipping profits averaged $64,900 in the third quarter of 2019 (Attom Data Solutions). That may seem solid, but it’s actually a 6% dip from the second quarter of 2019.
Additionally, the number of flips continues to decline. In Q3 of 2019, only 56,566 home sales were flips—down 7% from the same period in 2018.
What happened to the fix-and-flip?
Well, it’s still profitable and a common way to earn profits for investors when consumers are purchasing homes. However, a new strategy is becoming increasingly popular: the buy, renovate, rent, refinance, and repeat model (BRRRR).
The BRRRR has become attractive thanks to low interest rates, rising home values, and low inventory. Holding onto assets is a smarter play in many cases.
Additionally, there has been a trend in the United States towards rentership. Census data shows that 34.9% of households now rent their home. In 2006, the rentership rate was only 31.2%.
For multi-family investors, a higher rate of rentership makes renovating and holding a property more worthwhile. You can benefit from consistent cash flow by renting out units, enjoying asset appreciation and benefiting from the tax shelter of real estate depreciation.
“Rentership is the highest we’ve seen since the 1960s,” admits Trunfio. “This has led to a rise in rent prices, which further benefits investors.”
An Apartment List study found that rents have increased by 11.1% since 2015. Some cities, such as Mesa, Arizona, and Stockton, California, have seen increases of more than 25% in the last five years. Imagine owning rental property in that kind of market!
“With a strong jobs market, more boomers renting, and the mobile millennial generation continuing to lease, the rental market looks very, very promising for multi-family investors. The fix-to-rent strategy will become more popular,” attests Trunfio.
Leveraging the real estate market trends to your advantage
You don’t have to be an economist to stay ahead of the market. By actively examining real estate market data, especially what’s going on in your area, and studying how it affects the housing industry, you can see whether your investment strategy is on point and what improvements you should make. Even more importantly, you’ll know how to make moves that make you more money and put you in a good position for sustained success.
That concludes our quarterly overview of the real estate market trends investors need to know. If you have any questions or ideas, feel free to contact us at (484) 285–8830. We’re always ready to talk about real estate investing.