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The New Housing Market -- And How to Make the Most of It

Contributed by mm | June 24, 2004 1:32 PM PST

Patrick Barta discussed, in great depth, a number of drivers of the housing market in this WSJ article, and offered his advice for making sound real estate investments. (If you don't have WSJ online access, try this reprint at Baltimore Sun.)

Some key points:

Income Growth

Over time, home prices move in lockstep with incomes, because incomes help determine how much a consumer can spend on a home.

This doesn't mean you should necessarily target neighborhoods that have high average incomes. What matters is the rate at which the incomes are rising, not the amount of wealth that's already there. After all, income growth can easily stagnate in posh parts of town when an economy goes south.

Often, the best investments are made in transitional neighborhoods that once were economically distressed but are now enjoying rapid income gains because of new investments, and new jobs, in the area.

Interest Rates

The problem now, however, is that interest rates are more likely to rise than fall.

For buyers, one way to mitigate the pain of higher rates is to apply for an adjustable-rate loan that starts with an unusually low rate, then adjusts higher later if interest rates keep climbing. But that increases your risk later.

Then again, if you're not set on owning a home right away, you might just want to wait -- and rent. True, you'll be missing out on the current low interest rates. But you'll probably get a good deal from your landlord, and save yourself the headaches of worrying about your home's value when rates rise.

You can always buy later, and then refinance the mortgage once interest rates come down again.

An Aging Population

For investors, the best way to benefit from an aging population is to think about buying in areas that will benefit from baby boomers' migratory patterns. Popular locales for retirees, including Florida, Texas and Arizona, should all get boosts from retiring Americans. States that are less popular among seniors, including Rust Belt states like Ohio, could suffer.

Immigration Trends

Investors who want to benefit from rising immigration rates should target transitional neighborhoods with large immigrant populations.

Often, this will require focusing on fixer-upper properties that can be bought at a reduced price and then rented out while the neighborhood's income levels rise. Such properties can be more difficult to manage, but they often provide a steady income stream and above-average appreciation.

Credit Availability

But many economists worry that the mortgage-credit system already may be stretched to its limit. Besides higher delinquencies for many first-time home buyers, debt burdens in the United States are now significantly higher than a decade ago.

Lenders probably won't be able to push the current limit much further, and they could reverse course if delinquencies rise, as some expect.

Investors should pay close attention to quarterly mortgage delinquency data from the Mortgage Bankers Association.

Investors also should seek to avoid geographic areas with unusually high levels of defaults. Recently, this has included places that were hit hard by the manufacturing recession, including parts of Ohio, Michigan and North Carolina. It also includes cities that were smacked by the technology and telecom bubbles, including parts of Dallas and Denver.

Housing Supply

As a result, in part, the United States currently has a tight 4.6-month supply of existing homes for sale, according to the National Association of Realtors in Washington.

Less supply tends to push prices higher over the long haul.

Unfortunately, areas with tight supply also tend to have more volatile markets, meaning that prices can shoot up more rapidly during periods of high demand and slow or fall more during periods of weak activity.

It pays to buy homes in areas where it's difficult to add new supply, so long as you can stomach a more volatile market.

It's worth checking with your local city planning department to learn more about the building constraints that exist in your area, including rules governing lot size and population density.

You'll also want to inquire about any zoning rules that could attract other kinds of development to the neighborhood that could reduce your property's value, including industrial buildings or high-traffic retail outlets.
Source: The Kirk Report

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