Investment firms are taking over the housing market. While this was good when there was a flood of foreclosures, it’s now causing trouble because home buyers don’t have enough of an affordable supply to choose from.
Several years ago, the affordability of homes hit an all-time high. The recession caused mortgage rates and housing prices to plummet. As the housing market improves, though, the affordability rate is decreasing.
The National Association of Home Builders and Wells Fargo reports that of the homes sold from April to June, only 69.3% were affordable to a family with an average income of $64,400, according to CNNMoney.
In California in the second quarter, only 36% of residents could afford a home at the state’s median price, which is a significant decrease from 44% in the first quarter. This brought down the homeownership rate for California to 54.5 percent.
What has caused this drop in affordability?
The recession is ending. Mortgage rates have been increasing, and home prices are doing the same. This would be fine if income would also increase for home buyers, but that isn’t the case. Income is stagnant, which is making it difficult for home buyers to keep up.
The other problem is that supply is very low. Investors and investment firms have come into the housing market with a fury. They are buying up all of the low priced homes, fixing them up, and turning them into rentals.
Morgan Stanley reports that investors have spent $17 billion on homes to rent, and that figure will increase to $100 billion in next few years. Since back in 2007 when the recession hit, California has seen 500,000 new rentals and a decrease of 233,000 homeowners.
Investment firms are using a strategy called REO bulk buying. They buy hundreds or thousands of fixer homes because they are low priced. Instead of flipping them (fixing them up and selling them), they keep them to rent.
As you can imagine, this depletes the housing market of low priced homes, which is contributing to the affordability rate.
How the Affordability Crisis is Good for Investors
The good news is that this a good time to be an investor. You can greatly benefit from the investment firms creating thousands of rental properties across the country. Some of the investment firms you should consider are:
The Blackstone Group (NYSE: BX),which has bought 26,000 homes in nine states.
Colony Capital (NYSE: CLNY), which has spent $250 million each month on homes in addition to already having 10,000 properties.
American Homes 4 Rent (NYSE: AMH), which bought 18,000 homes for about $3.1 billion.
There are some other large leasing companies to consider as well, like Silver Bay Realty Trust Corp. (NYSE: SBY) and American Residential Properties (NYSE: ARPI).
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Investing in these companies will produce a return on the profits they make after fixing and maintaining the rental properties. It’s best to hone on the largest companies because they are buying the most homes, which will result in higher returns.
If you’re still wondering how rentals will last in a housing market that seems to be improving, think about it this way. As investment firms buy thousands of homes, there will be a lower supply of low priced homes. When there aren’t many homes, people won’t have a choice but to rent.
You must also consider that there are many individuals who had to foreclose on their homes a few years ago, so their credit is tattered, making it nearly impossible for them to buy a home right now. They will be benefiting from rental homes in their areas too, which means there’s a large market of renters.
Investing in the Housing Market with Rental Homes
Buying stocks in these companies is only one way to invest in the rental market. You can also follow the same strategy these large companies have at a smaller scale. Even though the affordability rate is high and the home prices and mortgage rates are increasing, it’s still a good time to buy homes. By finding homes that are affordable for you, fixing them up, and then renting them out, you could start seeing a lucrative return on your investment.
If you want to go this route, it can help to know where the most affordable houses are for sale. CNNMoney reports that Ogden, Utah is the nation’s most affordable area. It has an affordability rate of 92.8%.
Indianapolis is another good place to look for low priced homes, with an affordability rating of 91.8%. Other areas that you may want to set your eyes on are Harrisburg, Pennsylvania; Youngstown, Ohio; and Buffalo, New York.
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