I struggled with self-motivation and making meaning throughout the day; a battle I ultimately won.

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This week news surrounding pending home sales, interest rates, delinquency, and housing starts were the highlights.  You can read the full post on BiggerPockets real estate investing blog; enjoy!

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Has the real estate investor officially returned to the housing market?  A number of indicators point to the return of real estate investing including Move.com’s survey Real Estate Investors Set to Become More Active.  Of course this isn’t really news.  Investors account for 20% of the market according to NAR, a percentage which is trending down from 25% of the market towards the end of last year.  The Move.com survey also states that 22% are bullish on price increases, half expect prices to stay the same, and 23% are bearish. So it looks like the consensus is a price flat line.   I think the question is wrong.  If the reason you’re buying real estate as an investment today is only for the price rise, you might be missing the real opportunity; buying for income.

Fundamentally if a property doesn’t have a strong yield and you’re buying only for the inevitable price increase, it may take longer than expected to achieve your price target. Over the last 2 years buying real estate as an investment has been treacherous.  Many of us investors learned hard lessons from the crisis of just how illiquid real estate is. Today the rental market is robust and there is significant demand from outside the US for our real estate.  These factors have buoyed residential investment property, leaving some still holding the real estate they bought 5 years ago in a better position.

The last 2 years have ushered in a new type of real estate investors, many brave new and experienced investors, but often new to real estate investment.  I haven’t seen many stories on the investors that have been in the market over the last 2 years. Meanwhile people buying into real estate during this time have taken great risk knowing that prices are still in decline, financing is difficult, and the economy is sluggish. The trade-off is that short term price declines won’t affect the annual yield.  The IRR might not be is strong when compared to a perfectly times bottom when the property is resold; but resell?

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Interest rates found another new low for 2011.  The 30-year fixed rate eased from 4.61% to 4.60% for the week ending May 26th, 2011, according to Freddie Mac. A year ago the 30-year fixed mortgage averaged 4.84%. The 15-year fixed dropped from 3.80% to 3.78%. A year ago the 15-year fixed stood at 4.21%.

Softer rates are are result of slowing economic activity.  While the rates are good for home buyers and lending, it hasn’t been enough to stimulate any major activity in the real estate market.

Here’s my latest chart:

As you can see the trend at the beginning of the year was up.  I still believe this is the larger trend.  A sluggish economy is to thank for recent pause in interest rates; just be advised that rates seem to rise much faster than they fall.

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Is the inventory of homes increasing or decreasing?  Understanding this will give investors a glimpse into how long the current home price depression will exist.  The National Association of Realtors stated last week that the number of existing homes on the market stood around 3.87 million, representing a 9.2-month supply at the present absorption rate.  But how many homes are really out there?

CoreLogic estimated that shadow inventory, the number of homes 90 days late or worse currently not on the market, at 1.8 million homes as of January.  This was down about 200,000 from the previous year.

I saw a nice chart on Bill McBride’s site today that shows the number of REOs held by Fannie, Freddie, and Private Label Securities (PLS).  PLS properties are mortgages often made by builders, investment banks, and subsidiaries of banks.  These exclude traditional bank REOs.  What’s interesting is one can easily see the decrease from the peak (Q3, 2010) to now.  The decline is significant; nearly 20%.

Banks aren’t represented and they hold an estimated 1.2 million homes.  With home building at an anemic pace, I believe we’ll see these inventories continue to trend down.

For investors, I think it’s pretty clear that lower inventory means higher competition.  One can already see this in many cities where investors are tripping over each other.  We offered on some properties in South Florida recently.  One property had 19 cash offers at or above the list price of the asset.  Was it a case of 19 speculators?  I think we’re finding a bottom in many markets.  In Memphis we see the same thing.  Properties are selling a quick clip and the situation only seems to improve (for housing).

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My column this week in the Bigger Pockets real estate investing blog covered the declines in loan delinquency (and they are significant), NAR’s report on existing home sales, housing starts, and building permits.  Plus an update and graphic on interest rates.

The Week in Housing.

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Central Florida, otherwise known as the greater Orlando area has seen its inventory of available homes decline by 25% in the last 12 months.  Now at the present rate of sales, there is only a 5 month supply of homes on the market.

A case for investing in Florida?

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Talk is brewing at the federal level on terminating the mortgage interest deduction. Opponents of the mortgage interest deduction believe it unfairly rewards those who can afford housing also because it applies to investors.  Matthew Strozier wrote a great piece on the future of the mortgage interest deduction in the Wall Street Journal. As a full time real estate investor there is no limit to the amount of interest one can deduct.  Of course the deduction is important to us because we’re investing in the community.  In addition to investment in the community and improving neighborhoods, investors provide shelter for those who rent versus buy.

Real estate investing is capital intensive and carries risk.  Making a decision on whether to invest in a property requires looking at the overall benefits of buying the deal.  These benefits include; cash flow, equity build up, appreciation (not lately), and the tax benefits of investing.  Without the tax benefit investing in real estate is certainly less attractive.  With the trend moving towards renting versus owning, who does the government expect will invest in housing?

Opponents of the mortgage interest deductions also believe the US can keep fight the deficit by removing it.  I understand that austerity requires sacrifice, but why not cut the wasteful spending instead?  Housing is important to the economy and cutting programs that directly impact the economy is the last thing we should be doing.   What about the $8 billion loss the US Post Office reported last year?  I rarely receive anything important via traditional mail anymore.  How about cutting the service there to a couple days a week?  Or better yet privatizing it altogether?  Any private entity posting losses consistently such as the US Post Office would have been out of business decades ago.

Unfortunately life isn’t ‘fair’. If the mortgage interest deduction does head towards extinction, it’s only prudent that investors evaluate alternative asset classes to invest their dollars.  In short, investors could short housing.

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The Mortgage Bankers Association reminds me of network news lately.  They can’t seem to give us any good news regarding mortgage purchase applications.  The Purchase Index, which tracks mortgage purchase application volume, fell 3.2% for the week ending May 13th, 2011.  Refinances are rosier with an increase of 13.2% following 5 straight weeks of interest rate declines.  Americans aren’t felling good enough about buying a new house and instead are still looking for ways to trim budgets.  One of those ways is through a refinance of their existing debt.

The short term trend of more refinances and less purchases (refinances are 67% of the market) isn’t healthy for the housing market.  If the refinancing helps consumers save money today housing will benefit in the long run.

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According to a new report by the National Association of Realtors (NAR), foreign investment in US residential real estate increased 20% in the 12 months ending March 2011.  Foreign investors spent $82 billion on US real estate.  That’s $14 billion more than the prior 12 months.   To foreign buyers, US real estate is on sale.   Falling home prices in some states automatically give foreign buyers a 50% off coupon to redeem.  The declining value of the dollar makes US real estate even more attractive.

Not only is real estate cheap, the US is still considered a relative safe haven.  Let’s face it every time there is world turmoil, foreign governments seek the safety of US treasuries.  This might not always be the case but it is for now.  The same principle applies for real estate.  Many in the US are still feeling the pain of the down market whereas new foreign buyers see US real estate as a huge opportunity.

This has been evident at Investor Nation.  We’ve seen demand for properties increase significantly in the Memphis from foreign buyers.  That interest has resulted in transactions from Singapore to Paris and everywhere in between.  And Tennessee is seeing just a small fraction of the foreign interest.  California, Florida, Texas, and Arizona are the top 4 states seeing foreign investor activity, accounting for nearly 50% of all foreign investor transactions.

In 2011, European pension funds are expected to double their investment in US residential real estate.  With an estimated 3 million plus excess units in inventory, the flea market will be open for some time.

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