After five long years of bad news, the prognosis for the health of the U.S. real estate market in 2013 is surprisingly strong. The largest real estate social network in the world, ActiveRain, recently surveyed 2,430 real estate professionals and found that there is great optimism regarding the future of the U.S. real estate market and economy. Since U.S. economic recoveries often come on the back of the real estate market, a rebound in real estate is a great sign for the economy as well.
In February 2012, another survey on ActiveRain found that the bottom of the U.S. real estate market crash had been reached. Agents believed that 2012 would see an increase in real estate transactions plus a slight increase in real estate values. The results of this survey were used to create the “Recovery or Not?” real estate report and infographic.
A New Dawn in Real Estate
The future is bright for American real estate. A recent National Association of Realtors® (NAR) article[i] claims that existing home sales jumped more than 9 percent in 2012 (the largest increase in five years) and home inventory levels hit a five-year low in December 2012. CoreLogic’s Home Price Index shows an 8.3 percent increase in home prices from December 2011 to December 2012, which is the single largest percent increase since May 2006. This was also the 10th consecutive month of national home price increases.
The results of the aforementioned ActiveRain survey shows that agents predict robust growth in the U.S. real estate market and the U.S. economy as a whole in the upcoming year:
- 84 percent of agents believe that real estate values and the number of real estate transactions will increase in 2013.
- 77 percent believe that new construction starts will continue to increase.
- 74 percent believe that their local economy will improve in 2013 compared to 2012.
- No market is expected to see a decline in home values or real estate transactions in 2013. Contrast this with 2012 when one-third of the markets expected to see house values decline.
The 2013 increase in industry confidence is particularly dramatic when compared to the 2012 survey. Last year, industry insiders believed real estate values and new construction starts would be flat, but the number of real estate transactions would increase slightly.
2012 vs. 2013 Real Estate Confidence
(On a scale of 1 to 5, 1 represents a significant decline, 3 represents no change, and 5 represents a significant increase.)
Investment Opportunities in Real Estate
In 2012, ActiveRain’s “Recovery or Not” infographic predicted 2012 would be a “GREAT” time to invest in rental property. The 2012 real estate boom was driven by investors looking for greater yield when compared to the low interest rates offered by Treasuries, savings accounts, CDs and bonds.
The opportunities available in the real estate market were not lost on hedge fund managers. In 2012, New York-based hedge fund The Blackstone Group L.P. spent $2.5 billion buying 16,000 homes and is expected to add another 2,500 homes to its portfolio every month in 2013. JPMorgan Chase estimates that $10 billion in institutional money will go toward some 80,000 single-family rental homes in 2013.[ii]
But the opportunity to invest in single-family rentals has peaked, at least in the major markets. The 2013 ActiveRain real estate survey looks comparable to the one conducted in 2012 in terms of high-level investment opportunities for real estate. The survey found top investment opportunities for 2013 to be single-family homes as primary residences, rental properties, and multifamily rentals, in that order.
The data shows that there is a very slight reduction in confidence when it comes to real estate being a good investment. The only categories seeing a jump in confidence are new construction single-family homes and newly constructed condominiums. Though agents are largely bullish on real estate as a go-forward investment, this slight reduction in confidence could indicate that 2012 was the best year to get into real estate, as inventory has fallen and prices have increased – and will continue to increase – in 2013.
Investors also seem to be reacting to overheated rental markets. USA Today says that investors like The Blackstone Group are cycling out of 2012’s hot real estate markets, like Phoenix, and are now moving into Atlanta, Tampa, Orlando, Chicago, Las Vegas, Charlotte and many Californian cities.
New Construction is Hot Again
New home construction became dormant in the wake of the 2007 financial crash but has recently picked up speed. NAR reports that December 2012 saw a 54-month high for new construction starts. The nation’s largest homebuilder, D.R. Horton Inc., reported that net home orders were up 38.6 percent in the fourth quarter of 2012 when compared to 2011.
Banks Held Back a Real Estate Recovery
During the financial crisis, shadow inventory was a major impediment to the real estate market’s recovery. Four million units of inventory were short sales, bank-owned properties and foreclosures in 2009. In 2010 and 2011, 33 percent of real estate inventory was held by a bank in some way. Shadow inventory accounted for 25 percent of the market in 2012. The decline in shadow inventory is expected to continue; NAR expects it to drop to a single-digit percentage of the market by 2014.[iii]
Now that inventory is tight, the market has shifted from a buyer’s market to a seller’s market. Today, managing the gap between unrealistic buyers and unrealistic sellers has returned to the forefront of real estate industry insiders’ minds as the U.S. transitions into a more “normal” real estate market.
The Real Estate Roller Coaster
In October 2012, RealEstate.com completed an exhaustive analysis of U.S. home prices from 2007 to 2012, showing a loss of $9 trillion from March 2007 to November 2011, and a subsequent and very promising gain in house prices of $3 trillion from November 2011 to June of 2012.
Real estate agents and brokers are optimistic that 2013 will be even better for real estate.The markets where agents are most optimistic about real estate values are also the markets that had some of the greatest price declines during the real estate crisis. When ActiveRain polled real estate agents in 2012, California was home to some of the most challenged real estate markets and economies – like San Diego, San Francisco, and Los Angeles. In 2013, the technology market, fueled by IPO’s like those of Facebook, LinkedIn and Qualcomm Inc., is driving new wealth creation and rapid real estate price appreciation in cities like San Francisco and San Diego.
Many of the markets that suffered the steepest price declines and worst issues with foreclosures and short sales are now rebounding strongly. Los Angeles, Fort Meyers, Phoenix, and West Palm Beach are working through their issues with shadow inventory; this process is helped by appreciating home prices and low interest rates. Oddly enough, many of the markets where agents are predicting the largest increases in home values are also markets with high costs of living; these include San Diego, San Francisco, Honolulu, and Los Angeles. This reversal may be another indicator of a strengthening economy as a whole, particularly in California.
Reasons For the Real Estate Recovery
The Midwest, South and Mountain States and experiencing population and economic growth in the midst of America’s economic doldrums. Because of the financial crisis and continuing economic woes throughout the U.S., Americans are moving from high-tax, high cost of living markets to lower cost regions. Corporate America is also relocating away from the expensive metropolises to states with low taxes and costs of living. The best overall real estate markets average a cost of living index score of 95 versus the national average score of 100. As highlighted last year, Texas’ low costs of living and great long-term economic prospects make it a popular destination for migrating Americans.
America is currently experiencing an energy renaissance. The United States will become a net energy exporter by 2017, according to the International Energy Agency, thanks to new oil extraction technologies. Shale and natural gas extraction in Texas, North Dakota, Oklahoma, Arkansas, Ohio, Pennsylvania, West Virginia, and Michigan will drive the production of low cost, plentiful electricity. The associated boost to the economies of these regions will provide a boon to their local real estate markets.
Inexpensive labor and electricity, combined with the United States’ strong patent protection and infrastructure, is expected to bring manufacturing back to the U.S. As The Economist and Barron’s magazine have discussed, many large multinational corporations are looking to build new manufacturing plants in the Midwest instead of offshoring manufacturing to China, Vietnam, or other low cost countries.
Other common trends among the top real estate markets are a good balance between large corporations and their small business bases, large and growing Hispanic populations, university and military populations, and high quality of life.
Detroit may be an outlier in this analysis. Population due to suburbanization and deindustrialization has made Detroit a shadow of its former self, but it has recently benefited from the renaissance of the American automobile industry. In any national discussion about real estate and job creation, Detroit is used as an example of how a city can turn itself around.
Cracks in the Canadian Real Estate Market
Since 2000, the Canadian real estate market has been on a tear. Based on data from the Canadian Real Estate Association, its real estate market accelerated from 2000 to 2007, suffered a mild setback in 2008 due to the financial crisis, but rebounded so that 450,000 units have been sold per year since 2009.[vii] 2012 was an average year for Canadian real estate with 453,372 units sold.
Despite these indications of strength, there are signs of a potential decline in the Canadian real estate market. According to the MLS Home Price Index, single-family home prices have risen since 2005 from $325,700 to $517,100, an increase of almost 60 percent.[viii] Rising consumer debt due to high real estate prices has caused Moody’s to downgrade six of the largest Canadian banks. Construction continues to be on a tear in Canada, causing concerns about overbuilding, particularly in large real estate markets like Toronto.
ActiveRain’s 2013 survey of real estate agents shows less optimism for Canadian real estate compared to what was expressed in 2012 and what is currently found in the United States.
The largest challenges for the Canadian real estate market are that buyers lack the ability to save large enough down payments and are unable to obtain mortgages because of strict qualification requirements of the banks and government. Other areas of concern include the country’s already overheated real estate market, government staff reductions, and changes in mortgage rules that make it harder to finance a home.
Canadian real estate agents view condominiums in general as poor investment opportunities. This could be driven by overbuilding in the largest Canadian cities. Conversely, agents have increased their confidence in land as an investment opportunity when compared to 2012.
[vii] Canadian Real Estate Association, January 15, 2013