...but some are starting to cool. 

This month Global Insight and the National City Corporation teamed up to publish a survey of regional housing market valuations.  Of the 317 metro areas evaluated:

• 219 (69%) showed a slowdown in appreciation over the past year
• (21%) showed outright declines in property values
• 79 (40%) qualified as extremely overvalued. 

See the full study here.

The most overvalued metro areas were clustered on the west and east coasts with California and Florida dominating the top twenty.  Naples FL had the highest overvaluation at 101.5%, followed by Bend OR at 89.3% and Salinas CA at 79.4%.

At the other end of the spectrum, seven of the ten most undervalued markets were in Texas.  College Station, home of the Texas A&M Aggies, was the most undervalued at -22.3%, followed by Dallas TX at -21.2%, Fort Worth TX at -19.3% and Houston TX at -17.3%.

Source:Global Insight/National City Housing Valuation Analysis

The paper also lists the major regional price corrections of recent years.  Texas also features heavily in this list; back in the mid 80’s the oil industry fueled a glut of investing that resulted in a speculative bubble which spectacularly popped when the oil market crashed.  Houston declined by 21% over 12 quarters.  Odessa, another oil hub, declined by 28% over 14 quarters. 

The current market condition in cities like Houston and Fort Worth has created an environment in which it is comparatively easy to find investment properties that generate positive cashflow at relatively low risk.  The ratio of rents to property values is high, and although there is always market risk the probability of an absolute decline in mean values from this level is relatively low. 

Investors in overvalued markets however should be wary.  Price dips might look like buying opportunities, but at these levels getting into the market feels more like speculation than investing. 

David Lereah, the chief economist for the National Association of Realtors, gave a view of the future of the housing market this week during  a meeting of agents in Saratoga Springs.  In Lereah’s estimation the decline that started in the third quarter of 2005 was a needed cooling off period, but would be short lived. Interestingly, he stated that a rebound would occur in the next three to six months in most regions, but prefaced this prediction on the condition that the Federal Reserve shows restraint in raising interest rates. 

Lereah’s most quotable statement was in reference to the median price for a single family house in San Francisco: $740,000:  “Who can afford that?”

Read the full article here

Note that prices vary widely by region.  As a sample, according to NAR figures Houston averages $152k, Orange County $726k, Boston $421k, Chicago $278k, and Springfield $112k.

Another indication that the real estate market is starting to turn in some regions is starting to reveal itself.  According to RealtyTrac, foreclosures for the month of August are up 53% over on eyear ago.  Overheated markets are posting some of the largest increases:  Nevada (+255%), California (+160%) and Florida (+62%).  Much of the increase can be attributed to a cooling real estate market, compounded with rising interest rates as adjustable-rate mortages reset and increase the monthly debt burdeon paid by homeowners.

The latest in my series on avoiding investor burnout...

Principle 3:  You’ve found the right tenants, now take care of them

A rental property can only generate revenue if there is someone living in it. Vacancies are one of the greatest threats to achieving the financial performance that you expect out of your property, so once you’ve found the right tenant you’ll want them to stay. 

But more importantly, perhaps, being responsive and respectful to your tenants will also increase the likelihood that they take care of your property.  This will protect the unit’s value, and the end result is that happy tenants are likely to bother you less often.  This is what you want.   Answer voicemails promptly and address needed repairs quickly – this is an investment that pays off.  I recently had a tenant that would talk my ear off every time I came around.  He was the first tenant to move into the property after I purchased it and made some upgrades, so I had to visit a few times after he moved it to get some problems ironed out.  But building that goodwill paid dividends; they take great care of the house and I now never get a call. 

Next:  managing repairs…

I came across an interesting new offering from a company that calls itself Tenant Market.  Their business model, according to an early post, is based on providing a service that "...will help connect supply and demand in the rental market."   It's not yet clear how far they've come along in developing their service, but to create some buzz they have come out with a landlord blog that offers some no-nonsense advice to current and aspiring investors.  And an added benefit is that it's written with in a breezy style that's fun to read. 

I like their focus on ethics and responsibility (I liked their installments entitled Don't Be That Landlord.)  But I saw a thing or two on the blog that I wouldn't agree with (I for example, wouldn't advise beginning investors to use a property manager). 

Overall, seems to be an interesting site, and from it's tone it seems to be run by post-dot-com hipsters as opposed to the stodgy curmudgeons that write most real estate columns.  I'll be interested to see what they come up with. 

John Krainer of the Federal Reserve Board of San Francisco took a look at the performance of market statistics (sales volumes, months of supply on the market, etc) as an indicator of market downturns in a recent Fed Economic Letter. 

Krainer’s conclusion: market statistics can be leading indicators of market downturns, but they tend to be more accurate predictors when they come before sever recessions.  In typical Fed fashion the paper avoids making any strong statements about the current situation, but interestingly (and somewhat ominously) Krainer buries in the text of the paper a comment that recent market behavior “..bears more resemblance to the typical behavior before a recession-related downturn than to a non-recession-related downturn.”  He doesn’t revisit this observation in the paper’s conclusion. 

A couple of developments this week.

You might have noticed that "beta" has disappeared from the EquityScout.com logo.  That's because we had our official launch this week.  Thanks to all of you that were working behind the scenes, and all of you who contributed suggestions that helped us in the development of our real estate investment software tool.  You can see the EquityScout.com press release here, or can view the release in our Media Room. 

Our second event was that EquityScout.com was featured in a video newscast by DNN Real Estate News Network.  I'll post a copy of the clip when it's available. 

Principle 2: Select the right tenantLast month I started a series of posts on Avoiding Burnout in Real Estate Investments.

Before I bought my first investment property my wife ran out and rented Pacific Heights on video and forced me to watch it. Perhaps you remember this movie: Michael Keaton plays a evil con-man who rents half of a San Francisco duplex from a naïve yuppie couple then turns their lives into a living hell.  Bloodshed and drama ensue.
 
Well it’s not a great movie so I won’t recommend that you sit through it, but I will share with you the film’s primary insight: if you’re renting a high-end property do a credit check the applicant before signing the lease.  Housing laws vary from state to state, but one trait that they have in common is that they’re designed to protect the tenant, not the landlord. If you end up renting to a family who destroys your house or refuses to pay the rent then you’ll surely spend a fortune and a lot of time and effort getting them out.
 
If you’re renting a lower-end property then doing a credit check on the applicant is less likely to yield any useful insights since applicants for inexpensive properties may not have established credit histories. You’ll have to rely on other methods of evaluating applicants, such as references from previous landlords and from employers. Call the references. Follow up.
 
And lastly, learn something about the applicants when you meet them (and yes, you should meet them – don’t leave this to your realtor). Do they arrive on time? Do they strike you as someone who will treat your property respectfully?
 
In the end you’ll have to trust your instincts. Having a vacancy is stressful, but it’s not nearly as stressful as having a unit occupied by a tenant who makes your life difficult. It’s not a good idea to indiscriminately accept the first applicant who waves some cash in your face, tempting though it may be.  Remember – housing laws are first and foremost designed to protect the tenant; they’re not designed to protect your rights as a landlord.  Renting your property to the wrong person is an expensive mistake.
 
But it’s not just about finding the right tenant.  It’s also about taking care of your tenant once he or she has signed the lease. Being mindful of the obligation that you have to the family who is living in your property is a moral/ethical issue, but just as importantly it’s a key business issue as well. Doing the right thing goes hand-in-hand with economic success. I’ll talk about that in my next post.