Housing is wayyy pricey, BUT still more affordable than during the last peak

Home price growth in the U.S. soared to new highs in July (a major headache for investors as we mention further below), but some experts say it’s not all that bad.

Standard & Poor’s said Tuesday that its S&P CoreLogic Case-Shiller national home price index posted a 19.7% annual gain in July, up from 18.7% in June — the fourth straight month in which the growth rate set a record. 

The 20-City Composite posted a 19.9% annual gain, up from 19.1% a month earlier. The 20-City results were just shy of analysts’ expectations of a 20% annual gain, according to Bloomberg consensus estimates.

“The National Composite Index marked its fourteenth consecutive month of accelerating prices with a 19.7% gain from year-ago levels, up from 18.7% in June and 16.9% in May,” said Craig J. Lazzara, managing director and global head of index investment strategy at S&P Dow Jones Indices, in a press statement. 

“The last several months have been extraordinary not only in the level of price gains, but in the consistency of gains across the country,” he added.

However, according to a blog by First American Chief Economist Mark Fleming, in July, housing affordability continued its decline as year-over-year nominal house price appreciation reached a record 20 percent, vastly outpacing the increase in house-buying power compared with a year ago. 

House-buying power, how much one can buy based on changes in income and interest rates, increased by 3.8 percent in July compared with one year ago, propelled by lower mortgage rates and higher household income.

“The severe supply-demand imbalance in the housing market continues to fuel record-breaking house price appreciation across the country,” said Fleming in the blog, “yet lower mortgage rates and higher incomes mean homes are more affordable today than at their prior peaks in every market we track.”

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Foreclosure database Realty Trac recently completed its second RealtyTrac Investor Sentiment Survey, surveying over 300 individual real estate investors across the country to find out how they viewed the market, what problems and opportunities they faced, and what their impression was of today’s environment for real estate investing. 

● 48% of investors believed that the investment market is worse or much worse than it was a year ago 

● Almost 63% of survey respondents listed the rising cost of homes as a major challenge for residential real estate investing 

● The lack of available inventory was identified as the second-biggest challenge (57%) by the investors 

“Real estate investors continue to face the dual challenges of low inventory and rising home prices,” said Rick Sharga, executive vice president at RealtyTrac, an ATTOM company. “Coupled with strong competition from traditional homebuyers and rising material and labor costs, it’s no wonder that individual investors believe that the market is less favorable today than it was a year ago.” 

Here’s a link to a blog on the survey. 

About 48% of investors believed that the investment market is worse or much worse than it was a year ago, and 36% believe that conditions will remain the same over the next six months. Rising home prices (63%) have replaced lack of inventory (57%) as the #1 challenge cited by investors, although they trade places in the investor six-month outlook. 

Competition from traditional homebuyers (28%) fell out of the top three problems for investors and was replaced by increased material costs (36%). Still, many investors believe that ongoing competition from homebuyers will continue to be a challenge, and 27% said it will likely remain a top concern six months from now. 

The unprecedented demand from homebuyers has created an unusual market dynamic for individual investors: instead of competing with larger institutional investors, mom-and-pop investors find themselves competing with more traditional consumer homebuyers. 

The investors who participated in the survey are representative of the majority of real estate investors—the typical mom-and-pop investors who purchase between 1-10 properties a year. It is these individual investors who exert the most influence on market conditions. 

Nearly 90% of the 19 million single-family rental properties in the country are owned by mom-and-pop investors, while the largest institutions—collectively— own less than 2%. 

The fix-and-flip market similarly is populated by thousands of small investors who average about one flip a month, but who now face growing competition from the so-called iBuyers like Opendoor, Offerpad and Zillow, which are essentially institutions that do flipping at scale. 

While respondents to the previous RealtyTrac survey were almost evenly split between fix-and-flip and buy-and-hold investors, the respondents to the Fall 2021 investor sentiment survey included more investors who purchased properties for the purpose of renting them out.

This could be a reflection of current market conditions — ATTOM Data has reported that the number of flips in Q2 2021 was down year-over-year, as were flippers’ gross profits.

“Investors are more optimistic about the future than they are about current market conditions,” Sharga noted. “But they do worry about inflation – about 81% of the investors surveyed were concerned about inflation causing material and labor costs to rise, making affordability an issue for prospective homebuyers and renters, and increasing the costs of financing.”

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While mom and pop type investors are souring on real estate, big tech companies almost certainly are not.

The biggest U.S. companies are sitting on record piles of cash. They are getting paid next to nothing for holding it, and they are running out of ways to spend it.

So they are buying a lot of real estate. (WSJ paywall.)

Google’s announcement last week that it would purchase a Manhattan office building for $2.1 billion is the latest in a string of blockbuster corporate real-estate deals since the start of the pandemic. 

Amazon.com Inc. last year paid $978 million for the former Lord & Taylor department store in Manhattan. 

Facebook Inc. bought an office campus in Bellevue, Wash., for $368 million.

Overall, publicly traded U.S. companies own land and buildings valued at $1.64 trillion, according to S&P Global Market Intelligence. 

That is up 38% from 10 years ago, and the highest for at least the past 10 years, according to S&P.

Buying real estate is a way for these companies to avoid sometimes pricey and cumbersome leases, because they often occupy these buildings and become their own landlords. 

These usually modern or renovated and sometimes custom-built properties are the kind of buildings that have appreciated in value over the years. But owning real estate also puts companies at risk of losses if urban property values fall.

For now, the corporate buying spree is helping prop up commercial real-estate markets at the same time many investors are shying away from office and retail buildings amid rising vacancy rates.

Many private-equity and real-estate funds have also raised hoards of cash, but for the most part they have been reluctant to spend during the pandemic in hopes that prices could fall further. 

And unlike real-estate investment firms, big corporations often buy their buildings without taking out mortgages, allowing them to spend more of their money and to close on deals more quickly.

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