How Soaring Home Prices Hide Real Estate Bargains

Everybody likes good news, and here’s a trend which is likely to please just about everyone: Home values are going up. I mean really going up. According to …

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Everybody likes good news, and here’s a trend which is likely to please just about everyone: Home values are going up. I mean really going up. According to the National Association of Realtors, January home prices were up for the 47th month in a row. The Federal Reserve says that homeowner equity has increased by nearly $6 trillion since 2011.

These happy numbers have real meaning for investors.

First, the foreclosure rate is back to the levels seen before the mortgage meltdown. This is hugely important because it means there is less risk in the marketplace. Like moths to a flame, less risk draws in mortgage investors and their capital – capital which is pushing down mortgage rates.

Second, property owners – including investors with single-family homes – have more equity.

At the end of 2015 RealtyTrac says that the number of “equity rich” properties increased by 2.1 million units. “Equity rich” homes are defined as those with at least 50 percent equity. On the other side of the coin, 6.4 million properties were “seriously underwater” at year end, a reduction of 481,000 units when compared with a year earlier. The term “seriously underwater” means that property debt exceeded property value by at least 25 percent.

“There’s no doubt that real estate has recovered substantially during the past few years,” said Rick Sharga, executive vice president at Ten-X.com, an online real estate marketplace. “But at the same time, there are numerous opportunities for investors, as lenders push seriously delinquent homes through what’s been a 3-year foreclosure process, and many homes in certain markets are available for sale at prices which in some cases are actually lower than the values we saw in 2014 and 2013.”

Mixed News

No doubt there’s a lot of positive energy in the real estate marketplace, the news is overwhelmingly good, and the headlines are wonderful. However, lurking in the shadows are some realities which need to be acknowledged.

According to NAR, median existing single-family home prices increased in 81 percent of the metropolitan statistical areas (MSAs) it measured at the end of 2015. Values rose in 145 out of 179 MSAs.

The catch is that at the same time existing home values fell in 34 MSAs (19 percent).

If we dig a little deeper we can see that even in areas where home prices are rising they’re not rising for everyone.

In looking at more than 40 million properties, Weiss Analytics found in November, the latest period available, that 28,318,281 homes saw higher values. That’s down from 31,495,679 properties a year earlier.

For the same period Weiss also found that 11,833,930 homes saw equity declines – that’s 24.2 percent of the homes measured. Moreover, the number of homes in the whoops, we have less equity, category rose substantially from 7,282,612 units 12 months earlier.

"This is nothing like the rate of erosion we saw in the percent of houses rising in the 18 months prior to the housing meltdown, however this steady decline in appreciation is concerning," said company CEO Alan Weiss.

The Investor Opportunity

If there’s a bottom line here it’s that despite rosy headlines the real estate marketplace remains a mixed bag. Prices are rising in general but a large number of homes are languishing. Moreover, there are factors outside real estate which make selected property investments interesting.

First, while it appears home values are broadly rising, they’re not rising uniformly or universally. Bargains remain and seem likely to continue: the latest home purchase sentiment survey by Fannie Mae found that “the net percentage of those who say it is a good time to sell a house fell 2 percentage points to 7 percent.”

Second, you have to love today’s mortgage rates, currently at 4 percent and below. We’re not at the lows seen in 2012 but at the same time we’re not far off. Compared with historic norms, roughly 8.6 percent over a 40-year period according to Standard & Poors, financing today is cheap.

Third, according to the National Association of Home Builders, “the share of first-time home buyers has traditionally averaged around 40 percent, but in the aftermath of the housing downturn it now stands at just under 30 percent.”

What’s happening is that a lot of people can’t buy and the reason is a lack of income. NAHB estimates that during the past seven years “the slow recovery and uncertainty in the job and housing markets resulted in 7.4 million lost home sales.”

The bottom line is that we now have a large and widespread stock of homes at good prices, low mortgage rates, and a growing renter population. For many investors that’s a recipe for success.

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