A lot of news outlets stirred with news of a home sales drop in December, leading some to worry that the real estate recovery is over. For a real estate developer or fix-and-flip investor who uses hard money lending to get profitable real estate projects off the ground, are these headlines a reason to worry?
The short answer is no.
In reality, both existing and new homes are seeing price growth, even if the rate of sales is falling for existing homes. According to the National Association of Realtors (NAR), pending home sales fell by 3.7% in December on a year-over-year basis, but that is only part of the story.
The Investor Picture
The biggest drop in sales is coming from all-cash deals from large investors, who are fleeing the real estate market at a rapid clip. This is an important part of the story because investor buyers do not drive seasonal demand. Since their main concern is profit, they will buy and sell property year-round. Contrast this with traditional owner-occupier buyers, who love to buy in warm months and back off the market in winter. Looking at the graph on this website, you see the sharp drop-off in activity by the end of the year when owner-occupiers are waiting for warmer weather to go to open houses.
Why does this matter? Since 2013 was the tail-end of the big rush of investor buyers, they were still buying at a healthy rate in December of that year. But the time to buy low and sell high at a large scale is over, so they aren’t buying as much as they used to. This gives the appearance of weakness in the real estate market, but the reality is that it’s only weakness in the large investor part of the market.
The Price Trends
Proof that owners are still heavily involved in the market can be seen in the price trends. As NAR Chief Economist Lawrence Yun notes, prices are rising at a “fast” rate, causing prices to rise to their highest level since 2007. This is benefitting existing homes in particular, as the median existing-home price rose 5.8% year-over-year, eclipsing $200,000. However, the current price of $208,500 is still under the peak for national average prices in 2007, when it hit $219,000.
Going forward, many economists expect that prices will continue to rise, meaning the national median home price will probably exceed the peak by the end of 2015. The fact that the most profit-hungry big buyers are out of the market is actually boosting this trend. With less transaction activity in the market, buyers and sellers can normalize around the historical seasonal market of owner-occupiers and smaller developers. This also means demand for smaller developers and rehabbers is growing.
Financing a Rehab or New Build
If you are interested in taking advantage of the price gains that we’re seeing in both the new and existing home market, whether you are a rehabber, a fix-and-flipper, or a new developer, you will need financing to leverage your best ideas into a profitable reality.
While big banks aren’t eager to jump into the market, real estate specialists are. With a tailored hard money loan from Socotra Capital, you can get started on your next real estate development project right away.
Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.