Investors in real estate-owned (REO) and rental markets may need to consider other avenues in the market as previously rapidly growing low price tier housing markets begin to decline in performance.
In recent years, the low price tier of the housing market has performed extremely well compared to the mid-and high-price tiers in the market. Strong performance in the low price tier has keep the attention of investor buyers. Now, this segment of the market is beginning to decline in performance and investors may need to consider expanding their business in other markets.
This phenomenon is causing an array of uncertainties and doubt among investors, according to Clear Capital ’s Home Data Index (HDI) Market Report through March 2016. The report is generated from a broad array of public and proprietary data sources and provides insights into housing price trends and other leading indices for the real estate market at the national and local levels.
“As most markets continue the status quo, drops in performance for the low price tier may signal an end of the tremendous gains once seen in low tier investments,” the report stated.
According to the Clear Capital, the low price tier and several under-performing MSAs are experiencing declines in performance.
Typically, the low price tier (lowest 25 percent of home sales) beats out the mid-tier (middle 50 percent of home sales) and the top tier (highest 25 percent of home sales) in quarter-to-quarter growth. However, the latest quarterly data shows that all three tiers’ growth is nestled around 0.5 percent.
Low tier quarterly growth usually outpaces the top tier by an average growth rate of 1.5 percent and even reached a difference of 2.0 percent in November 2014.
Alex Villacorta, Ph.D., VP of Research and Analytics at Clear Capital noted that although the winter real estate seasonal slowdown is winding down, the numbers through the end of March are somewhat dichotomous.
“Most of the nation’s top performing markets have seen very little change in performance since last month and have continued to grow throughout the last quarter, despite the winter slowdown in activity,” Villacorta stated. “The nation’s lowest performing markets, however, appear to be much less able to resist the effects of the winter slow season even still as quarterly growth continues to decrease.”
Among the top three highest performing major metros are (based on quarterly growth): Seattle, Washington (1.8 percent), Tampa, Florida (1.4 percent), and Phoenix, Arizona (1.4 percent). Clear Capital’s three lowest performing metros are (based on quarterly declines): Boston, Massachusetts (-3.6 percent), Rochester, New York (-0.9 percent), and Memphis, Tennessee (-0.7 percent).
“Separately, we are beginning to see two very different ends of the national market, the low and top tiers, start to converge potentially toward a more homogenous pattern of growth,” Villacorta said. “Although this drop in performance for the low price tier may indicate a more sustainable model of affordability for first time homebuyers, it may also plant doubt and uncertainty, especially with the investors—such as the REO to rental investors—who have previously taken advantage of the rapid growth of the tier. Even as price growth for all tiers remains in the black, it may be time for investors to find a new niche in the industry. Perhaps we will see REO or rental investments take a rise.”