Consider Investing in Older Houses Near Newer Homes
Published on: Friday, December 18th, 2015
One of the absolute best ways to profit from buying, fixing, and flipping real estate is to buy an older home surrounded by larger and newer homes. This real estate valuation theory is “The Principle of Progression.” It’s defined as “a property of lesser value enhanced through proximity to higher value properties.”
It’s an excellent opportunity for investors. Here’s why…
With the median-priced used home still hovering near $200,000+ (nationally), it may be much better (in the near term) to focus on buying, assigning, or holding older homes located in the progress of growth for new development.
Investors these days want to find distressed, discounted properties to buy, fix, and flip or hold. They’re not looking to pay true market value or in some cases (as seen with new homes) above current market value.
New-Home Sales Numbers
Per the U.S. Census and the U.S. Department of Housing and Urban Development, here are the reported numbers of new-home sales each year since 1963:
* February 2015: 539,000 (seasonally adjusted annual rate)
* January 2015: 500,000 (seasonally adjusted annual rate)
* A 7.8% + increase between February and January 2015 new-homes sale projections.
* February 2014: 432,000 new-home sales.
* A 24.8% year-over-year increase in seasonally adjusted annual new-home sales trends between February 2014 and February 2015.
* The median price for new homes sold in February 2015 was $275,500.
* The average price for new homes sold in February 2015 was $341,000.
* The seasonally adjusted estimate of new homes for sale at the end of February 2015 was 210,000. Per the U.S. Census and U.S. Department of Housing’s own publicly released comments: “This suggests a supply of 4.7 months at the current sales rate.”
* Between the years 1963 (median U.S. home price sold: $17,200) and 2015, new U.S. home sales averaged just over 655,000 homes sold each year.
The best new-home sale year during this 52-year time span was in July of 2005 when the seasonally adjusted new home sales figures reached a mind-boggling 1,389,000 new-home sales pace.
Conversely, the worst new-home sales month was just over four years ago in February 2011 when the new-homes sales pace reached just 270,000.
* In the 1970s and 1980s, the combination of both new and used home sales typically hovered within the 800,000 to 1,000,000+ home sales per year range.
Declining Inventory of Used and New Homes
With the record-low or near record-low mortgage interest rates over the past several years, you’d think home builders would be out in droves building new development tracts in today’s hottest housing markets.
But development trends for new residential communities are declining, partly due to much tighter residential construction loan options, a sluggish employment market, and fewer qualified buyers.
Historically, the new-home development market improves as both the job market and overall economy are improving. While residential construction trends are declining, new construction for multi-family apartments has been improving in order to keep up with increased demand for new rental units in and around major metropolitan cities like Los Angeles, Seattle, Boston, and New York City.
Millions of homeowners were foreclosed upon during the “Credit Crisis” that began in 2007. These foreclosed homeowners became tenants. Increased demand for rental units coupled with declining new residential development led to increasing rents and decreasing vacancy rates.
Homeowner percentage rates in 2015 are now near the 30-year lows of 1984 as the tenant percentage numbers continue to increase.
Metropolitan Cities vs. Suburbia
Rural and suburban housing regions are lagging far behind the larger metropolitan areas in terms of price gains in recent years. Many of the largest housing markets have experienced 10% – 25%+ annual home price increases from the combination of falling inventory levels (new and used properties), record low rates, and increased buyer demand.
Based on historical appreciation trends, these under-appreciated suburban regions may later offer the highest potential price increase upsides as more people are priced out of the more expensive metropolitan regions.
If so, investors should consider older homes surrounded by newer communities in the same progress of growth in areas such as these…
Per realtor.com, Top 10 Housing Markets to Watch in 2015:
1.) Atlanta, Georgia
2.) Dallas, Texas
3.) Denver, Colorado
4.) Des Moines, Iowa
5.) Houston, Texas
6.) Los Angeles, California
7.) Minneapolis, Minnesota
8.) Phoenix, Arizona
9.) San Jose, California
10.) Washington DC
The average new U.S. home built today can be valued approximately $100,000 higher than an existing older home, depending upon the region. Higher sales comps for newer properties can rapidly increase older home values as well.
Investors should consider purchasing older properties near newer home developments in their regions of interest.