Distressed Property Investors Drive Housing Market Optimism

MAY 20, 2013 12:42pm ET

When the authors of the Home Value Forecast predicted a year ago that the U.S. real estate market was going to turn in a positive direction, they just did not think it would happen this quickly.

Some of the reasons why both Tom O’Grady, CEO of Waltham, Mass.-based Pro Teck Valuation Services, and Michael Sklarz, principal of Collateral Analytics, who both author the HVF were optimistic for improvements in the housing industry was due to the fact that the number of new homes being built had been running at historically low rates for more than five years. Therefore, this would create a significant shortage of new homes supply once demand returned with a better overall economy.

Second, the substantial price declines in a number of markets led to many mortgages being underwater, and as a result, the owners could not afford to sell. Therefore, this reduced the normal supply of existing homes available for sale.

Lastly, one of the main drivers fueling the turnaround in many U.S. real estate markets is due to investors interested in purchasing distressed inventory.

“Large investment funds are continuing to purchase REO and other distressed single family homes to rent out,” O’Grady explained. “These funds have also been renovating homes, which has helped to improve the overall conditions of the surrounding neighborhoods and provided a positive injection of capital.”

Because investors are rehabbing distressed properties they buy, this is more good news for the industry because it is unlikely that homeowner buyers would have had the ability to do the same.

In April’s HVF update, the 10 best performing metropolitan areas to buy single family homes based on indicators such as sales/listing activity and prices, months remaining inventory, days on market, sold-to-list price ratio and foreclosure and REO activity, concentrated on cities in California.

For example, five of the top 10 markets are in California, led by the Anaheim region as the best place to buy a home. Also representing the Golden State on this list are Los Angeles County and Oakland, as well as Sacramento and Stockton, both of which had been very distressed cities after experiencing severe home price declines since their markets peaked in 2005 and 2006, respectively.

Texas also features two markets on this list including Dallas and Austin. A number of other Texas markets did not make the top 10 but are also showing very good conditions like Houston, Fort Worth, Lubbock and San Antonio, the report revealed.

Fort Lauderdale was the only Florida metropolitan area on the HVF top 10 chart.

Meanwhile, a new entrant to the best metropolitan table to buy a home is Farmington Hills, Mich.

“This is a market that was very hard hit in the recent recession but appears to be experiencing improving overall economic conditions, including affordability and compelling rental yields for investors, which is apparently attracting both institutional and individual single family home investors,” Sklarz said.

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