Should Real Estate Be Part of Your Investment Strategy?

Many potential home buyers remain skeptical about the housing market and for that matter about any market they are considering for investment of their discretionary funds. What should a distributed investment plan today look like? Placing money in the banking market is generally secure but provides marginal rates of return. The bond market always deserves close scrutiny. The stock market has certainly improved though rates of return remain below desired levels and there is always a fear that it may tumble in value again based on circumstances the investor or maybe even the nation cannot influence sufficiently. What about the housing market? Is it showing the necessary signs of improvement for an investor’s distributed investment strategy to once again include a significant allocation to the housing market? How should I redistribute my investment portfolio today and does the housing market deserve a larger share? To provide one respected view, let’s examine the August 01, 2012 Wall Street Journal article, “Finally, It Is Time to Buy a House and Realtor Magazine’s Daily Real Estate News, August 06, 2012 summary of that Wall Street Journal article. Here is what was reported.

Some Americans are still jittery over the housing market, but here are eight positive signs that should quell some of their fears.

  1. Housing prices are on the rise across the country.
  2. Foreclosures have slowed. Analysts suggest that as the supply of distressed homes slows, buyers will be forced into higher-price properties too.
  3. Inventories of for-sale homes on the market are decreasing. In fact, inventories of for-sale homes have dropped 24 percent from a year ago.
  4. Mortgage rates are at ultra record level lows, for those who can qualify.
  5. Housing starts rose 6.9 percent in June. Also, existing-home sales were up 4.5 percent higher in June compared to one year ago.
  6. Home building stocks are on the rise.
  7. For investors who are buying homes, rents are soaring, allowing them to cash in on their investments. Rental prices are at a 10-year high as median units rent for $710 a month.
  8. Home affordability is at record highs for the median income family, due to falling home values and super low mortgage rates. In fact, a recent study found that it is cheaper to buy a home than rent in basically every major city in the U.S. For those who buy, you can save the cost of renting by owning the home for five years or less.

But while the signs point to a housing market on the mend, some Americans still remain hesitant. Many Americans are still underwater on their mortgage, owing more on their home than it is currently worth. Also, the economy continues to weigh on the recovery, particularly a dampening employment outlook, which analysts see as tied to housing.

Still, The Wall Street Journal concludes in a recent article that if you take into account all the positive signs lately in the housing market, “housing presents an attractive long-term investment that should hold steady or even have upside surprise in the short term.”

So this is what the Realtor Magazine and the Wall Street Journal have concluded very recently about the general US housing market. Does that apply to the Outer Banks (OBX)? The answer is a resounding yes. Housing prices have not yet begun to rise but they do not appear to be declining as they had over the last several years. Inventories are reducing, the number of foreclosures and short sales has decreased, interest rates for second homes have been available at or below 3.5% with no points, and rental income has been on the rise all while fixed income yields have fallen to an historic low. Therefore, this may be exactly the right time to invest in housing in the OBX.

It is my personal view that the market in the OBX has experienced most of the market corrections one would expect for these past 5-7 years in the form of a growth in inventory, a glut of foreclosure and short sales, and lowered prices. These trends are indeed reversing themselves along the lines described in the Wall Street Journal article. The Outer banks Association of Realtors (OBAR) monthly statistical report supports the new trends. Their July 2012 report states that active inventory has declined 24% over the last three years, and 2012 year-to-date sales are up 17%. During July 2012, Dare County foreclosure filings declined by 44% supporting an overall belief that there is a definite downward trend in the number of filings. Similarly, the OBAR reports that sales of distressed residential properties (short sales and bank owned sales) have also declined steeply. Meanwhile the overall rate of increase in sales year-to-date compared with one year ago has risen by 17% (40% for land and 12% for houses). This suggests that wise buyers in late 2011 and throughout 2012 are taking advantage of the buyer’s market. If the market trends reported above continue and other factors remain constant, housing prices may be in line for a gradual increase again.

I believe the OBX market is poised for a gradual resurgence that will afford investors with excellent bang-for-the-buck purchases that include affordable and very reasonable prices, excellent rental income, tax advantages of ownership, and a real opportunity for value appreciation again.

Following are four examples of exceptional houses, one that was recently sold and one rapidly under contract at prices that will allow the new owners to enjoy almost certain market appreciation while accruing rental income if desired, and two in Nags Head that are listed for sale and can provide new owners with a similar forecast for return on the investment. Each of these will grow in value as the housing market continues to recover.
 

  “SOLD” MLS# 73979 The first is a new construction 3 bedroom, 2 bath, 1500 sq ft house with lots of upgraded amenities on West Avalon Street that just sold below appraised value for under $250,000 with a 3.5% mortgage and seller contributions toward closing costs.



 

  “UNDER CONTRACT” MLS# 76011 (atlanticrealty-nc.com) ($415,000)
The second example is a previously owned exceptionally maintained property and great buy on Hallett Street between the highways, 3 lots from the ocean in Kitty Hawk. In less than 2 weeks, this 5 bedroom, 3.5 baths, house with pool and numerous other amenities was under contract with a backup offer.



 

  “FOR SALE” MLS# 74232 (atlanticrealty-nc.com and Coastalhaven.com) $599,000
This 6 bedroom with 4 masters, 5.5 baths, private pool, hot tub, abundant decking, fireplace, game room, large front and rear yards, ocean views, is in Nags Head. Well located in a quiet cul-de-sac between the highways 3 lots from the ocean, this dream house provides the total beach experience but is also close to outlet mall and grocery shopping, restaurants, and recreation spots; medical, police, and fire respondents; and Jennette’s Pier, Jockey’s Ridge, and avenues West to Manteo and South to Hatteras and beyond. Its immaculate condition, location, and abundant amenities have made it a favorite with 2012 rental income of $40,000- $50,000.



 

  “FOR SALE” MLS# 74153 (atlanticrealty-nc.com) $497,000
This 5 Bedroom, 4.5 baths, house with private pool, hot tub, sun decks, ocean view and other amenities is also in Nags Head. It has just undergone a make-over with fresh paint and all new flooring and enjoys good rental income. It too provides the privacy of a quiet cul-de-sac and is close to recreation, good food, shopping, Jockey’s Ridge, and Jennette’s Pier.

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