State of the Housing Market – February 2018

The national real estate market feels safe and stable. There is a nice movement between buyers and sellers. Property values are appreciating. Things are looking good. But our perceptions and our reading of the pulse of the housing market may not always be accurate. So we decided to consult with some of the industry experts to get their opinion of the state of the housing market.

National Housing Market Increased 6.6 Percent

Based on the most recent CoreLogic Home Price Insights report for February, “home prices nationwide, including distressed sales, increased year over year by 6.6 percent in December 2017 compared with December 2016.” This rise in home values was three times greater than inflation. The Bureau of Labor Statistics reports that the Consumer Price Index rose only 2.1 percent during 2017. Locally, there was a 5.5 percent increase in home values in North Carolina – which is still outpacing inflation.

The Driving Force behind Property Appreciation

Supply and demand forms the backbone that supports the housing market. When the demand exceeds the supply, prices increase due to an inventory shortage. This is the current driving force behind the increase in home values. Frank Nothaft, the Chief Economist at CoreLogic, explains it this way. “The number of homes for sale has remained very low. Job growth lowered the unemployment rate to 4.1 percent by year’s end, the lowest level in 17 years. Rising income and consumer confidence has increased the number of prospective homebuyers. The net result of rising demand and limited for-sale inventory is a continued appreciation in home prices.”

In addition to a low inventory of listed homes, good economy growth coupled with new job creation is making it possible for more home buyers to enter into home ownership. But there is a dark side to all of this. Because home values are continuing to rise at a pace that exceeds wage increases, it is becoming more challenging for first time buyers and moderate-income families to buy. The President and CEO of CoreLogic, Frank Martell, estimates that one out of every three large metropolitan areas are currently overvalued.

Within the same CoreLogic report, however, Jacksonville is considered undervalued and will stay so until 2022. New Bern is estimated to be well priced within normal affordability ranges. The housing market in Wilmington, on the other hand, is considered to be overvalued and the trend is forecasted to continue into 2022.

2017 Rental Market Update

While knowing what is going on in the residential sales market can help an investor to decide to hold or sell, we are more interested in knowing the details about the multi-family rental market. Over 2017, we have seen rents raise 2.3 percent nationally which comparable to the rate of inflation. This tells us that it is more cost effective to continue renting than buying.

Based on a recent Investment Outlook report by JLL, the average multi-family cap rate for the nation was 4.2 percent. Raleigh-Durham is outperforming the national average. They offer a cap rate that ranges from 4.75 to 5.10 percent for Class A assets within the CBD.

Within the same multi-family report provided by JLL, their research indicates that the multi-family sector is viewed as a strong investment sector. “For the third year in a row, the sector saw more transaction activity than any other property sector. This indicates a continued environment of strong liquidity for multifamily assets.” Secondary markets are drawing more attention and are yielding better returns. This includes markets such as Salt Lake City, Philadelphia, and Jacksonville.

The Residential and Multi-family Real Estate Forecast for 2018

Some market sectors worry that if price appreciation does not slow in the near future that we could end up with another real estate bubble. CoreLogic forecasts that market appreciation will slow to 4.3 percent from December 2017 to December 2018.

Employment growth feeds an increase in real estate values and a higher demand for rental properties. This will be especially so in Raleigh. According to the 2018 investment forecast by Marcus Millichap, “an employment gain of 2.7 percent will add 25,000 workers to payrolls in 2018, well above the national rate of 1.2 percent.”

Raleigh continues to be a forerunner in the multi-family market. The increase of investment buyers from major Northeast and California markets should create a bidding war with above list price offers. This could motivate some owners to sell during 2018. “Properties near the downtown cores, the universities and Research Triangle Park will be especially desired. Buyers focusing on higher first-year yields may find opportunities in secondary and tertiary sub-markets within the metro or smaller cities nearby where cap rates can be 100 to 200 basis points higher.”

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