“Wisdom hath built herself a house,” says the wise King Solomon in his Book of Proverbs 9:1. Throughout this collection of the King’s teachings, houses are associated with stability, wisdom and prosperity. For those of Solomon’s day, as today, the state of housing can reveal the state of a nation.
Current economic indicators show that the US housing market appears to be improving – and one indicator of this upswing is the rising prices of existing homes for sale in major markets across the country. Yet, although mortgage interest rates are at an all time low, it’s harder to qualify for a mortgage now than in the five previous years. What are the implications of these contradictory indicators for income property investment?
Recent years have seen a high volume of relatively low-cost properties hitting the market, due to the collapse of the housing sector which began in 2008 with masses of subprime mortgage defaults. Unprecedented numbers of homes went into foreclosure, making it possible for investors to snap up valuable properties for low prices. Adding to that, numerous lenders softened requirements for short sales, allowing struggling homeowners to sell their properties for less than the mortgage owed.
After the initial housing crisis hit, the flood of foreclosures slowed to a trickle as lenders and the courts processed the backlog of pending cases, picking up as those cases cleared and the houses involved were listed for sale. But now, that source of low cost properties is finally drying up. Tighter lending standards and more programs to support homeowners in trouble are shrinking the number of low cost properties available to homebuyers of all kinds.
According to Inman News, the national median price for existing homes has risen by more than 10 percent compared to just a year ago. And this is the longest streak of rising prices since 2006. These trends may be linked to another phenomenon of the emerging hosing recovery: rising rents and lower rental vacancies in a number of markets around the country.
Rising rents may on the one hand push some renters into making a home purchase instead, since rents may be higher than mortgage payments at the current low rates. On the other hand, one reason the rental market continues to expand is that many potential homebuyers can’t afford the required down payments, or don’t have the credit to support a mortgage under current lending standards aimed at eliminating many of the problems associated with subprime loan defaults.
Many real estate analysts and trend-watchers maintain that a healthy balance between housing buyer and seller demand depends on about a six-month supply of available homes on the market. As of the beginning of December 2012, the supply was down to less than five months’ worth across major markets surveyed.
While the scarcity of existing homes for sale may mean good news for the housing recovery, it presents new challenges for investors. Diversifying assets in more than one market, as Jason Hartman advises, is one strategy for finding viable properties. Multiplexes of up to four units can be purchased under the same conditions as the scarcer single-family homes, with less competition.
Continuing low interest rates make mortgages a bargain, but investors, like buyers of residential property, can also expect to face more scrutiny when applying for loans. This means potential investors may need to find alternative sources to fund their investments.
Rising home prices and greater demand represent a positive trend for the nation’s housing market as a whole. But independent investors seeking low cost properties may need to think outside the box to find and fund quality rental income properties for a stable and prosperous investing career. (Top image: Flickr/St_A-Sh)
The Solomon Success Team