Real Estate is at its Most Affordable Point in Decades
Home affordability relative to household income reached its best level in decades as property values fell. This news bodes well for real estate investors and homebuyers alike. An abundance of housing inventory and a dearth of buyers have created a bonanza of real estate deals.
Data provided by Moody’s Analytics track the ratio of median home prices to annual household incomes in 74 markets. Nationally, the ratio of home prices to annual household income reached a peak of 2.3 in late 2005. By September 2010, the ratio had fallen to 1.6, a level not seen since 1989.
Data provided by the National Association of Home Builders and Wells Fargo in February 2011 echoed the Moody’s numbers. The Housing Opportunity Index found that 73.9 percent of new and existing homes sold in the fourth quarter of 2010 were affordable to families earning the national median income of $64,000, surpassing the previous high of 72.5 percent reached in early 2009. Before that point, the index had never reached 70 percent and rarely went above 65 percent. The index has been above 70 percent for eight straight quarters.
According to data from the Lehigh Valley Association of REALTORS® Multiple List Service (MLS), 9.3 percent of homes for sale are pre-foreclosure short sales and 5.4 percent are bank-owned foreclosures. Many of those properties are being snatched up by real estate investors and bargain-hunting homebuyers.
So the data indicate that now is the time to buy, but what should people buy? The answer for those who plan to buy a home to live in is fairly simple: buy what you can afford in a neighborhood that you find desirable. In a matter of minutes, a good mortgage loan originator can help a homebuyer understand what they can afford.
The answer for real estate investors is a little more complex and depends on their level of experience. In the current market climate, flipping can be dangerous for novice and intermediate investors due to the lack of buyers and the abundance of inventory on the market.
A proven strategy for real estate investors in this market is to buy income-producing properties. A strong suggestion for landlords is to buy fixer-upper properties in working class neighborhoods, renovate them, and rent them with the help of a licensed property manager. By improving a house, the landlord should create equity. Furthermore, the renovations serve as “repair insurance,” ensuring that costly repairs will not be necessary for at least the next five years. Investors who buy fixer-upper properties in cash and then refinance them in a few months after they are rented should recoup much of their cash investment. That may allow them to buy the next property in a matter of months, using the same capital.
By hiring a property manager, the investor is free to focus on acquiring the next deal while allowing an experienced professional to manage the tenants. Investors who pay full price or close to full price for an already-improved property will not create equity and will likely not be able to refinance and pull cash out for many years. We are in the midst of the greatest buyer’s market of our generation, and now is the time to acquire more than our fair share of real estate. To learn more about real estate investing, go to www.lvrig.com for information on the Lehigh Valley Real Estate Investors Group. Also, check out www.reinvestorfest.com for information on a major real estate educational seminar that takes place April 1st through the 3rd right here in the Lehigh Valley.