Top Real Estate Prospects

The coming months will be relatively mundane for many real estate investors – both buyers and sellers. However, there are a couple of areas heating up. Last year saw 3.5 million homes emerge from having underwater mortgages. The biggest drag on the real estate market for the past several months has been a lack of inventory. With so many mortgages back in the black and more becoming so each month, houses available for sale are expected to increase steadily for at least the next six months.

© Pixelbliss -

© Pixelbliss –

The knowledge that home prices increased more than 10% last year and being back in the black with their mortgage will prompt more homeowners to put their houses up for sale. More inventory will draw more buyers into the market. However, that same increase in inventory will prevent home prices from escalating as much as they did last year. Expect prices to increase in the 4% to 5% range this year. That’s typical of a healthy market that’s not out pricing its sustainable gains.

Younger Buyers Will Enter the Market

There has been media attention to the fact that there have not been many young buyers in the market for several years. It’s true, the unemployment picture and tight market have kept most first time buyers out of the market recently. That is starting to see some change for the simple fact that in many markets it’s less expensive to buy than it is to rent.

One lone originator processed 20,000 loan inquiries last year. Of those, about 63% identified themselves as first time buyers. The younger generation would rather rent than own because it leaves them with more options and to easily make changes as their lifestyle changes. However, it’s becoming a financial reality that it costs less to own than rent. It’s only a national average but according to Trulia statistics, it’s 35% cheaper on average to own than rent in most major cities. Even in high cost cities like NYC and San Francisco it’s 9% to 12% respectively less costly to own.

As long as mortgage interest rates remain at historical lows and rents continue climbing, owning will remain the better financial decision. Now that younger people are able to find jobs, some will make the decision to remain living with roommates or in their parents’ basement for several months to save a down payment.

The unknown remains about whether these young people will be able to qualify for a mortgage in this tight market. If the mortgage market loosens up, look for the younger generation to begin becoming first time buyers.

The large coastal cities have the smallest financial reasons to buy instead of rent. The mid-west cities offer the most financial incentive. In bankrupt Detroit, it is 65% less costly to buy than rent. In Gary Indiana, buying costs 58% less. In Memphis, the number is 55%. Cleveland comes in at 54%, and Kansas City comes in at 53%.

PhotoNationally, mortgage rates would have to reach into double-digits before renting becomes cheaper than buying. Since that’s not going to happen any time soon, first time buyers need to do some math to see how much they will save each month once they realize with a 20% down payment and a 30-year mortgage fixed at an even 5%, makes buying cheaper than renting in most cities.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.