Balancing Real Estate Investment Risk and Reward: 2017’s Best Markets for ROI

Investors are always interested in securing investment opportunities featuring the ideal balance of risk and reward, and rightly so. In the real estate market, there are several still-emerging trends influencing where investors are most likely to find properties in which the potential return on investment greatly exceeds the potential risk associated with that investment. In 2017, at least in a general sense, the best and most balanced investment opportunities can be found in cities located in the southern half of the United States, with a few notable exceptions, of course.

Each of the following cities selected earned its placement on this list through an analysis of a number of factors most likely to be predictive of future value relative to the likelihood of investment risk. The cities are limited to those featuring a population density of at least 500,000 residents, with the future price forecast and current level of affordability representing the most heavily weighted of the various factors used in evaluating the best limited-risk, high-ROI real estate markets.

Dallas, Texas

Dallas tops the list of cities in which real estate investments feature a significant return on investment along with a minimal potential for risk, as the Texas city is currently underpriced by 3 percent relative to historical averages. In the past year alone, home prices have gone up by nearly 4 percent, but that rate is expected to accelerate rapidly over the next three years mostly due to gains in job growth as well as overall population growth. Based on these trends, home prices are expected to increase by 31 percent by 2020.

Jacksonville, Orlando, and West Palm Beach, Florida

The financial crisis hit Florida hard, but the state’s real estate market has proven to be among the most resilient in the country, as Jacksonville, Orlando, and West Palm Beach feature all the conditions necessary for yielding a significant return on investment that involves minimal risk. Consistent job growth throughout the state, combined with a renewed commitment to restraint among builders, has made several cities throughout the state among the most undervalued in the country, with some undervalued by as much as 20 percent in recent years.

Seattle, Washington

In Seattle, Washington, the Pacific Northwest real estate market features at least one city representing the ideal balance of investment risk and reward. At a price of more than $400,000 on average, Seattle’s average home price is the highest of the five cities listed here, but the expectation of a 26 percent increase will push home values over the $500,000 threshold by 2020, making the iconic Pacific Northwest city one of the most balanced investment opportunities for investors seeking to maximize ROI without courting any unnecessary risk.

Declining Trade Deficit Indicates Potential for Substantial Gains in GDP Growth

Just a single month after an increase in the US trade deficit inspired at least some degree of pause among economists, the $4-billion decline in the trade gap measuring goods has offered ample reason for economic optimism as well as the likelihood of continued GDP growth. While the January numbers indicated a trade deficit totaling $68.8 billion, data from the month of February indicated the trade gap closed to just $64.8 billion, leading some economic analyses to alter GDP growth prognostications by as much as half of a percentage point.

It is necessary to point out, however, that data taken from the opening months of any new year are subject to substantial variances because of a number of factors that remain somewhat fluid — yet not entirely unpredictable — on a year-to-year basis. The Chinese lunar new year, for example, has a significant influence on the national trade deficit of the US, as the overwhelming majority of China’s businesses shut down for the duration of the holiday. With China, more so than any other country, the US holds its greatest trade deficit, which is why the annual holiday wields so much influence over early year trade deficit metrics.

Even after accounting for the influence of the Chinese lunar new year, the decline in the US trade deficit supports the notion held by many economists regarding the potential for continued economic growth going forward. In fact, the likelihood of continued GDP growth is further bolstered by increases in inventory production, including both retail and wholesale inventories. In the case of both retail and wholesale inventories, the February data shows an increase of 0.4 percent.

With the closing of the trade deficit gap of $4 billion from January to February, along with significant data demonstrating a 0.4 percent increase in inventory production across retail and wholesale inventories, it seems clear that the economy is poised for a period of sustained growth in GDP, even in the face of the recently released data indicating a first-quarter slowdown for the 2017 year.

As most economists — not to mention the officials at the Federal Reserve — have concluded, the first-quarter slowdown in GDP growth does not appear indicative of an emerging economic trend. Instead, a closer look at the data reveals the existence of the necessary preconditions supporting the onset of a sustained period of stable economic growth. Given the fact that service-related trade patterns tend to remain stable and relatively predictive on a month-to-month basis, the $4-billion decline in the trade deficit pertaining only to goods offers ample support for an optimistic economic view for the foreseeable future.

Chinese Investors Continue to Invest Heavily in US Real Estate Market

Over the past few years, countless real estate industry headlines have focused on Chinese investors and their ongoing and genuinely staggering level of involvement in the commercial and residential real estate sectors. According to our own independent analyses, the past five years of data indicate Chinese investors are responsible for putting well over $100 billion into commercial and residential real estate properties throughout the United States.

While most of the attention has focused on the more high-profile efforts made by foreign investors to secure safe assets offshore — including, for example, the $2-billion sale of the Waldorf Astoria to the China-based insurance group Anbang as well as its failed attempt to secure the Starwood Group for a sum of $14 billion — a great deal of the activity taking place during the past five years reflects a high-volume effort inspired by a number of economic factors. It is these same economic factors that point to the likelihood that foreign investment will double over the course of the next five years.

The fall of the yuan is one of the primary motivating factors pushing Chinese investors into the US real estate market, as the projected stability of the US real estate market serves as a vehicle for wealth preservation in the face of growing concern regarding the yuan. With few limitations on foreign-based real estate purchases in the US, Chinese investors are essentially free to enter the real estate market, often with the goal of investing in a rental or resale property. Of course, many foreign investors also rely on a real estate investment as a vehicle for securing legal entry into the US via an EB-5 investor visa.

It’s worth noting that any analysis of Chinese activity in the US real estate market is quite likely to be underestimating the full extent of investment activity over the past five years. This is due to the simple fact that a large volume of foreign investments can be executed through front companies or trusts that are not necessarily subject to public disclosure. As a result, the historical data, as well as the predictive analyses based on that historical data, does not necessarily provide a comprehensive view of the sizable Chinese real estate investment activity in the US.

Although it is not possible to understand the complete extent of the investment activity undertaken by Chinese investors, it is clear that the activity is indeed substantial enough to have an impact on some of the nation’s largest and most expensive real estate markets. In fact, the bulk of the activity from investors based in China has focused on markets that include San Francisco, Miami, Chicago, Seattle, Los Angeles, and New York.

During the next five years, it is possible and perhaps even quite likely that Chinese real estate investments will account for a sum approaching $220 billion or more. While the bulk of that investment will likely be directed toward commercial properties, the residential real estate market in the US will also experience a continued rise in activity from foreign-based investors, with investors based out of China accounting for the majority of that activity.

With Increase in Home Deliveries, Lennar Corp. Exceeds First-Quarter Expectations

Lennar Corp. posted profit and sales numbers that greatly exceeded expectations for the first fiscal quarter, and it appears the homebuilder is currently poised to continue to outperform expectations in the second quarter after trending upward by almost 1 percent according to recent premarket trade analyses. Of course, it is worth noting that although the homebuilder’s quarterly net income fell compared to one year ago, it still exceeded the earning-per-share consensus and experienced an increase in revenue growth from $1.99 billion to $2.34 billion.

According to our own recent analyses, a renewed economy featuring the promise of sustained growth is part of the reason homebuilders like Lennar Corp. have been able to exceed performance expectations during the early part of 2017. Even though the supply of real estate is limited nationwide — in many cases requiring an increased reliance on off-market expertise — Lennar Corp. was still able to exceed expectations in homebuilding revenue and home deliveries.

In the case of homebuilding revenue, Lennar Corp. succeeded in generating $2.02 billion despite expectations indicating just $1.95 billion. As for the total number of home deliveries, Lennar Corp. again outperformed expectations, increasing home deliveries from 4,806 up to 5,433. In addition to the impact created by early indications pointing to a renewal in economic strength as well as sustained economic growth, the fact that Lennar Corp.’s home-buying incentives increased by $1,100 (up to $22,700 from last year’s average of $21,600) might have also factored into the homebuilder’s ability to outperform its first-quarter expectations.

The increase in the average incentives provided to homebuyers also paired with relatively static average home sales prices, with first-quarter analyses showing an average home sales price of $365,000. Even so, Lennar Corp.’s first-quarter performance is clearly the driving force behind the homebuilder’s stock price rising by 27 percent thus far this year. Lennar Corp.’s year-to-date stock spike of 27 percent compares with a 10 percent increase in the SPDR S&P Homebuilder exchange-traded fund and a 6 percent gain in the S&P 500 SPX.

As Lennar Corp. continues to exceed performance expectations while also outpacing both the SPDR S&P Homebuilder ETF and the S&P 500 SPX, it is fair to wonder whether the homebuilder will be able to sustain its impressive first-quarter performance numbers. Should Lennar Corp. succeed in doing so, it will be interesting to conduct an analysis that properly explores the role of all the different factors enabling the homebuilder to outperform expectations while increasing home deliveries and consistently generating greater homebuilding revenue.



Federal Reserve Minutes: Balance Sheet Reduction Linked to Planned Interest Rate Increases

The Federal Reserve’s March policy meeting offered some new insight into the central bank’s plans for the remainder of the year. While the Federal Reserve has long telegraphed its intention to increase interest rates as it closes in on its inflation goal of 2 percent, the minutes from the most recent policy meeting show that the Fed also intends to reduce its balance sheet as a consequence of rising interest rates.

This revelation is certainly of interest for many reasons, but the level of disagreement among committee members is also worthy of deeper exploration. The committee, which is comprised of 17 total members and 10 voting members, appeared somewhat divided with regard to the timing of the planned interest rate increases and the subsequent reduction in the balance sheet.

As the minutes indicate, the voting members preferred a more measured approach — and relied on their status as voting members to assert this preference — while many of the non-voting members expressed at least some level of dissent, preferring more immediate action given the potential for headline inflation to cross the previously outlined threshold of 2 percent. After raising their concerns over the potential of exceeding a 2 percent rate of inflation in relatively short order, the prevailing members cited the limited risk associated with increased inflation, largely due to current expectations among consumers and businesses.

Overall, the Federal Reserve expressed optimism for the long-term prospects of the economy. In doing so, however, officials also noted the possibility that the first-quarter GDP reading will fall short of expectations despite the overall health of the economy and the likelihood of substantial growth over the long term. Officials also engaged in a bit of hedging as well, indicating the possibility that an unexpected or otherwise sudden uptick in economic activity could accelerate their current plans for increasing interest rates and reducing the balance sheet.

Addressing the balance sheet, whatever the timing ends up being, will require a reduction in the $4.5 trillion worth of government- and mortgage-backed bonds. As for the actual timing of the balance sheet reduction, the minutes from the policy meeting indicate that officials are currently eyeing a December announcement, which would follow two separate increases in interest rates. In the meantime, it seems quite likely to expect a slowdown in reinvestment as the year continues to progress.

All of this, of course, is subject to change over the coming months. Despite the plan outlined during the policy meeting minutes, the Federal Reserve will surely allow the performance of the economy to dictate the ideal timing for raising interest rates, reducing the balance sheet, and slowing reinvestment.