Clear Capital: Rising P/E Ratios Mean Investors Must Do Their Homework

Posted by Patrick Barnard on March 31, 2014 No Comments
Categories : Residential Mortgage

With home prices now stabilizing, investors looking to get in on the rental market are going to have to conduct a more careful analysis of where to purchase properties, according to Clear Capital.

The firm's Home Data Index Market Report finds that as home prices have increased during the past two years, those gains ‘outpaced growth in the owners' equivalent of rent.’ This is significant for investors because when home prices rise faster than rental rates, the price to earnings (P/E) ratio climbs, potentially reducing investor returns within the single-family rental asset class.

However, now that home price appreciation has slowed in most parts of the country, ‘investors will need to dive down into granular data and analysis to find markets where attractive home prices and rental rates still offer competitive investments,’ Clear Capital states in its report.

‘Analyzing rental rates and home price trends at the national level suggest the current investor pool may start to wane as the rate of home price growth outpaces the rate of owners' equivalent of rent,’ says Alex Villacorta, vice president of research and analytics at Clear Capital, in a release. ‘Don't expect investors to exit all at once. Good deals at the micro market level will persist well into 2014.’

The report finds that home prices were relatively flat in March, as they were in January and February. The saturation rate of distressed properties over the month also remained relatively stable at 21.8%.

The firm says the Midwest may be at greatest risk of upcoming price declines because it experienced ‘nearly non-existent growth over the quarter’ and recently saw some short-term declines. Clear Capital notes that the last time the Midwest fell into negative territory was in June 2012.

The firm says home prices dropped on a quarterly basis in five of the metro markets it tracks.

The slowdown in home price appreciation is perhaps most pronounced in the lower price tiers (homes selling for $95,000 and less), Clear Capital says. Although that segment saw prices increase by as much as 31.8%, on average, since the market bottomed in 2011, during the past quarter, low-tier home price gains slowed to just 1.2%, a substantial difference compared to 3.7% a year ago.

The firm notes that the recent stabilization in home prices ‘could motivate first-time and move-up home buyers to re-engage.’

‘Our data through the end of March reveals prices remained steady through the final weeks of winter – a sigh of relief to all market participants,’ Villacorta says. ‘Yet, national quarterly gains of just 0.7 percent mean there's certainly still risk for short-term price declines in some markets. But over the year, we see phase three of the recovery unfolding, which we define as moderation across all price tiers.

‘The key to overall market progress and stability in 2014 will lie in the transition from investor to traditional home buyer demand,’ Villacorta adds. ‘While each segment will continue to be important, healthy markets have shown higher rates of traditional home buyer demand and less investor-driven demand. Should prices remain stable, home buyer confidence will build, supporting a balanced transition.’

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