In a June 2013 interview in Kiplinger's Personal Finance Mark Vitner, managing director and senior economist for Wells Fargo gave brief insight into the return of speculation into residential real estate.
As opposed to 'Speculation 2005,' which allowed everyday folks to 'state-their-income' and qualify for 10, 15 or more homes, Vitner briefly touches upon the recent interest of private equity armed with large pools of money buying and renting single family real estate, a topic visited in this column in March.
Most interesting was Vitner's opinion that these investors were 'overpaying' for property as they compete with owner occupants. The reason for investor interest in real estate centers around the belief that younger professionals, who are taking longer to start a family that is saddled with record amounts of school debt, will prefer to rent longer than previous generations; a topic also discussed in this column in January 2012. Today's investors are speculating on a continued rise in average home prices and rental rates.
Only a year ago, a single family detached property in Carlsbad at 2,700 square feet sold for around $672,000 in 70 days with a near 4 percent discount in asking price. Flash forward 12 months to today's local market. A similarly sized property sells for estimated $778,000 at 99 percent of asking price to multiple offers in 20 days. A 15.7 percent jump in total housing price or a 79 percent increase on a typical 20 percent down payment. For the value investor that is focused solely on the monthly net-return and not factoring for appreciation, the recent rise in home prices makes it harder justify real estate as a viable investment option. Rental property today is closer to break-even than the 5 percent to 8 percent returns more common in recent years. Conservative estimates would require real estate investors to have a 10-year or longer time horizon to justify buying property at today's home prices. But the alternative of a near offensive return in a savings account or risking investing into a volatile and record high stock market, investors continue to compete with owner-occupants for available housing.
The renewed interest in real estate is not just in Carlsbad, San Diego or an American phenomenon.
An April 14 edition cover story in The Financial Times goes in depth on how a, "growing number of investors, depressed by poor returns on their savings, are looking at becoming landlords." It seems Great Britain's extended period of reduced rates is also enticing savers to become real estate investors. A comprehensive graphic of Great Britain shows average yields on rental properties in Britain to be between 4 percent to 6.5 percent. But home loans in the UK and Great Britain are much different than in the States. Most are a fixed rate for between 2 and 5 years and then adjust to a benchmark rate. A 30 year fixed rate home loan is an American product. British real estate investors are exposed to a greater degree to interest rate fluctuations.
But today's investors are speculating that although higher rates are inevitable, they are not likely in the near-term.
The Congressional Research Service outlined current monetary policy in a February 12, 2013 report: "In September 2007, in a series of 10 moves, the federal funds target was reduced from 5.25 percent to a range of 0 percent to 0.25 percent on December 16, 2008, where it now remains. In December 2012, the Fed pledged to maintain "exceptionally low rates" at least as long as unemployment is above 6.5 percent and inflation is low."
The U.S Department of Labor as of May 3 estimates unemployment at 7.5 percent. Average 30-year fixed conforming mortgage rates hover around 3.75 percent.
The question remains to investors local and abroad, what will happen to the value of real estate when record low borrowing rates and government's monetary policy changes with an improving economy? As they say in Great Britain, "The floor is yours."
Lund can be reached at [email protected].
As opposed to 'Speculation 2005,' which allowed everyday folks to 'state-their-income' and qualify for 10, 15 or more homes, Vitner briefly touches upon the recent interest of private equity armed with large pools of money buying and renting single family real estate, a topic visited in this column in March.
Most interesting was Vitner's opinion that these investors were 'overpaying' for property as they compete with owner occupants. The reason for investor interest in real estate centers around the belief that younger professionals, who are taking longer to start a family that is saddled with record amounts of school debt, will prefer to rent longer than previous generations; a topic also discussed in this column in January 2012. Today's investors are speculating on a continued rise in average home prices and rental rates.
Only a year ago, a single family detached property in Carlsbad at 2,700 square feet sold for around $672,000 in 70 days with a near 4 percent discount in asking price. Flash forward 12 months to today's local market. A similarly sized property sells for estimated $778,000 at 99 percent of asking price to multiple offers in 20 days. A 15.7 percent jump in total housing price or a 79 percent increase on a typical 20 percent down payment. For the value investor that is focused solely on the monthly net-return and not factoring for appreciation, the recent rise in home prices makes it harder justify real estate as a viable investment option. Rental property today is closer to break-even than the 5 percent to 8 percent returns more common in recent years. Conservative estimates would require real estate investors to have a 10-year or longer time horizon to justify buying property at today's home prices. But the alternative of a near offensive return in a savings account or risking investing into a volatile and record high stock market, investors continue to compete with owner-occupants for available housing.
The renewed interest in real estate is not just in Carlsbad, San Diego or an American phenomenon.
An April 14 edition cover story in The Financial Times goes in depth on how a, "growing number of investors, depressed by poor returns on their savings, are looking at becoming landlords." It seems Great Britain's extended period of reduced rates is also enticing savers to become real estate investors. A comprehensive graphic of Great Britain shows average yields on rental properties in Britain to be between 4 percent to 6.5 percent. But home loans in the UK and Great Britain are much different than in the States. Most are a fixed rate for between 2 and 5 years and then adjust to a benchmark rate. A 30 year fixed rate home loan is an American product. British real estate investors are exposed to a greater degree to interest rate fluctuations.
But today's investors are speculating that although higher rates are inevitable, they are not likely in the near-term.
The Congressional Research Service outlined current monetary policy in a February 12, 2013 report: "In September 2007, in a series of 10 moves, the federal funds target was reduced from 5.25 percent to a range of 0 percent to 0.25 percent on December 16, 2008, where it now remains. In December 2012, the Fed pledged to maintain "exceptionally low rates" at least as long as unemployment is above 6.5 percent and inflation is low."
The U.S Department of Labor as of May 3 estimates unemployment at 7.5 percent. Average 30-year fixed conforming mortgage rates hover around 3.75 percent.
The question remains to investors local and abroad, what will happen to the value of real estate when record low borrowing rates and government's monetary policy changes with an improving economy? As they say in Great Britain, "The floor is yours."
Lund can be reached at [email protected].