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Market Observers Expect Real Estate Investing in 2017 to Be Healthy—If Not Easy.

The constant flurry of news about the housing market has been consistently upbeat the past few years, as home prices increased, wages took a historic jump in 2015 and the market worked through the foreclosures left over from the Great Recession.

“A lot of the data looks very healthy, and I would say we are in most markets back to a normal—whatever that is, exactly—but a normal, healthy housing market,” says Daren Blomquist, senior vice president of communications at ATTOM Data Solutions, the parent company of RealtyTrac.

Although experts say the housing market is back to “normal,” that doesn’t mean that real estate investing has suddenly become easy. Experts say that while the run-up in home prices has made many markets unaffordable, real estate investors will be able to find values in 2017.

LATE 2016 U.S. MARKET SNAPSHOT

Although the U.S. economy is growing very slowly (about 1 percent annualized for the past three quarters), home appreciation in many areas of the country is experiencing double-digit growth. Slow economic growth would seem to deter home purchases, so other factors are powering the market, says Arash Sotoodehnia, chief credit officer and chief risk officer at RealtyShares.

“What we have is a continued, very benign financing environment,” he says. “So if you qualify for a loan, the cost of financing is pretty low, interest rates are still pretty low, and that supports house prices.” What’s driving the housing market is historically low rates, “reasonably solid” consumer confidence numbers and historically high wage growth, Sotoodehnia says.

Smart real estate investors know that national numbers—whether they be rosy or grim—don’t necessarily apply to a local market. “Local markets are so dependent on local employment trends, even the subtle things just like what neighborhood is becoming more ‘hip’ in a market and what neighborhood is out of favor,” says Sotoodehnia. “A lot of local dynamics—economic, cultural and other factors—impact what individual houses may do in individual neighborhoods.”

Experts have noted a softening in many high-end markets in 2016. San Francisco, for example, has seen prices “flatten out” in 2016, according to Blomquist, and RealtyTrac’s data shows that prices actually dropped in San Francisco County in May. RealtyTrac’s researchers also noticed that demand for starter homes is strong, and that buyers priced out of the higher-end markets are looking for homes in relatively pricey but less-affluent areas like Denver.

OUTLOOK FOR 2017: ‘VICTIM OF ITS OWN SUCCESS’

The softening of the higher-end market was something that RealtyShares “noticed in the spring, and it carried through in the summer,” Sotoodehnia says. In addition to San Francisco, high-end homes in Miami, Los Angeles and New York “are sitting on the market a little bit longer, and there’s less interest on the developer side to undertake big projects in those markets,” he says.

“We’re hearing that the high end of the single-family market is falling off of a cliff,” agrees Jack BeVier, partner at The Dominion Group.

The weakening in demand is a result of prices rising faster than incomes, according to Blomquist. He foresees weakening in more markets in 2017, with a slowing home sales volume and, “at the very best, plateauing home prices into 2017 in many markets,” he says. The combination of soaring home prices and slower wage growth is “one of the major reasons behind that; the housing market has become a victim of its own success,” Blomquist says.

RealtyTrac’s affordability index shows that 20 percent of the markets analyzed are unaffordable by their historical standards, according to Blomquist. “So affordability is a big reason I think we are starting to see signs of demand weakening and that we will continue to see that into 2017,” he says.

Sotoodehnia says that RealtyShares has noticed a “builder-enhanced focus” on starter homes. A report by the U.S. Census Bureau and the Department of Housing and Urban Development said that more new homes were sold in July 2016 than in any month since October 2007. The price for a new home fell by almost $15,000 in June, which is a strong indication that builders are targeting the lower end of the market.

“I think in 2017 that will be a continued theme,” says Blomquist. “The markets that are less affordable will cool off, and the ones that will still continue to do well are those that have a combination of affordability and jobs.”

Rehabbers might be in for a tougher 2017, as BeVier expects “continued declines in distressed foreclosure inventory, which will compress flipping margins and yields for rental investors,” he says.

WHERE TO INVEST IN 2017

Although demand is decreasing at the higher end, many markets are still experiencing solid growth. Tampa, for example, has experienced 20 percent year-over-year growth yet still has a median home price below $200,000, according to Blomquist.

Other markets that are experiencing double-digit year-over-year increases include Phoenix (12 percent), Portland (12 percent), Austin (12 percent) and Denver (11 percent), according to RealtyTrac data.

Portland, Austin and Denver are interesting markets, Blomquist says, as they aren’t exactly bargain priced with median home prices in the $300,000 to $350,000 range. Yet relative to markets like San Francisco, with a median price of $755,000, they look downright cheap, he says.

“Housing most years is a very regional and a local phenomenon, so I think we definitely look at it regionally and locally,” Sotoodehnia says. “There are definitely some markets that are not as robust and other markets that are growing very, very rapidly.”

With markets like Denver and Austin starting to get expensive, investors are going bargain shopping. The No. 1 place RealtyTrac data shows institutional investors are looking is Birmingham, Alabama. “That is probably not the first market you may think of. Actually, in a lot of real estate it’s not a secret anymore,” says Blomquist. Alabama is well represented, as Mobile and Huntsville made the top 10 of institutional investor hotspots as well.

The secondary and tertiary markets “are going to be the best options for real estate investors because of the lower prices,” Blomquist says. He adds that while lower prices are good, the combination of lower prices and strong underlying economic fundamentals are what make a market truly desirable.

“I think there will still be that strength in the market when you have that combination of affordability, job and wage growth—population growth is the other one I’d throw in there as a good kind of nexus of factors that are going to be the strongest markets in 2017,” Blomquist says.

Other markets that institutional investors are heavily into include Memphis; Augusta, Georgia; Lakeland, Florida; and New Haven, Connecticut. New Haven doesn’t necessarily have a lot of jobs, Blomquist notes, but it’s close to a city with a plethora of jobs: New York. “With some of these markets, it’s not always that there are a lot of jobs right there, but it’s at least access to jobs,” he says.

The bottom line for real estate investing in 2017: While still good, experts agree that real estate investing will be more challenging than the past couple of years. “It’s still a very favorable market, I would say, for real estate investors, but 2017 won’t be as good as 2016, and 2016 wasn’t as good as previous years, honestly, as the market has risen,” says Blomquist.


RESOURCES:

The Dominion Group

www.thedominiongroup.com  |  410-727-0908

RealtyShares

www.realtyshares.com  |  855-880-6050

RealtyTrac

www.realtytrac.com  |  800-550-4802


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