Determining a Market

The big motivation for large real estate investors was the yield they could potentially receive from purchasing real estate in depressed markets. Early adopters entered the market in 2008 and 2009 and by 2010 the market was flood by big money investors. Today we are seeing a saturation in terms of investors and yields are not worth the time for many large funds. For example, rents in Arizona and Nevada are down from where they were in 2010 in spite of the rapid rise in housing values. It could be because there is a saturation of rentals in these markets or simply because incomes are weak in these areas. One thing is certain and some investors are losing their appetite for rental real estate. Another interesting trend involves higher inventory and subsequently and ease in the volume of bidding wars. What are some of the trends in the current housing market?

Rental analysis

us rent prices

One interesting trend is the large rise in rents for New York since 2010. Los Angeles rents appear to be steady or falling somewhat according to the median list price. The rental trend in Los Angeles appears the same as it does for the nation.

What is interesting is when comparing housing values:

zillow home price index

Los Angeles is one of the markets that has turned around quickly. The trend isn’t evenly distributed as the chart above highlights. The big jump in New York rents is interesting since home values according to the above seem to be fairly stable. Unlike Arizona and Nevada with falling rents and incredible jumps in home values, New York would seem to justify a move up in prices when looking at rents.

The young and in debt

Americans overall receive a large portion of their reported net worth through real estate equity. Since many young Americans bought near or at the peak, they never really had the chance to accumulate any equity growth. Many also bought with FHA insured mortgages or low down payment loans stretching their budgets. Because of this, net worth for older households has largely recovered from the peak but for younger households, they are still down by a whopping 40 percent from the peak:

age of household net worth

Source: New York Times

The main reason? Negative equity. The debt still remains connected to peak housing values and while stocks are near record levels, real estate values nationwide still have a long way to go to reach those previous peaks.

Bidding wars easing up

Redfin has an interesting report on bidding wars. Of course the most competitive markets seem to be in California. Take a look at the bidding war trend:

red-fin bidding wars

Source: Red fin

The main reason for this? The largest monthly inventory increase in three years might help to ease off some of the insanity in the current market. This might offer some wiggle room around the country but the heat is still on in manic California:

competition markets

Look how crazy the San Francisco market is in terms of competition. In May, over 96 percent of winning bids were over asking price! Orange County and San Diego had very high numbers here as well. So if you are out there in this mania and are losing out, this is probably why.

Going after strategic defaulters

A large number of people strategically defaulted during the height of the bust and many thought they were off free and clear. Now that prices are up, banks are looking into those strategic defaults from the past:

“(WaPo) [Freddie Mac spokesman Brad German] said Freddie Mac is targeting “strategic defaulters,” which the agency defines as “someone who had the means but chose to go into default, that there were no extenuating circumstances that affected their ability to pay. If you’re choosing not to pay off your mortgage, but you’re paying other bills, we would consider that strategic default.”

In 2011, Fannie and Freddie flagged 12 percent of 298,327 properties they had foreclosed on — more than 35,000 — for deficiency judgments in an attempt to collect $2.1 billion in unpaid mortgage debt, according to an inspector general’s report released in October from the Federal Housing Finance Agency.”

Americans seemed to be shocked that data was being collected on them while they post their entire lives chronicled by the minute on Facebook voluntarily. So it should be no surprise that our GSEs were also tracking those strategic defaulters. Now that times are good and equity is back up, you might be receiving a letter if you strategically walked away from your mortgage and had assets in other investment vehicles.

The trends suggest that rents are tight because incomes are tight. You also see that bidding wars might be reaching an apex in terms of manic fever in some markets. In the end, the momentum is still on the upside but for how long? Can the Fed continue to purchase MBS and risk inflating that $3.3 trillion balance sheet even further? The fact that inventory is rising is a good sign for most Americans.housingbubble.com

The information included here is incredibly valuable, thanks so much to both Nathan and Randy for providing it. I know I've taken some notes and learned some things that are very helpful in analyzing markets.
I think there are some intangible factors worth consideration in choosing a market. I guess I always look at things a little unconventionally, so I'll share these factors here, using some of the weird kinds of names I like to give things.
1) The Pendulum Swing Factor--Most long-term investors are looking for stability. Recent turns in the market have shown us areas that can go up or down mercurially in value, and rents that can fluctuate accordingly. They have also shown us the areas that absorb national fluctuations the best--these areas are not going to be among your top performers in terms of either price or rent increases, but they are also not going to see the bottom fall out either. If you are looking for an area that provides this stability, look for the areas where the rental rates are high in comparison to purchase prices of properties, but research these rates and changes in them all the way back to about 2000. The last dozen or so years have been very revealing, and the most stable areas would be the places where you would want to own rental properties, as long as they show a strong CAP rate and Net Income.
2) The How Easy Is It Going To Be To Solve an Emergency Factor--Do you know someone who could be a go-to person in an emergency within a certain area? Or is it close to where you live? Or can you quickly establish a solid relationship with someone who can help in dealing with issues? Remote investing is not a problem as long as you do not create too much exposure to risks you are unwilling to bear.
3) The Plan B Factor--So let's suppose that your plan to buy, tenant, and rent a property, and then just sit back and collect the revenue does not work for some reason. What are your contingency plans for changes in the market, changes in the environment, etc. We cannot plan for everything, but we can plan for some things. You may discover that some of your contingency plans are even better than your Plan A. For example, I own some small multi-unit properties, but I usually use sandwich lease options with single family properties. I can increase the returns on these properties significantly vs. a standard rental scenario, and I'm willing to risk the idea that the property will sell at the end, because I know I can do it again with another property. It also allows me to create very pleasant, if not phenomenal returns on properties where it is very difficult to get ANY return on a standard rental. It makes it more reasonable for me to invest close to home rather than working remotely. I'm not opposed to remote investing, I just have an action plan that works even in my local marketplace.
Every investor has their own criteria for investing, and their own long-term objectives. It's interesting and fun to work with other areas besides your own back yard, and I do some remote investing for that reason, but it is not always necessary to look to the other side of the fence to find green grass.

Thank you Nathan, Randy, Dallin,

Some awesome tips here! I'm bookmarking this!

I also invest out of state, and my advice to anyone investing remotely is to have an A team in place before you close on that first 'great deal'. You need an A player real estate agent; an A player handyman/contractor; an A player insurance agent; an A player property manager; an A player banker (if you plan to refinance), an A player title agent; and an A player attorney.
Once you have your A team in place, it will be 'fun' investing remotely!

Valerie, I just need to follow you around for great ideas, thanks.

The only other aspect of remote investing that can be troublesome if you don't handle it well is communications. Make sure that your phone system is set up so that you receive calls, and if you need to be able to differentiate between areas that you are working with, that you have arranged for that. Your email needs to be easy for you to use to manage any additional sorting requirements. You may need to modify your business cards or get new ones made for the new area that can be sent out to people, your website may need to be updated, etc. Don't let poor communication destroy your business, and set rules with your A-Team in regard to communications, which could include periodic update teleconferences or phone calls just like you would schedule an in person meeting regularly if they were in your local area.
There needs to be a seamless feel for everyone involved with your business to where they feel and understand that you are in control of your business, that you have direction, and that you are keeping tabs on what is happening. I have made this comment before, that you either manage your business, or you manage your managers. Leverage the time and expertise of others, but never lose touch with what is going on with your business and what makes (or costs) you money.