HOUSE SALES UP, BUT WHAT DO THESE NUMBERS MEAN TO RENTAL INVESTORS?

by Tim Herriage

HOUSE SALES UP, BUT WHAT DO THESE NUMBERS MEAN TO RENTAL INVESTORS?

by Tim Herriage

by Tim Herriage

June 2016 sales of existing homes were the strongest numbers in nearly a decade. This was attributed to low mortgage rates, helped by Britain’s decision to leave the European Union that is causing heightened investment in U. S. 10 Year Treasuries (U. S. mortgage rate benchmark,) scarce housing stock and an improving economy.
7-22 Existing Homes Sales
Per the National Association of Realtors, June sales were up 1.1% over May to settle at an annualized run rate of 5.57 million, achieving the highest level since February 2007.
Sales for May were revised down 20,000 to 5.51 million from an initially reported 5.53 million.
All charts courtesy The Daily Shot
 CONTRADICTING EXPECTATIONS
The Wall Street Journal surveyed economists who had expected June sales would decrease 0.7% to a pace of 5.49 million. Economists were expecting 2016 sales to moderate over 2015.
If the professionals are forecasting uncertainty, this is not good for individual homebuyers about to make the decision of a lifetime. Rental investors should embrace this uncertainty as it keeps those careful tenants considering a home purchase, off the market for a little longer.
DOES VOLUME TRANSLATE TO VALUE?
With the increase in volume however we are seeing a slowing or reduction in the generalized national housing index. This is the sort of dangerous data that a Wall Street economist will use to validate the argument that housing, as an investment commodity, does not hold its value. As we discussed in a recent blog http://www.2020rei.com/stocks-good-houses-bad-only-if-you-use-stock-market-metrics/ using “convenient numbers” that allow simple comparisons of value is deceptive.
7-22 HPI reportAlthough this chart shows national house price appreciation (HPA) eased a little the rate is still ahead of the national inflation rate ensuring well-located SFR rentals will remain in demand. Also missed in these charts is the fact the annual HPA rate is a compounding number, so even a moderating number is piled on top of previously higher numbers.
 
 
BEWARE “THE TYRANNY OF AVERAGES”
Make sure that any valuation of a specific property uses local market comparisons, or if a rental property, is analyzed to verify it is generating positive cash flow, making this property the basis of a viable rental business.National averages are merely a starting point and no indication of specific value. Do your own local due diligence.
BEHIND THE NUMBERS
A monthly national rate change statement, just like publishing a monthly index number is a snapshot of the housing market. These may generate a “feel good” number but gives little context, however comparing the growth rate of hourly earnings to house price appreciation, a deviation shows up with HPA beginning about 2000 with loosening credit, the 2008 correction and then a return to the same HPA rate. Note this House Price Index (or HPA) chart is not to the same timeframe as HPA rate above.7-22 HPI vs Income
INVESTOR LESSONS
Major political and economic events, or any expected regulatory changes from future administrations are not forecast to mitigate housing demand or major changes in mortgage credit availability. Demographics and demand are a foregone conclusion. This means investors buying well-located rental properties in strong Sunbelt economic centers will be faced with continued demand for safe, convenient and market priced SFR rentals. In keeping with the NAR marketing message, “Now is a great time to buy a (positively cash flowing rental) home.” We add, “in a market with great job and economic performance like the Dallas/Ft Worth Metroplex.” For more call 2020 Companies.

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