Shifting Dynamics for Residential Real Estate

Investors and Colleagues,

There’s a major transition underway for residential real estate in the US. For a number of years, inflated home prices have distorted the equilibrium between owning a house, signing a long-term lease.

Since the “American Dream” has been largely built on home ownership, purchase demand for homes jacked up prices to unsustainable levels, while rental rates were low due to depressed demand. But according to a recent study, the price points have reversed to a point where it is much more economical to buy than rent. From the Wall Street Journal:

“Home prices and mortgage rates have fallen so far that the monthly cost of owning a home is more affordable than at any point in the past 15 years and is less expensive than renting in a growing number of cities.”

If you think about it for a minute, this is the way the equilibrium actually should work. When you lease a car, you pay more per month because you are paying a premium for the flexibility of a short-term commitment. The same should be true when you rent a house. Renting keeps you from making a long-term commitment to a particular area – and for that flexibility, you pay a premium price.

Looking at the picture from the perspective of a home buyer, it also makes sense. If you’re going to buy a property to live in for 20 or 30 years, you should expect to get a “discount” for committing to that home for a long period.

And of course if you buy a home for the purpose of renting it out and collecting monthly income, the dynamics have to make sense. You need to expect to collect more in monthly rent, than your interest, taxes, and maintenance expenses.

Now that these price dynamics are back to a “fair” place of equilibrium, the entire market is affected.

Price Affects Supply and Demand

In most economic textbooks, we are taught to look at “price” as a function of supply and demand. The statement that we all remember from these classes is “All things being equal…”

But in the real world, supply and demand don’t operate in a vacuum. Consumers change habits based on price points, along with assumptions of value and long-term expectations. In the case of the residential real estate market, price often affects supply and demand (instead of the other way around)

Today, as individuals make decisions about where they want to live, they have a number of options to consider. They can rent space in a multi-family community (apartments or townhomes), they can rent space in a single family dwelling (there are plenty of distressed as well as premium homes for rent in the Atlanta market) – or they can take advantage of low mortgage rates and attractive pricing to purchase a new or used home.

Since the monthly cost of buying is now lower than renting, we’re expecting to see demand pick up in 2012 – leading to increased activity in the Atlanta housing market. This will result in two important dynamics:

• The “shadow inventory” of homes that banks and the FDIC are holding for sale will be absorbed by the market, resulting in a more stable real estate environment.

• Builders with low inventories of finished new homes will need to acquire land to keep up with the rising demand for new homes.

Seizing The Trend

We’ve all heard the phrase “make hay while the sun shines…” In business as well as when investing, it’s important to capitalize on opportunities when they are available. This requires both the ability to recognize an attractive opportunity, as well as the willingness to execute on the idea.

At Ashford Capital, we have worked hard to identify the most opportunistic properties in the Atlanta market. These are the developments that builders will be first to purchase – so that they can meet rising demand for new homes.

In terms of execution, we have stepped up to the plate and purchased these properties at an incredible discount. Our investors have made a similar decision by identifying our investment programs as an attractive way to benefit from the real estate opportunities in Atlanta – and they have executed by placing capital in our investment programs.

Is your investment program following a similar path? Are you recognizing the opportunities available to you – and executing by making your capital work for you?

If so, then I would love to chat with you about how Ashford Capital can offer strong absolute returns as well as diversification for a traditional investment program. If not, then what better place to start than with an investment company that has identified high-return situations and allows you to come alongside and share in the profits?

I would love to have a call with you and give you more information on our investment opportunities. Would you call me this week so we can set some goals for your investments in the coming year?

Wishing you every success,