AUGUST 2019 THINKREALTY.COM/HNR
IN PARTNERSHIP WITH ATTOM DATA SOLUTIONS
MY TAKE | 16 Creative Investing for Passive Returns DATA IN ACTION | 22 Hottest ZIPs for Home Flips in Q1 2019 BIG DATA SANDBOX | 24 Flipping or Flopping: Home Flippers Selling While Gross Profits Stumble
Fewer First-Time Home Buyers Threaten the Market
STRATEGY GSE REFORM: HOUSING FINANCE SAVIOR OR LOOMING DISASTER?
BUSINESS FUNDAMENTALS SHIFTING FROM
SELLING TO RENTING? HOW TO MIND THE GAP
MARKET & TRENDS IS FLORIDA AT RISK OF ANOTHER REAL ESTATE CRISIS?
MARKET SPOTLIGHT | 25 Prospecting for Opportunity in the Pacific Northwest
The chain of transactions that powers the housing sector begins with first-time buyers – a seemingly vanishing species. Why has ownership become less interesting to potential first-time purchasers and what can be done about it? Could first-time buyers become the solution for millions of owners now trapped in underwater properties? HOW FEWER FIRST-TIME HOME BUYERS THREATEN THE REAL ESTATE MARKET 06
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Creative Investing for Passive Returns After more than 10 years of a bull market, investors are increasingly considering how to prepare for the potential impact of the next economic downturn - especially those concerned about volatility. In this issue, Guest Contributor Gary Beasley, CEO & Co-Founder of Roofstock, discusses how many investors are looking for an intelligent way to adjust their investment portfolios. 16 MY TAKE
25 MARKET SPOTLIGHT Prospecting for Opportunity in the Pacific Northwest While it’s still a favorite among those looking to purchase property at rates far below the inflated prices of places like California and New York, shifting market conditions in the Pacific Northwest have pushed investors to be increasingly creative in searching out opportunities. Housing News Report looks specifically at market conditions in Boise, Portland and Seattle as they pertain to the latest market trends and investment strategies.
Hottest ZIPs for Home Flips in Q1 2019 According to ATTOM Data Solutions’ Q1 2019 Home Flipping report, the home flipping rate reached a new high with 7.2 percent of all home sales during 22 DATA IN ACTION
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the quarter being a flip – the highest home flipping rate since Q1 2010. ATTOM took a deeper look into the data and uncovered those zip codes where the flipping rate was well above the national rate.
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Flipping or Flopping: Home Flippers Selling While Gross Profits Stumble ATTOM Data Solutions’ Q1 2019 Home Flipping report also noted the flipping rate is up from 5.9 percent in the previous quarter and up from 6.7 percent a year ago. Taking another deep data dive, ATTOM uncovered those markets with 50 or more flip sales in Q1 2019 and a population greater than 200,000 that are pushing the flipping rate upward. 24 BIG DATA SANDBOX
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holds. Delaying homeownership thus will have long-run, negative impacts on the wealth of typical families. For example, Federal Reserve data shows that homeown- ers, on average, have 40 times the wealth of renters.” As it turns out, first-timers generate a lot of demand and the owners who benefit most are at the base of the market. “Owners of the country’s most af- fordable homes are gaining equity the fastest, because demand for entry-level homes continues to grow faster than supply,” reported Zillow in a 2018 study. Over the past five years, it added, “people who own the most affordable homes have seen their equity grow by 44.4 percent, while owners of top-tier homes have gained 26.6 percent.” “In today’s mortgage market,” Mike Fratantoni, chief economist with the Mortgage Bankers As- sociation (MBA) told the Housing News Report, “loans to buy a home comprise about 75% of the total, much higher than in recent years when we were in a refi boom. In a purchase-dominated market, first- time buyers become even more important.” But as good as first-timers are for the housing sector, a lot of po- tential sales are never made. “While the first-time homebuyer market has grown by close to 40 percent since 2014,” said Tian Liu, chief economist at Genworth Mort- gage Insurance, “there are still 2.7 million missing first-time homebuy- ers. They represent vast, largely un- tapped opportunities for the housing industry over the coming years.” The big question, of course, is whether purchases by first-time buyers can be increased.
FIRST-TIME BUYER MARKET SHARE EXISTING HOME SALES
YEAR 2018 2017 2016 2015 2014 2013 2012 2011 2010* 2009* 2008 2007 2006 2005 2004 2003**
33% 34% 35% 32% 33% 38% 39% 37% 50% 47% 41% 39% 36% 40% 40% 40% 42% 42% 42% 42% 41% 38% 30% 37% 44%
How Fewer First-Time Home Buyers Threaten the Real Estate Market
“First-time homebuyers help determine the health of the overall housing market,” explains Rob Chrane, CEO at Down Payment Resource. “New buyers often purchase the entry level housing stock, allowing repeat buyers to move up to a new home.” According to Robert Dietz, chief economist with the National Asso- ciation of Home Builders (NAHB), “first-time buyers have a strong long-run impact because they lift the homeownership rate, which up until the first quarter of 2019 had posted two-plus years of gains. Additionally, economic research shows that housing wealth is a ma- jor component of the savings and wealth of typical American house-
2001 1999 1997 1995 1993 1989 1987 1985 1981
BY PETER G. MILLER Y ou can’t have home sales without buyers and the most important buyers of all are first- time purchasers. While it might seem that a sale is a sale, that’s not the case. The chain of transactions that powers the housing sector be- gins with first-time buyers. Unfortu-
solution for millions of owners now trapped in underwater properties?
nately, first-timers are a vanishing species and as a result, millions of transactions are missing from the real estate marketplace. Why has ownership become less interesting to potential first-time pur- chasers and what can be done about it? Could first-time buyers become the
THE FIRST-TIMER PARADOX First-time buyers are important because they represent additional demand.
Source: National Association of Realtors *Special tax break for first-time buyers **Survey taken irregularly prior to 2003
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FEATURED ARTICLE: How Fewer First-Time Home Buyers Threaten the Real Estate Market
THE MISSING BUYERS It used to be that first-time buyers routinely represented 40 percent of all existing home purchases, if not more. Part of the problem, according to the Urban Institute (UI), is that mortgage standards have hardened. The Institute estimates that if we stuck with 2001 qualifying requirements, an additional 6.3 million loans could have been originated be- tween 2009 and 2015. If we figure that 42% of those mortgages might have gone to first-time buyers (the first-time buyer percentage for 2001) then an additional 2.6 million sales might have been produced, a figure similar to Genworth’s. Or maybe not. The economy has radically changed during the past few decades and quaint notions of em- ployment, affordability and borrowing capacity need to be re-thought. Income. According to the Census Bureau, median household income reached $61,372 in 2017 – up 1.8 percent in a year. In 2017, the infla- tion rate was 2.1%. In other words, in 2017, people had more cash in- come, but those dollars lost buying power, or they bought a touch less than the smaller incomes earned in 2017. Corrected for inflation, the median household income was $58,609 in 2001, meaning that over a period of 16 years there has been very little income growth. However, general figures don’t tell the whole story. According to a 2016 study by economists Thomas Piketty, Emmanuel Saez and Gabri- el Zucman, not everyone is sharing higher incomes. “The top 1%,” they write, “used to earn 11% of national income in the late 1960s and now earns slightly over 20% while the bottom 50% used to get slightly over 20% and now gets 12%. Eight points of
national income have been trans- ferred from the bottom 50% to the top 1%. The top 1% income share has made gains large enough to more than compensate the fall in the bottom 50% share, a group de- mographically 50 times larger.” Debts. While income has stalled for large segments of the popula- tion debts have soared. For home- owners, the news is good. Mort- gage debt went from $9.85 trillion in the first quarter of 2009 to $9.65 trillion ten years later, a drop of $20 billion despite soaring home prices according to the Federal Re- serve Bank of New York (NY Fed). But, during the past ten years, non-mortgage debt – borrowing for student loans, auto purchases and credit card bills – increased from $2.68 trillion to $4.02 trillion. According to Robert Dietz, the NAHB’s chief economist, “we are watching two sources of debt that are delaying home buying: student loans and auto loans. Student loan growth has been significant over the last decade, and now totals more than $1.5 trillion. Auto loan growth has picked up since 2013. While student loans can often lead to higher lifetime income (in the form of a college degree), there are too many students attending college, accumulating student loans, and now attaining a degree. This is a social policy failure, and a Federal Reserve study indicates that such student loan burdens are responsible for about 20 percent of the ‘missing homeownership’ among younger households. Auto loan debt is also a concern because of recent trends in terms of longer loans and smaller down payments.” For just credit cards alone, says Axios, “U.S. card holders are expected to pay $122 billion in in- terest charges in 2019. That's 12%
more than what they paid in 2017 and 50% more than what they paid as recently as 2014.” Such credit card charges, of course, represent dollars that could have been used to bulk up savings, pay down debts, or fund the down payment on a home. For lenders, the increasing- ly-bleak combination of stalled incomes and soaring debts make loan approvals enormously diffi- cult. How can first-time borrowers with massive debts qualify for financing under traditional stan- dards? In many cases the answer is that they can’t unless underwriting norms are stretched. HUD says almost a quarter of the new FHA mortgages it insures now have debt-to-income (DTI) ratios above 50%. On average, the DTI for FHA purchase mortgages in FY2001 was 37.68% versus 43.09% in FY2018. Freddie Mac, through its Home Possible program, will now accept DTI ratios “generally up to 50%,” a standard which, it acknowledg- es, exposes the organization “to increased mortgage credit risk.” In 2017, Fannie Mae updated its Desktop Underwriter (DU) system to accept certain loans with debt-to- income ratios of as much as 50%. Subsequently, in 2018, Fannie Mae established additional stan- dards to limit its acceptance of riskier loans, those with high LTVs, multiple delinquencies, debt-to- income ratios above 45% and small or nonexistent reserves. The Gig Economy. The quickie definition for a “job” used to be 40 hours a week plus benefits. That definition is no longer so certain. The government explains that for its purposes "people are classified as employed if they did any work at all as paid employees during the
reference week; worked in their own business, profession, or on their own farm; or worked without pay at least 15 hours in a family business or farm." The gig economy is here and the key benefit, according to the Society for Human Resource Management (SHRM), is that workers “have greater control over their schedule and they can avoid routine annoy- ances such as bad managers, office politics and interminable staff meetings. They also might learn new skills and gain valuable experi- ence at a temporary stint, ultimately giving them the tools to advance in other gigs or in staff jobs.” Employers also get benefits. They have the ability to hire workers when and where they want without the need to pay for unemployment insur- ance, Social Security, health insur- ance, vacation time, or retirement. We have mortgage lending expe- rience with gig workers, what we used to call the self-employed. Any number of fields traditionally have large numbers of sole-practitioners – think of locksmiths, plumbers and lawyers as well as the old-standbys such as freelance writers, design- ers, and photographers. What’s different now is that we don’t know where a wider gig econ- omy might lead. Will gig employ- ment produce steady wages and bigger incomes? Or less money? So far the results are mixed. The JPMorgan Chase Institute re- ports that between 2013 and 2017, that monthly income went up for non-transport work (+1.9%), selling (+9.4%) and leasing (+69%), but fell for transport workers such as part- time drivers (-53%). A related issue concerns income stability. Both an employee and a gig worker might earn $60,000 a year. However, while the employ-
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Second, renting is often cheaper than buying. A study from ATTOM Data Solutions found that “renting a three-bedroom property is more af- fordable than buying a median-priced home in 442 of 755 U.S. counties analyzed for the report – 59%.” “With rental affordability out- pacing home affordability in the majority of U.S. housing markets, and home prices rising faster than rental rates, the American dream of owning a home, may be just that — a dream,” said ATTOM spokes- person Jennifer von Pohlmann. Can the trends now in place change? Possibly. Less price ap- preciation, lower mortgage rates and rising household incomes could make ownership attractive for many potential first-time buy- ers. At least part of this formula is now in place. Mortgage rates for 30-year fixed-rate financing reached 3.99% at the end of May, down from 4.56% a year earlier according to Freddie Mac. IS OWNERSHIPWORTH IT? For many potential first-time buyers the issue is not cost, it’s value. Simply put, many believe ownership is a possible disad- vantage. After all, if you rent or live with Mom and Dad, there’s someone else to do repairs. You can spend on the things you really want. If you suddenly get a job on the other side of the country, there’s no home to sell. A recent ValueInsured Modern Homebuyer Survey finds that “only 43% of millennials believe buying a home today is a secure financial in- vestment, down 16 points from 59% in Q1 2017. In other words, mil- lennials today find that homeown- ership is less attainable, requires more sacrifices, and is riskier. It is
ee is paid $5,000 each month, the gig worker might earn $6,000 in one month and $4,000 in anoth- er. Monthly income swings make budgeting – and required mortgage payments – difficult for first-time buyers without adequate reserves. Mortgage Rates. There’s no question that mortgage rates impact affordability, there’s even a number to show how much. Lawrence Yun, chief economist with the National Association of Real- tors, estimates that each .1% rate increase results in 35,000 fewer home sales. We don’t know where interest rates will go, whether they will continue at bargain-basement levels or not. What we do know is that the rate environment for the past decade has been exceptional- Millennials,” according to the Urban Institute, “prefer living in high-cost cities, where housing supply is inelastic. Within a city, millennials prefer living in counties with a more urban environment, where the house prices have increased more than in the surrounding areas. The shift in geographic preference is mostly observed among highly- educated millennials.” URBAN INSTITUTE
ly-positive. Looking at weekly Fred- die Mac interest levels between April 1971 and March 2019, the average mortgage rate was 8.08%. That compares with an annual rate of 4.54% in 2018 and just 4.31% for the first four months of 2019. Prices vs Payments. The catch is that the central concern for many first-time buyers is not the mortgage rate, but the size of the monthly payment. The Nation- al Association of Realtors (NAR) says median home prices in April reached $267,300, “the 86th straight month of year-over-year gains.” The “median” national price, however, is not the typical price found everywhere. A just-released study by the Brookings Institute shows that two- thirds of the nation’s employment growth and three-quarters of its GDP growth can be found in just 490 counties. Little is left over to be divided among the remaining 2,622 counties. Most geographic areas
have numerous affordable housing options for first-time buyers, but not the chic metro cores where most of the jobs, dollars and op- portunities are found. If you’re a first-time buyer with 5% down how much income do you need to purchase? Across the country, says the National Asso- ciation of Realtors, purchasers need $60,143 but the real answer depends on where you buy. The NAR study shows that you need a big income to purchase in metro areas which include such cities as Anaheim, CA ($188,832), Boston ($108,862), Boulder, CO ($142,474), Denver ($105,415), Los Angeles ($129,492), Naples, FL ($101,261), San Diego ($146,345), San Fran- cisco ($219,517), San Jose, CA ($287,969), and Seattle ($117,312). Alternatively, there are plac- es where a modest income can readily result in ownership, loca- tions where typical home prices are less than the cost of many
SUVs. Think of metro areas that include Akron, OH ($32,739), Am- arillo, TX ($37,200), Binghamton, NY ($25,303), Cumberland, MD ($23,439), Davenport, IA ($29,741), Decatur, GA ($19,072), Peoria, AZ ($25,587) Waterloo-Cedar Falls, IA ($28,372), and Youngstown, OH ($21,055). Even where prices appear attractive there’s some question as to how many renters are interested in ownership. “Millennials,” according to the Ur- ban Institute, “prefer living in high- cost cities, where housing supply is inelastic. Within a city, millennials prefer living in counties with a more urban environment, where the house prices have increased more than in the surrounding areas. The shift in geographic preference is mostly observed among highly-edu- cated millennials.” While everyone has their likes, the reality is that housing costs are a huge weight for many potential first-time purchasers.
A recent home affordability report from ATTOM Data Solutions showed that leading metro areas are largely off-limits to most wage earners. A review of 473 counties found that 335 — 71% — “were not affordable for average wage earn- ers” even with just 3% down. For many first-timers the lack of affordability is visible in two ways. First, many potential buyers simply do not have the dollars needed for the purchase of a home. According to the Federal Reserve, “relatively small, unexpected expenses, such as a car repair or replacing a broken appliance, can be a hardship for many families without adequate savings. When faced with a hypothetical expense of $400, 61% of adults in 2018 say they would cover it, using cash, savings, or a credit card paid off at the next statement.” Translation: 39% cannot readily finance a small emergency with cash on hand or credit.
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FEATURED ARTICLE: How Fewer First-Time Home Buyers Threaten the Real Estate Market
not a surprise that their desire for homeownership dropped during the same period.” Among those who make the leap from renter to owner, a relative- ly large percentage have qualms about their decision. According to Zillow, 4% of those aged 55 and above regret their decision to buy rather than rent, while 17% be- tween the ages of 18 and 34 have misgivings. Many households will not buy a home because they believe future values will decline. A just-issued survey by the NY Fed shows that in five years, 29% of the households surveyed expect home values to fall. And, importantly for first-time buyers, “younger respondents – those under 50 — perceive more downside risk compared to those over 50.” TAX REFORM With the passage of tax reform in 2017, the rules for residential real estate changed significantly. At first this may not seem right. Such things as mortgage interest and property taxes remain potentially deductible. However, the new rules are constructed in such a way that most people will not take tradition- al real estate write-offs. The Tax Policy Center estimates that just 4 percent of all households will claim the mortgage interest deduction under tax reform, down from 21 percent under the old rules. Taxpayers can take either the standard deduction or itemized deductions. Under the new rules many taxpayers will elect not to take shelter write-offs because they can get a bigger benefit with the standard deduction, as much as $24,000 for a married couple. Other taxpayers will be forced to take
most first-time buyers is saving up for the down payment,” according to Mike Fratantoni with the Mortgage Bankers Association. “Lenders need to be active in FHA, be up to speed on Fannie and Freddie’s HomePossible and HomeReady programs, and be in contact with their local housing finance agencies and other potential sources of downpayment assistance.” Mortgages backed through the FHA, VA and USDA are available with little or nothing down, and of- fer liberal underwriting standards. These programs are designed to serve first-time buyers. For instance, more than 80 percent of all purchase mortgages endorsed through the FHA in FY2018 went to first-timers. We know that govern- ment-backed programs work for first-time purchasers. We have decades of evidence to prove it. What we need is more program marketing. There are more than 26,500 state and federal licensed mortgage entities. If they each did one additional first-time buyer loan per month, that would be almost 320,000 extra sales per year, enough to significantly impact the market. STEP 2 Introduce borrowers to down payment assistance plans. There are thousands of potential down payment assistance sources, such things as grants, loans, mortgage credit certificates and lower-cost mortgage insurance. There are special programs for teachers, first responders, health- care workers, veterans and surviv- ing spouses of veterans. There are also programs for energy-efficient homes and visible properties – homes with easy wheelchair access and other accommodations. Rob Chrane, with DownPaymen-
the standard deduction because itemized write-offs are limited. For instance, there’s a $10,000 cap for state and local tax (SALT) deduc- tions such as property taxes and income taxes regardless of how much you actually pay. These changes are not an acci- dent. They are a way for the federal government to increase revenues. The tax reform legislation itself says the “repeal of itemized deduc- tions for taxes not paid or accrued in a trade or business (except for up to $10,000 in State and local taxes), interest on mortgage debt in excess of $750K, interest on home equity debt, non-disaster casualty losses, and certain miscellaneous expens- es” will generate an additional $668.4 billion in new tax revenue. Under the old rules, homeown- ers had substantial tax advantag- es when compared with renters. If a renter paid $1,500 a month for housing, there was nothing to deduct. If an owner had a $1,200 a month mortgage payment for principal and interest, and paid $200 for property taxes and $100 a month for property insurance, a total of $1,500, the tax implications were very different. The owner could write off $2,400 for property taxes. At 4.25% over 30 years, the mortgage had a starting balance of $243,932. The interest write-off in the first year was $10,288. In total, the owner would have at least $12,688 in write-offs unavailable to the renter ($10,288 + $2,400). In the 22% bracket, that’s a tax savings of $2,791. In addition, the owner will accumulate $4,112 in mortgage amortization in the first year, a form of forced savings. Now the rules have changed. The new standard deduction — as much as $24,000 — is equally available to both homeowners and renters.
Since most owners will no longer itemize deductions, the tax advan- tage between owning and renting is now essentially zero for many pro- spective first-time purchasers. The visible tax incentive to own – once a huge selling point for the housing sector – is largely gone. HOWTO GET MORE FIRST- TIME BUYERS INTO THE MARKETPLACE Given the litany of problems and woes faced by first-time buyers, is there anything that can be done to increase their numbers? Steps which do not materially enlarge marketplace risk? The reality is that we have in place a number of options which can be used today to increase first- time buyer activity. More debt and other rising costs directly impact potential buyers' ability to save money for the down payment on their home. The down payment has long-been the first-time buyer's biggest challenge because they don't have the proceeds of another home sale to help fund their down payment and closing costs.” ROB CHRANE
STEP 1 Make better use of what we have. “The biggest barrier facing
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FEATURED ARTICLE: How Fewer First-Time Home Buyers Threaten the Real Estate Market
tResource.com, explains that “more debt and other rising costs directly impact potential buyers' ability to save money for the down payment on their home. The down payment has long-been the first-time buyer's biggest challenge because they don't have the proceeds of another home sale to help fund their down payment and closing costs." Chrane – whose site allows buy- ers to search through thousands of down payment assistance pro- grams by location – adds that “it's important for buyers to research all their home financing options in ad- vance. The average down payment help found by the Urban Institute's report was more than $9,000. That can be the difference between buy- ing a home today or remaining on the sidelines for a few more years.” STEP 3 Change the tax code. The tax rules are full of special benefits for every business and industry you can name – thousands of pages filled with exceptions, preferences and carve outs. If we really want more first-time buyers, then we can achieve that result almost instantly by changing the tax code. We’ve done it before. When the housing market and much of the economy were teeter- ing on the brink of collapse, the government created special bene- fits for first time buyers. Under the Housing and Economic Recovery Act of 2008, first-time buyers could receive a benefit equal to as much as $7,500 for a married couple, $3,750 for a single filer. The term “first-time home- buyer” was defined to mean some- one who had not held title to real estate for at least three years and earned less than $150,000 for joint filers and $75,000 for singles. This was described as a “first-
time homebuyer credit” but in the fine print said the government would “re-capture” the money ad- vanced. In other words, it was really an interest-free loan that had to be repaid over 15 years. If the property was sold in less than 15 years, the balance of debt was due at closing. Sure enough, first-time buyer ac- tivity rose from 41% of the market in 2008 to 47% in 2009. This was a good result, but not good enough given the dire condition of the economy. So what did the govern- ment do? It changed the rules. Under the American Recovery and Reinvestment Act of 2009, first-time buyers – those who bought before the deadline and had not owned for at least the past three years – could now get a tax credit of as much as $8,000. Not only was the benefit size increased but, more im- portantly, the credit did not have to be paid back. (A tax “credit” means your tax bill is lowered by a certain amount, say $8,000 in this example, while a tax “deduction” reduces only a portion of your tax bill, perhaps
22% of $8,000 or $1,760.) Housing is a large portion of the overall economy. If the goal is to re-charge the economy on a wide- spread basis, then a tax credit for first-time buyers works. Buyers – and markets – in both rural areas and metro cores would be helped. Local tax collections would increase as a result of more transactions and generally higher prices. And – importantly – some of the homes currently underwater would become salable as property prices rise. Don’t believe that a new first- time tax break would energize the real estate marketplace? In 2010, fully 50% of the real estate mar- ket was represented by first-time buyers – far more than the 33% percent seen in 2018. Peter G. Miller is a nationally-syndicated newspaper columnist, the author of seven books published originally by Harper & Row (one with a co-author), and for many years a Washington-based journalist.
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SINGLE-FAMILY RENTALS: CALM AMONG STOCK AND BOND VOLATILITY
Creative Investing for Passive Returns
-40% 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
SOURCES: Roofstock, S&P 500, Federal Reserve, 10-Year U.S. Treasuries, Zillow home prices, U.S. Census Bureau average rents for SFR detached houses.
EXPLORING THE SINGLE-FAMILY RENTAL SECTOR IN A POTENTIAL ECONOMIC DOWNTURN.
BY GARY BEASLEY A fter more than 10 years of a bull market, investors are increas- ingly considering how to prepare for the potential impact of the next eco- nomic downturn — especially those concerned about volatility. While they shouldn’t panic (from my point of view, the next recession will be more of a dip than a crash), many inves- tors are looking for an intelligent way to adjust their investment portfolios to be well positioned to weather the next downturn. It’s clear that, as we approach notching the longest eco- nomic expansion in recent history, a little defensive thinking is in order.
Notably, during the Great Recession (from 2007 to 2011), SFR rents never declined on average despite a national decline in home prices of over 30 percent and stock market losses that took four years to recoup.
that the two measurements are unrelated. For this reason, SFR is considered a good defensive play for those investors who may be nervous about the outlook for the stock market and are hedging their bets by seeking a portion of their returns from current yield as opposed to relying principally on changes in stock prices. SFRs have a strong track record, even during periods of stock market declines. Notably, during the Great Recession (from 2007 to 2011), SFR rents never declined on average despite a national decline in home prices of over 30 percent and stock market losses that took four years to recoup. This meant that owners of those rental homes generally experienced improving yields on their invested capital, despite home
SFR is considered a good defensive play for those investors who may be nervous about the outlook for the stock market and are hedging their bets by seeking a portion of their returns from current yield as opposed to relying principally on changes in stock prices.
gle-family rental (SFR) sector pres- ents a potentially compelling option when the stock market feels over- heated or a recession may be on the horizon. As perhaps the fastest-grow- ing segment of the US housing market, SFR properties are unique because they have characteristics of both bonds (current income) and stocks (appreciation potential), with returns historically being similar to those generated by the stock market, albeit with much less volatility. A proprietary study from Roof- stock showed that SFR returns are largely uncorrelated to equities, meaning they don’t move in lock- step. Correlations between S&P and SFR returns from 1994 through 2008 are at near zero, meaning
prices falling. What’s more, some 9+ million families lost their homes between 2006 and 2014, which bolstered fundamental demand for rentals as these families suddenly became long-term renters. THE NEWRENTER PROFILE It’s clear that the profile of the average renter has changed, too. According to a recent study from
Freddie Mac, Millennials and Boomers are choosing to opt out of home ownership for financial reasons and/or lifestyle preferenc- es. Both demographics appreciate the greater flexibility, mobility, and typically lower total monthly costs of a renter lifestyle, and also prefer the privacy of a home as opposed to apartment living, which in turn encourages tenants to stay longer. With the market still tight for those
THE SFR OPPORTUNITY Investing in the burgeoning sin-
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MY TAKE: Creative Investing for Passive Returns
with less than perfect credit, and continued challenges with afford- ability for home purchasers, many Millennials are inclined to rent rather than buy, helping bolster rent growth. AN EMERGING ASSET CLASS SFR as an asset class has also been growing in popularity. Insti- tutional investors started buying in earnest in early 2012, and today about 300,000 homes are owned by institu- tions. While it may seem like a lot, it represents less than two percent of the 16 million SFRs that represent about $3 trillion in value nationally, with the vast majority owned by mom and pop investors. In 2018, SFRs saw increased attention from new inves- tors both large and small, partly due to higher volatility in equity markets, which led some to examine different ways to diversify their portfolios.
U.S. HOME PRICE APPRECIATION AND RENT GROWTH
MEDIAN ASKING RENT
HOME OWNERSHIP RATE
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
U.S. HOME PRICE APPRECIATION AND RENT GROWTH
For those looking to creatively augment their portfolios as we continue to ride the ups and downs of the stock market roller coaster, investors should consider single- family rentals as one arrow in their quivers. Given where we are in the economic cycle, with many economists predict- ing a recession by the end of 2020, the timing may be ideal for many inves- tors to consider taking advantage of
growing rental demand while interest rates are still relatively low. The power of compounding also adds to the allure of investing in SFRs, which have the ability to generate cash flow over time while building equity value via appreci- ation and principal paydown. A number of factors make the SFR market attractive for investors looking to build long-term wealth, establish a monthly income stream, take advantage of tax benefits, and diversify away from stock mar- ket volatility. For those looking to creatively augment their portfolios as we continue to ride the ups and downs of the stock market roller coaster, investors should consid- er single-family rentals as one arrow in their quivers. There are many ways to get started, including finding properties on your own and acquiring, renovating, leasing and
managing them, or leveraging on- line platforms like Roofstock, which is a platform to research and invest in properties around the country from the comfort of your phone or laptop. Increasingly, platforms like Roofstock are redefining what’s possible in the real estate industry as we enter a new era where tech- nology-driven platforms increas- ingly allow clients not only access to great content, which was Real Estate 1.0 (companies like Zillow and Trulia), but to commerce , which is Real Estate 2.0 (companies like Roofstock, Opendoor and Cadre).
% HOME PRICE APPRECIATION YOY
% RENT GROWTH YOY
Gary Beasley is CEO and Co-Founder of Roofstock, an online marketplace for buy- ing, selling and owning single-family rental investment homes.
SOURCE: John Burns Real Estate Consulting 2018
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DATA IN ACTION
Hottest Zips for Home Flips in Q1 2019
the national rate. The drill down con- sists of those zip codes with at least 10 or more flip sales in Q1 2019.
sold them within 12 months for a median price of $112,500, almost doubling their initial investment. Next on the list is zip code 11433 in Queens county, New York with a flip- ping rate of 35.7 percent. Here, home flippers purchased their investments for a median price of $292,700 and sold for a median price of $487,500, a gross flipping return on investment of 66.6 percent (not including rehab and carrying costs). The three remaining top 5 home flipping zip codes in Q1 2019 were 33147 in Miami-Dade county, Florida (home flipping rate of 32.7
percent); 38115 in Shelby county, Tennessee (home flipping rate of 32.4 percent); 92802 in Orange county, California (home flipping rate of 32.4 percent). Closing out the top 10 list with the highest home flipping rate is zip code 37917 located in Knox county, Tennessee (32.1 percent); 93728 in Fresno county, California (30.8 percent); two zip codes both located in the Miami-Dade county in Florida – 33142 (30.3 percent) and 33168 (27.5 percent); and finally zip code 63033 in Saint Louis county, Missouri (27.4 percent).
ZIPS THAT ARE FLIPPING HOT
A TTOM Data Solutions just released its Q1 2019 Home Flipping report and found that 7.2 percent of all home sales during the first quarter, reached a new high flipping rate, the highest since Q1 2010. The 7.2 percent flipping rate is BY ATTOM DATA SOLUTIONS
Eight out of the top 10 zips with the highest home flipping rates were at more than 30 percent. Leading the list was zip code 93212 located in Kings county, California with a flipping rate of 48.0 percent. In this top California zip code, real estate investors purchased homes for a median price of $72,500 and
up from 5.9 percent in the previous quarter and up from 6.7 percent a year ago. However, while flippers are flipping, gross profits are stumbling. Homes flipped in Q1 2019 sold at an average gross profit of $60,000, down from an average gross flip-
ping profit of $62,000 in the previ- ous quarter and down from $68,000 in Q1 2018 to the lowest average gross flipping profit since Q1 2016. ATTOM Data dug deeper into the data and uncovered those zip codes where the flipping rate was well above
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Boise City, ID
BIG DATA SANDBOX
Home Flippers Selling While Gross Profits Stumble
In ATTOM Data Solutions recently released Q1 2019 Home Flipping report, the home flipping rate reached a new high with 7.2 percent of all home sales during the quarter being a flip – the highest home flipping rate since Q1 2010. This flipping rate is up from 5.9 percent in the previous quarter and up from 6.7 percent a year ago. Diving a bit deeper ATTOM uncovered those markets with 50 or more flip sales in Q1 2019 and a population greater than 200,000, that are pushing the flipping rate upward. Eighty-five of 138 metropolitan statistical analyzed in the report (62 percent) posted a year-over-year increase in their home flipping rate in Q1 2019. However, those top 10 markets that saw the greatest home flipping rate in Q1 2019, all of them but one market had a decrease in the Gross ROI.
Prospecting for Opportunity HOW THE PACIFIC NORTHWEST IS FARING AMIDST SUPPLY AND DEMAND.
Home Flipping Rate
YoY Pct Change in Gross ROI
BY JOEL CONE, STAFF WRITER
A s in many parts of the country these days, there are still deals to be had in the Pacific Northwest region, a favorite region for inves- tors looking to purchase property at far below the inflated prices of places like California and New York. However, current market conditions demand that investors be increas- ingly creative in their prospecting for those opportunities. With the Great Recession over, the times of bargain basement priced properties in the Pacific Northwest (PNW) are in the rearview mirror. “From a regional aspect, we con- tinue to see migration from Califor- nia to Washington and Oregon,” said Matthew Gardner, Chief Economist at Windermere Real Estate. “Are Seattle and Portland continuing to suffer from housing affordability? Certainly, they are for several rea- sons. They are running out of land. They’re not building enough housing
to meet immigration growth, and we have more demand than supply.” Likewise, Boise is having its share of problems dealing with its own land use issues and lack of available housing while its popula- tion numbers continue to increase. Still, given that housing afford- ability — and homelessness — are genuine concerns, the question remains whether Boise, Portland, and Seattle will continue to be pop- ular choices for investors looking for somewhere to park their money despite rising home prices and unbalanced inventory levels.
population and jobs. But, the real estate market is in high demand and short on supply, making it a tough market to find deals. An associate broker with Ist Place Realty and a real estate investor, Cameron Williams char- acterizes what’s happening in the Boise market at present as “crazier than last year” though investors continue to come in to the area particularly from California. Home to a population of 217,000 people, Boise topped Forbes list for the fastest-growing cities in the country for 2018. “Between Boise and Nampa (the metro area) including Twin Falls, we have around half of the state [popu- lation] here,” said Donald W. Holley, emeritus faculty at Boise State Uni- versity’s Department of Economics. “In total, about 20 percent of the immigrants coming here are from California and 12 percent are coming
Atlantic City-Hammonton, NJ
Las Vegas-Henderson-Paradise, NV
Durham-Chapel Hill, NC
Charlotte-Concord-Gastonia, NC-SC 8
Tampa-St. Petersburg-Clearwater, FL 9
Clarksville, TN-KY 10
BOISE: TOUGH BUT NOT IMPOSSIBLE
The economic indicators for the Boise metro area are enticing for real estate investors. Being the state capital, the overall numbers look good for future growth in both
ATTOM Data Solutions analyzed sales deed data for this report. A single-family home or condo flip was any arms-length transaction that occurred in the quarter where a previous arms-length transaction on the same property had occurred within the last 12 months. The average gross flipping profit is the difference between the purchase price and the flipped price (not including rehab costs and other expenses incurred, which flipping veterans estimate typically run between 20 percent and 33 percent of the property’s after repair value). Gross flipping return on investment was calculated by dividing the gross flipping profit by the first sale (purchase) price.
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MARKET SPOTLIGHT: Pacific Northwest
Properties with Foreclosure Filings Qtr-Yr Boise City, ID Portland-Vancouver-Hillsboro, OR-WA Seattle-Tacoma-Bellevue, WA Q1 2018 208 764 820 Q2 2018 188 708 782 Q3 2018 231 513 799 Q4 2018 226 746 1,139 Q1 2019 98 687 820 PROPERTIES WITH FORECLOSURE FILINGS
from Washington state. The rest are coming from all over. For a small area, there’s been a lot of in-migra- tion and not a lot of out-migration.” And that population increase has been putting pressure on the hous- ing market for a long time. Holley noted that prices on existing homes have been rising an average of 11.4 percent per year since 2011, while prices for newly constructed homes have seen an annual average of 9.3 percent over the same time period. While it has some of the fast-
the investment business of small investors, the increased demand for housing in the metro area is being satisfied by another source — commercial developers building multifamily product. “I’m amazed at the number of apartments being built,” Holley said. “Multi-family dwellings, three or four stories, 100 up to as many as 200 units. It seems to be occur- ring all over the city. Much more so than in the past.” Still, investors are doing what they can to find deals despite the hard- ships the market is throwing at them. “There are still off market deals out there,” Williams said. “They’re out there but investors are digging hard for them. Direct mail is still working in this market.” While there is plenty of money
available from hard money lenders to fund deals, there’s more money out there than there are houses. And corporate investors are taking up whatever excess inventory there is at the entry level price point. “Local investors aren’t buying at the foreclosure auctions because the institutional investors are still taking the few that come up,” he said. “They buy them at the foreclosure auction, fix them up, and rent them out.” According to data released by AT- TOM Data Solutions, there were only 98 properties with foreclosure filings during the first quarter of 2019, down 56.64 percent from the previ- ous quarter and down 52.88 percent from the same quarter of 2018. “It’s too hard to make flipping work,” Williams added. “Individual investors who are willing to market
BOISE CITY, ID
Properties with Foreclosure Filings
Boise City, ID Portland-Vancouver-Hillsboro, OR-WA Seattle-Tacoma-Bellevue, WA
Boise City, ID Portland-Vancouver-Hillsboro, OR-WA Seattle-Tacoma-Bellevue, WA 2010 $135,000 $222,000 $284,148 2011 $124,229 $200,000 $244,605 2012 $141,314 $211,000 $258,000 2013 $167,887 $242,701 $295,000 2014 $174,563 $260,000 $315,000 2015 $186,202 $280,000 $340,000 2016 $202,488 $315,000 $368,000 2017 $221,000 $347,000 $410,000 2018 $250,000 $372,000 $449,950 MEDIAN SALES PRICES est-rising home prices, the area’s in- comes are not keeping pace, despite an unemployment rate of 2.4 percent as of April 2019. As Holley explained, the state is a relatively low wage area with cheap labor, much of which is not well educated nor highly skilled. While it might be cutting into
BOISE CITY, ID
Median Sales Prices
Seattle-Tacoma-Bellevue, WA Portland-Vancouver-Hillsboro, OR-WA Boise City, ID
are still finding success. But we’re not on the scale with the larger markets like Memphis or Indianap- olis. We don’t have the population.” For all of 2018, only 3.5 percent of total home sales were flips, ATTOM reported. That is up 2.7 percent from the year before, but down 12.5 percent from 10 years ago. Proper- ties that were flipping were bought for a median purchase price of $211,639 and sold at a median price of $249,844 for a gross return on in- vestment of 18.1 percent and taking
an average of 215 days to flip. “We’re seeing some investors getting them under contract and then putting them back on the mar- ket selling them on the MLS with- out putting anything into them.” As of the first quarter of this year, ATTOM reported that only 4.8 percent of Boise homeowners were seriously underwater while 27.7 percent were equity rich. The median home price in the Boise metro area for the quarter was $254,379, up 1.6 percent from the previous quarter and a 5.6 percent
increase from a year ago, a 110 percent increase from the area’s post-recession bottom in the first quarter of 2011.
PORTLAND: A GOOD PLACE FOR BUSINESS For people looking for a low- er cost of living and a busi- ness-friendly environment to find jobs, Portland is a good alternative. That includes doing business as a real estate investor. In 2018 Forbes named it the third
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