Are there good investment properties left in Houston? May a foreclosure not be a good deal? An introduction to some numbers to watch.
I have been thinking a good deal about analytics lately, since I redoing some of my business reports. This set me off to consider what metrics would be important for a real estate investor if he was looking at a market report. I am still formulating some ideas on that topic, but when I heard that foreclosure sales went down, and that this possibly may be due to the poor quality of the housing stock that is left, I decided to write this post to share my thinking on the real estate market for investors.
Understanding real estate data
You have to understand some things about data in the housing market. One, unlike the web, data cannot be retrieved in real time, so you will find certain market conditions being reported for either January and December around the middle of February. You will never know what is happening at this moment. When you hear comparison numbers, the analysis will be comparing what happened last January to this January. This is actually helpful, but you could be misled if you think the number is comparing January 2010 to December 2009. Two, the data is being presented might be meaningless. For example, more permits are issued than the number of housing starts, and the number of housing starts is greater than the number of completions. You may know 100 permits were pulled for a given area, but that does not mean that the builder will construct 100 homes. Three, data is presented in a way that is useful to the intended audience. A number is a number, and to understand its value, we need a context. That context will be driven by the goals of the people creating the reports. If you have a real estate investor’s association producing reports, you may obtain different bits of data, with different interpretations.
The Houston Real Estate Market for Investors
When the statement was made that the foreclosure stock (the lifeblood of investors) may not be of the best quality, I was taken aback. I have been inspecting foreclosures that were good choices for investors. However, I gave the topic some thought about what I had seen around town. I also checked some real estate search engines to see what may come up. Over the last six months, I had inspections in neighborhoods or developments where the builder or owner never completed the project, and the homes went into foreclosure. Some of these units were near completion, but others required a good deal of work. When I conducted my search, many of the great deals were partially completed homes. Home buyers had been competing against investors for foreclosures, but home buyers would not purchase these partially complete homes, and most investors would not as well. I could not find anyone who was tracking the number of incomplete builds, but this may be a good value for real estate investors.
The news also mentioned that housing starts are up. I noticed that construction was increasing on my travels around Houston, so I was not surprised by this number. When I did some checking, I discovered that Texas has the highest number of permits issued for residential construction when compared to the other states (this data comes from the December figures). Will this high number of permits, and the increase of housing starts, mean more new homes on the market (home completions)? This may be good news for real estate investors (less competition for foreclosures) and bad news (competing against new home sales, which bodes better for renting your property). I will take housing starts as good news, because that metric indicates confidence in the economy, which could mean higher returns for investors who manage their holdings well.
The number of foreclosures does depend on the economy, so how is Texas faring? Here is a tricky topic to observe. We do not know how many homes are going into foreclosure, because the lenders are not going to advertise that number. We also do not know what lays in store for economic growth. The number of foreclosures depends upon the job market. If people are working, and they are earning well, then we will have fewer foreclosures. Texas has done well, but there are storm clouds on the horizon. The EPA could force changes which will cost industry in Texas, which may cause industry to lay off workers. (Debating the merits of the case is not in the scope of this blog; I will say that I applaud the decision by the EPA, but I acknowledge that there may be job loss due to this finding, simply because industry will be scared of the consequences). We also have to worry about what may be happening in other parts of the world. This past recession demonstrated that world markets are more connected than we thought. Actions in Greece or China could have a dramatic effect on our own economy. Didn’t think that a real estate investor in Houston had to worry about what was happening in Greece? My point is that although the economic forecast for Texas is good, we do have some factors to consider which may effect the economy this year.
Let me go back to the number of pending foreclosures. There is some grounded speculation that lenders held off on foreclosures during the holidays that many homes were going into the foreclosure process. Remember, we will not have these figures for several months, because the foreclosure process can take some time, and reporting will take a bit longer. Most real estate search engines will permit you to search for foreclosures alone, so the fastest way to see a rise in foreclosures may be checking the number of listings on these sites (this will not be entirely accurate, but you can watch the trend). If this number does rise, consumer confidence can suffer, effecting the economy. The one stimulus plan that does not seem to be the focus of complaints is the one for housing through tax credits. This plan has placed many sellers in the position of rushing to have their home on market before the deadline, and many buyers to find homes before the deadline too. However, the program will end. It has helped consumer confidence in this market, but we will have to see what will be happening in the summer months. My guess is that is when we will see more foreclosures on the market (if they are coming).
Real Estate Investor Strategies
What can we glean from this data? If you are looking to sell a property, now is the time. Overall, you may be better to hold the property for next year, so renting is a good option for this year. If you have the funds and ability, you might find that buying partially completed homes could bring you great returns. You will need a good crew to complete the homes, and you will need to evaluate them carefully ( the weather will have caused damage). There are properties in prime locations which can be purchased cheaply. If you are looking for a property which requires little work, that you can turn around to rent or sell, you will have a tougher job. Some investors do not like working with Realtors, because they feel that they can save some money, but this may be the time that you want a Realtor who knows foreclosures as a source. A Realtor will be aware of listings faster than you. Lastly, be ready for the summer. Now matter your strategy or your beliefs about the economy, we will be seeing new data at that time, which can effect how you should act.
Your real estate investing business is unique. I am providing a generalized summary based upon my own experiences and feelings. I hope that you will take a look at the figures coming out, take the time to understand them, determine their relevance to you, and then develop a plan of action. I have to refine this data. I did not include the performance of REITs in this report, but that can be a key indicator for insights. The number of permits is a good value to see interest in an area. Housing starts is a good value for builder confidence; however, we did not look at housing completions, which can be a good indicator of economic conditions. Remember treat your real estate investments as a business (meaning evaluate all aspects of what you are doing).