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If there's one thing about cycles - what goes down eventually comes up. We are enthused to be involved with a number of residential projects as a capital partner in Southern California during this "Conservative Renaissance" of real estate. The great response from the market to these single family offerings clearly affirms our sentiments that a recovery is in full swing. This in addition to our commercial holdings, clearly supports the conclusion that the recovery is across the real estate product types. But as always, smart investors practice cautious optimism even during a positive period. The road ahead looks promising for continued growth in real estate, but a few trends are worth keeping our eye on that could impact the cycle down the road.
We all recall too well the dark days of the housing crisis characterized by plunging property values and growing shadow inventories before disparate forces in real estate actually converged to create opportunities investors are currently enjoying today. First, strong government initiatives in the form of legislation, regulatory reform, and programs benefitting distressed homeowners mitigated the flow of foreclosed properties ending on the auction block or as REO. Second, monetary policies and other market conditions maintained a low ceiling for interest rates, allowing investors and consumers (that could meet strict underwriting guidelines) to borrow at cheap rates. Third, the economy following its own cycle of growth finally showed sustained month-after-month improvement, with the much welcomed inverse relationship of falling unemployment and rising GDP. The result has created a market of increased demand caused by the lack of distressed properties available at a discount, affordable mortgage payments due to low interest rates, and more consumer confidence that they will have an employment base to support a mortgage.
Vista Urbana, an affordable home project in the Ventura area is one of our success stories. Peak served as the capital source for the endeavor. Construction commenced in October 2011. The affordable housing development consists of 156 condominium units, recently completing phase I and II of construction with all units reserved or sold. Units in phase III, currently in the final phases of construction, have all been pre-sold. Oak Terrace, a mixed townhouse / single-family residence project in Thousand Oaks catering to a more upscale audience is another Peak capital project that boasts 84 units upon completion. With almost 50% of units built and occupied, the remaining units have also been pre-sold. In both of these ventures, favorable market conditions have contributed to their success.
Rising interest rates is the one factor posing a potential threat to the current momentum. So far, the market has been able to operate smoothly in light of tight inventories. The upward pressure this is applying to home values is starting to entice more homeowners to sell, and some analysts anticipate home values to appreciate more than six percent in 2013. However, rates have incrementally increased over 100 basis points in a year, and some fear the combination of higher rates with higher valued homes could price many consumers out of the market. Moreover, investors could begin looking for better returns in other investment vehicles.
As affordability decreases, urgency increases. Rising home values, along with rising rates,can continue the momentum by spurring ambivalent buyers that can afford to participate into the market while they perceive they can still afford to buy. That, coupled with increased inventory generated by new sellers benefitting from rising equity in their homes, should prove to modulate the increased cost of homeownership in line with continuing improvements in the economy. In light of appreciating home values and interest rates, we’re confident we are still at the beginning of a great cycle for real estate, and are anticipating great returns from additional residential projects we are involved in as financing partners that should complete construction in the next twelve months. Investors and consumers alike can both benefit from today’s market. Appreciating values and rates reflect the fortitude of a market and economy that can support it.
Inventory, Inventory, Inventory. The return of housing to better days has mainly been attributed to lower interest rates, fewer defaults and a gradually healing economy. But what has brought the biggest smile to the face of analysts and homeowners alike is steady appreciation in home values as part of this new cycle. Since the end of 2011, home values have risen over 5% nationally, and are forecast to rise at least 6% over the next five years. The increases have been much higher in many major cities. It all has to do with supply, or the lack thereof, that’s driving home values north. While everyone is encouraged to see the return of equity of home values, a protracted period of tight inventories could have a negative impact on the current cycle. Simply put, if buyers can’t afford to buy, the process stalls.
Attaining the right balance of all the ingredients that have led to the current recovery phase can be tricky. The combined result of fewer foreclosures and mortgage delinquencies combined with brisk all-cash investor activity is effectively containing the specter of a looming shadow inventory of distressed homes that had once been seen as one of the major headwinds preventing a full housing recovery. The downside of this is, of course, an overall reduction in available, affordable homes on the market.
Fortunately, those developers and investors wise enough to understand the nature of the real estate cycle foresaw the scarcity in inventory and the resulting opportunity as they brought more units online. Investors in new multifamily housing flourished in 2011 with units becoming available now, and overall construction in housing for both apartments and single family dwellings actually helped to boost the economy out of recession. We have been involved in a number of new projects in Southern California aimed at bringing affordable units to the market. Case in point: we served as a major capital partner for a 156 unit condo development in the Ventura County area that broke ground in the 3rd quarter of 2011, and the developer is currently in the second phase of development to meet demand with most of these units already pre-sold. Another project we’re involved in is a 10 unit townhome subdivision in the Tujunga community that will be bringing 10 new homeowners into that market shortly. We are also online and committed to begin a residential gated development and a Thousand Oaks home development in the area.
What’s often ignored in the inventory equation is the participation of the “move-up” buyer and having available product to meet demand. For a fully functioning housing cycle to occur there has to be an upward migration of current homeowners to larger homes to allow first-time home buyers and growing family households an opportunity to purchase at affordable prices. Of course, as the last period saw home values depreciate, the cycle stalled as homeowners found themselves held hostage by falling equity and the inability to leverage it toward a larger purchase. Today paints a different picture, as homeowners are starting to test the waters with rising home values and multiple offers on listings. Inventory now becomes a welcome problem to have at the affluent end of the housing scale. In March, homes sales over of $800,000 are up over 33% from last year in Southern California. The current housing cycle requires adequate supply for move-up buyers to continue its progress. We have positions in the affluent market as well as the primary partner in a 20 acre, 15-estate equestrian development project in the Sunland community.
Home values for entry level as well as larger homes are skyrocketing, to the delight of homeowners, potential sellers, real estate professionals affirming that for the long term, real estate is and always has been, a sound investment choice. Additional housing units coming to market to balance the supply/demand equation won’t dampen appreciating values, but should modulate increasing values just enough to allow more new buyers into the market and persuade more owners that they can locate replacement properties if they list their current home.
