We’ve been watching the economy and real estate market diverge for a while. Now that disparity appears to be showing up in rapid double digit appreciation for some homeowners. While others are sinking underwater on their mortgages.

How is this possible? Where are property prices rising and falling the most? How do you invest through it?

Equity Appreciation Growing At Almost 28%

Overall equity growth for those with mortgages and whose homes have appreciated in the past year has been close to 28%.

California and Florida are well ahead of the pack for positive growth. With an average annual increase of $100k in equity. More than many earn at their jobs.

Places like SWFL have still been seeing prices grow by 30% to over 40% year over year.

Homeowners Falling Deeper Underwater

At the same time, CoreLogic reports that negative equity has grown by over $300B in the past year as home prices in some areas sink below what they owe on their home mortgages.

That’s an increase of over 11% from last year.

The states where homeowners are falling deepest underwater appear to be centered in the Midwest, followed by the Northeast.

What’s Causing This Divergence?

All of this can really be tied back into inflation.

On one hand business owners and real estate investors are enjoying all the benefits of inflation in the form of profit. Yet, make so much money that they really aren’t fazed by inflation in groceries or gas prices.

The low end of the market is also untouched. As prices go up, so do government benefits to cover those increases. Such as with Section housing payments.

It’s the middle class which are really being destroyed. Higher interest rates, huge spikes in food, utility, and insurance costs are wiping them out financially. Which also means they can’t buy homes, and may not be able to afford the ones they have.

Those who see their equity being depleted, and end up owing more on their homes than they are worth due to high LTV mortgage loans, will frequently walk away.

How To Invest

There is still plenty of money to be made in declining markets. Though if you are going to invest in areas where negative equity is growing, it is wise to demand far deeper discounts to account for a continued slide in values during your deal.

If you are investing in areas still on the upswing, where the money is going to, it is still wise to account for a gradual slowing in appreciation.

If you have your exit in place before you get in, and fully leverage your deals with the best transactional funding, you minimize risk, and maximize the upside at the same time.

 

What do you need to know about financing real estate deals in 2020?

It’s shaping up to be another exciting year for real estate investors. Financing is expected to continue to grow in use this year, and it will be a big part of every real estate investor’s business. Here’s what you need to know.

Interest Rates

The great news is that interest rates ought to remain low through 2020. They will need to remain low to prop up the economy and keep things going through the presidential election. Of course, that didn’t stop the fed from sabotaging the market back in the run up to 2008. Though rising rates shouldn’t be an urgent concern, yet.

Available Capital

There still appears to be more capital than deals. Big funds, banks and international investors are still looking to deploy billions of dollars in US debt. Lenders are still wary of lending to owner occupant home buyers, and that will probably increase with current market trends and more states demanding lenders go through judicial foreclosures. Investors will benefit from this.

Declining Markets

Watch out for the snowball effect from declining house values. Some homeowners are already experiencing deep declines in their equity and potential resale prices. When lenders deem certain areas as ‘declining markets’ it can be very difficult to finance houses there. They can get blacklisted. Or at least expect lower LTV loans, repeat appraisals to keep up with declining values, and tougher underwriting. Credit lines may also be cut off.

More Competition For The Money

Investors have plowed an enormous amount of cash into the US real estate market over the past decade. Some have severely depleted their liquidity already. With the threat of a recession and downturn on the horizon, it is smarter to keep more cash. Instead of just 3 to 6 months of living expenses and operating costs as an emergency fund, upping that to 24 months of capital reserves may be a crucial move. That means more investors competing for loans. Even many who have only used cash up until now.

More Mortgage Defaults

Expect to see even more homeowners in negative equity positions and defaulting on mortgages this year. It’s worth noting that Zillow stopped up dating their data on mortgage defaults and underwater properties back in 2018. That could be a sign that there is a lot more happening under the surface than most are aware of.

 

Underwater mortgages and negative equity homes are back again. Just how bad is it? What does it mean for real estate investors?

The latest statistics from ATTOM Data show a resurgence in underwater homes in 2019. ATTOM’s latest report measures this metric by the number of properties that has serious negative equity, and owe at least 125% of their home’s value on mortgages.

Seriously Underwater

There were at least 5.2M homes in this situation as of Q2 2019. That’s about as many homes that sell in an entire year in a strong market.

This does not count all of those who just have zero equity or too little equity for a conventional sale using a Realtor. If you added in, all those that owe 90% to 124% of their property value on mortgages this number could be dramatically higher. It will get higher every day as prices float down again.

Then if you count other debt and liens that may mean owners have even less equity, that number may already be at crisis level. Think past due property taxes and code violation fines.

Some zip codes are already seeing negative equity properties return to 2012 levels, with upwards of 20% of properties in trouble. In at least 32 zip codes more than half of properties are seriously underwater.

Equity Rich Properties

The good news is that there is a large number of equity rich properties out there as well. These are those with a loan to value of 50% or less.

While this number is shrinking, and has been since 2017, nationally, 25% of homes were considered equity rich in Q1 2019. Most of them being in California.

What it Means for Real Estate Investors

While there do still seem to be speculative buyers willing to pay 150% of the real value out there, many more property owners are finding themselves stuck. They simply can’t sell conventionally. It’s going to take seller financing and creative financing to make it happen.

The great news is that all of these equity rich properties are really ripe for wholesaling. Those equity cushions will shrink if the market keeps contracting, but wholesalers who act fast still have plenty of potential properties to pick from.