The United States housing market is the foundation of our fragile economy, as made evident by the current recession and real estate bubble. Its downward trend in recent years has crippled our economy while placing millions of Americans in financial purgatory. It appears, however, that the worst may be behind us. Pending home sales continue to improve, suggesting that the housing market is slowly returning to normal. Can we attribute this to the benefits of investors?
With the housing market primed to remove us from our economic instability, facilitation of this sector should be of utmost importance. The role of residential developers and real estate investors has never been more important. Despite several grossly exaggerated misconceptions, the benefits of investors will play an integral piece in returning the housing market to pre-recession standards.
Investors have a measurable and immediate impact on the social good of a geographic region. A symbiotic relationship exists between them and the communities they proceed to develop. The following details the benefits of investors and their impact on local housing markets:
Home Appreciation
Real estate investment plays a significant role in home appreciation. The acquisition of a parcel, with intent to restore, initiates a process from which the entire neighborhood may benefit. By renovating properties that were once considered to be a drain on the community, investors increase the price of their current project while simultaneously escalating appreciation rates of surrounding assets. The addition of a newly renovated structure in a particular neighborhood will serve to impose costs and benefits on nearby property owners.
Home appreciation is the direct result of comparable properties within a specific jurisdiction. Replacing a dilapidated building with that of a newly renovated house will serve to eliminate eyesores while increasing the value of nearby homes. Improved curb appeal will proceed to drive up consumer interest within the community, resulting in increased demand. When the demand for housing increases faster than the supply of housing, home prices naturally increase. Home appreciation is just one of the many benefits of investors.
Job Creation
Real estate investors have made it possible for many workers in the industry to return to their respective fields, as indicated by a modest improvement in our unemployment rate. According to the Bureau of Labor Statistics, unemployment fell to 7.6 percent by the end of March. A correlation may be drawn between the recent housing sector improvements and the drop in unemployment.
The process in which investors procure a property initiates a chain of events that stimulates the economy. Every step in rehabbing and/or flipping a house involves the exchange of money in return for goods and services. The following list represents a fraction of the jobs that may be required to rehab and flip a house:
- Contractor
- Mortgage broker
- Inspector
- Appraiser
- Closing agent
- Notary
- Title insurance agent
- Insurance agent
- County clerks
- Attorney
- Handyman
- Electrician
- Plumber
- Roofer
- Painter
- Mason
- Investor
A collaborative effort is required for an investor to successfully renovate a home and sell it to a potential buyer. The chain of events that transpires during this process introduces a variety of employment opportunities.Therefore, the benefits of investors can provide jobs for countless individuals and monetary gains for local businesses supplying the project.
Benefits of Investors to Financial Institutions
Historically high foreclosure rates are due to the efforts of financial institutions to get non-performing loans off their books. Banks and similar institutions stand to benefit from the removal of foreclosed homes, as their ownership is a drain on available money supplies. Acquiring non-preforming loans provides banks with more work and no monetary gains. Therefore, those that continue to accumulate non-preforming loans (foreclosures) are subjected to a significant financial burden.
Foreclosed homes on a bank’s books can threaten the broader economy. In receiving a house as collateral during foreclosure, banks forfeit any future capital gains they would have made in interest. Financial institutions are then forced to sell the home at a reduced rate, making it difficult to recoup their losses. It has been estimated that foreclosures typically cost banks about 25% of the value of the house.
Smaller capital gains can force financial institutions to exercise extreme caution with future loans, as there is less money to go around. Local businesses are then charged higher interest rates to protect the bank’s interests. The shortage of available capital, along with higher interest rates, severely impedes the growth of local businesses and the economy.
Actions taken by investors serve to alleviate the financial burdens placed on banks by foreclosures. In purchasing non-preforming loans from financial institutions, residential investors generate a cash flow that was otherwise nonexistent. Banks can then proceed to recoup their losses through continual interest payments provided by recently sold houses. Real estate investors that acquire previously foreclosed homes can free up capital for the financial institution, resulting in better loans at lower rates for businesses.
Tax Benefits On a Local Level
The benefits of investors provide local cities with the opportunity to collect more taxes. By acquiring, restoring and selling multiple properties, investors increase the amount of homes owned within a particular jurisdiction. As home ownership increases, the city in which the property resides gains access to increased monetary gains in the form of property tax.
Property tax is a levy on a particular piece of land that each owner is required to pay. Under this system, local governments evaluate the monetary value of a particular property. Once the value has been determined, tax is applied to the owner in proportion to the value set forth by the city.
Property tax received from homeowners provides the city with an invaluable source of income. It is the main tax supporting local education, police/fire protection, local governments, some free medical services, and local infrastructure.
Probate and Divorce
Millions of people each year, for reasons out of their control, are looking for ways to sell their property immediately. Those that are currently going through a divorce, or that have received property through probate, may be looking to sell their property as fast as possible.
Probate may present recipients with unwanted tax and interest charges. The added financial burden may prove to be too much for certain individuals. It is imperative for them to remove the recently acquired property from their list of assets. Those currently going through a divorce may seek to sell their property for a variety of reasons as well. Perhaps the mortgage is too expensive for a single income.
So how can the benefits of investors help those currently going through a similar situation?
Real estate agents and developers serve to assist this particular niche market. Investors have the potential to offer cash upfront to acquire the property in question, alleviating any financial hardships brought on by the property. They offer individuals an outlet for potentially catastrophic situations.
Lower Crime Rates
Homeowners may be unaware that crime reports in local areas affect the cost of homes and should be carefully considered when choosing a neighborhood to reside. Studies conclude, nearly unanimously, that crime tends to have a negative effect on property values. A home’s proximity to a distressed asset can play a significant role in restricting fair market prices.
Distressed properties have been known to harbor an eclectic variety of delinquent individuals. A small percentage of them may contribute to higher crime rates and home depreciation. According to the Atlanta Fed Bank, a seriously delinquent homeowner can cause prices on properties within 0.10 miles to fall by at least 1.2 percent.
Investors have developed a reputation for acquiring dilapidated homes that often fit the description of a distressed property. Successfully rehabilitating such a property may remove any delinquents or transients that reside within. Removing a distressed property from a geographical region may serve to lower crime rates in a given area while simultaneously increasing home appreciation.
Reduce Environmental Impact
The benefits of investors may be seen in the environment. Residential developers have been credited with reducing the carbon footprint produced by older and distressed properties. The process of residential development allows investors to implement a “green” strategy that often maximizes energy efficiency and reduces negative effects on the environment brought on by older homes. The most common strategies witness investors create highly usable and efficient spaces with minimal environmental impact.
Methods used to reduce a home’s carbon footprint may include:
- Energy Star rated appliances reduce energy costs
- Energy efficient lighting and wiring reduce electrical output
- Insulated window installments reduce heating and cooling costs
- Ceiling fans reduce dependence on air conditioning systems
- Carpet is replaced with hardwood floors, which have a much longer lifespan
- Toilets, faucets and shower heads are replaced with low flow versions that reduce water consumption
- Drought tolerant landscaping and drip irrigation systems limit external water consumption
Similar adaptations allow investors to eliminate our carbon footprint, resulting in a healthy, sustainable community.
According to an Executive Summary Issued by the EPA’s Office of Sustainable Communities, environmentally conscious investments such as this are “attractive to private-sector interests because they can find a ready market and compete financially. They appeal to local governments because they can be the building blocks of a growing economy and high-quality, economically sustainable neighborhoods and communities while also helping to create a cleaner, healthier environment.”
Revitalize Impoverished Communities
The benefits of investors have the potential to influence our struggling economy by aiding in community development programs. The New Markets Tax Credit (NMTC) was established in 2000 as a means to encourage investor participation in low-income communities. As a part of theCommunity Renewal Tax Relief Act of 2000, the NMTC was designed to spur revitalization efforts of low-income and impoverished communities across the United States.
According to the Internal Revenue Service (IRS), “this particular credit permits individual and corporate investors to receive a credit against federal income taxes for making Qualified Equity Investments (QEIs) in qualified community development entities. These investments are expected to result in the creation of jobs and material improvement in the lives of residents in low-income communities.” The credit is equal to 39% of the investment paid out over seven years.
Examples of expected projects include, but are not limited to, increasing home ownership opportunities. A Community Development Entity must have a primary mission of investing in low-income communities and persons to receive the credit.
Since its inception, this particular program has given approximately $30 billion in tax credits. Equally as impressive, is the revitalization effort that has taken place over the same period of time. Participating investors have helped several communities create jobs, further education and aid social welfare.
The incentives program was extended on January 1, 2013, ensuring that real estate investors will continue to support credit-starved businesses in rural and urban communities across the country.
Contribute to Gross Domestic Product (GDP)
The affect real estate investment has on our economy is reflected in America’s gross domestic product (GDP). GDP is an aggregate figure that represents the market value of all officially recognized final goods and services produced within a country. Therefore, goods and services provided by investors contribute to America’s GDP as a whole.
According to the National Association of Home Builders (NAHB), housing investments contribute to GDP in two ways: through private residential investment and consumption spending on housing services. Residential investment has averaged roughly 5 percent of GDP while housing services have averaged 12.5 percent.
Residential development may benefit America’s GDP with the initiation of the following:
- Construction of single-family homes
- Construction of multi-family homes
- Residential remodeling
- Production of manufactured homes
- Gross rents (which include utilities)
- Owners imputed rent (an estimate of how much it would cost to rent owner-occupied units)
- Brokers’ fees
- Tax revenue for the city
- Building supplies and labor
Considering that economic growth is typically defined as the percentage change in real GDP, investors’ contributions to these areas are synonymous with economic stimulation. The wake of their actions generates an increased need for goods and services that may help a struggling economy. For a more comprehensive breakdown of the benefits provided by investors, click here.
Investment in property generates economic freedoms and access to good jobs and homes, reducing the strain on federal social welfare programs. GDP, along with other aggregate measures of wealth and production, are exponentially increasing as a result of real estate investment.
The benefits of investors continue to shape our local economy, along with the housing market as a whole. The affect of investment-minded individuals may not be underestimated. It is important, however, to make sure said investors are practicing sound principals.
Investing in property places some form of inherent risk on an individual. It is imperative that only those with the appropriate knowledge and resources participate in residential development. Teaching people how to invest in real estate the right way is one of the best things that can be done to revitalize communities and ensure strong property values. Housing markets will continue to reap the benefits provided by the actions of educated investors.
Justin Lee Thayer is Lane counties expert in market analysis for real estate investors. Call Justin @ 541-543-7287