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Perspective

2020: A Year to Forget For Most, But Not For SFR

The SFR Industry Resiliency By: Adam Stern, CEO, Strata SFR There are some industries that tend to do better than average or even flourish during times of economic downturn. If we look back to past recessions in the US, those tended to be segments of the economy where demand does not much fluctuate based on changing prices; sectors such as basic household staples, healthcare, and consumer goods. The reason these sectors tend to outperform the rest of the economy during times of economic contraction is simple! People’s basic needs and their desire and ability to fill them, regardless of the economy, stay consistent. Other sectors do well for other reasons. Segments such as discount retailers and fast food do well because when times are tight, eating and buying cheaper is more appealing. Since the inception of the Single-Family Rental Industry in early 2008, back when the trend was still referred to as Foreclosure-To-Rental, it was speculated that SFR was going to be a “recession-proof” industry. The rationale made sense too. It was widely proposed that SFR would do well during economic expansion as higher home values would push many to rent as homes became less affordable to many, including cash-strapped millennials with high college debt, and at the same time create good returns for SFR portfolio owners as equity in homes increased creating the opportunity to leverage that equity to foster expansion. The flip side of that coin was if the economy tanked, it would mean higher unemployment and stagnant wages, driving many to rent, and in a shrinking economy, SFR investors would reap the benefits of lower home prices and higher returns.  All of this was speculation until this year. With the proliferation of COVID-19 and its resulting effects on the world economy, I don’t think anyone can argue that SFR has been a beneficiary of some stark economic, demographic and lifestyle shifts that have seen the trending toward people living in Single Family Rental Homes and especially those investing in SFR, to take a swing to the positive. Reasons for the Win How the SFR industry won in 2020 reflected a somewhat atypical recession cycle. The current situation, triggered by a worldwide pandemic, has changed the way many people live and work. It also coincided with one of the most divisive and hotly contested elections in recent memory. From top to bottom, there were many winners along the value chain in the SFR industry and few losers which I will outline briefly below. Let’s start with the incumbent SFR industry players, those that have amassed huge portfolios by steadily buying SFR throughout the mid-2010s. Firms such as Tricon, American Homes 4 Rent, Invitation Homes and others have seen strong appreciation in stock prices as the industry has matured. These firms have proven to Wallstreet that scale and efficiency equate to predictable returns. The steadily increasing Net Operating margins of these various platforms, combined with strong earnings from streamlined operations, have attracted new and cheaper capital. This has allowed publicly traded SFR companies to be competitive in a tightening market. As 2020 unfolded, amid uncertainty caused by the pandemic, many firms pulled back on acquisitions which allowed them to focus on operations. This shift in buying habit did not seem to have hurt them though. If anything, it proved that these firms, through their sheer size and organizational prowess, are relatively safe bets for capital to ride out uncertain times. Mid-Cap and Small Cap SFR firms have also seemed to fare well based on the strategies they chose in the years before the pandemic arrived. These firms, like the larger SFR REITs, focused on reinforcing operations and have chosen asset types and geographies that have held up well during the pandemic. They have seen strong income with little change to delinquency and vacancy rates. As such, many have remained well positioned to attract follow-on and newly raised capital from investors hungry for cashflow and yield. This in turn put them in a good position to expand upon their build acquisition infrastructure to deploy capital. Some segments of this category have struggled however during the pandemic. Firms that chose markets and targeted tenant bases that were exceedingly susceptible to the ravages of the pandemic, such as areas where tenants are in lower rent bands or where wages and jobs were adversely affected by the pandemic, have seen higher delinquencies, evictions (in areas where they remained legal), and stagnant or decreasing rent levels. THE NEW WINNER—B4R A huge winner in 2020 has been the new-construction rental sector or as many know it, Build-For-Rent. As overall inventory levels have reached historic lows in many markets around the country, combined with the seemingly insatiable appetite of renters for newly built, more modern rental housing, Build-For-Rent has seen an influx of investment capital through various avenues. These avenues include incumbent SFR firms and not too surprisingly, new entrants such as multi-family investment firms. Other types of real estate investment companies have come into the space as well. For example, those who have been able to leverage their current operations in other real estate food groups as a way to entice institutional capital to back their play in this asset class that is now competing with the other core commercial verticals. To clarify, Build-For-Rent is the practice of buying land (raw or developed) and engaging with lot developers and builders to construct single family detached homes and townhomes for the purposes of holding as rental properties. There are several strategies players are implementing in this space. Building scatter site new construction homes for example is not a new phenomenon, as many investors bought distressed lots in broken subdivisions that resulted from the downturn and have been buying and building homes for rent on individual lots over the last decade. But the new strategy being employed by many SFR REITS, multifamily investment firms, and newly formed Build-For-Rent operators is the single site SFR subdivision. This new “thing” that many are figuring out has become the

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The Great Migration

What does the urban center exodus and work-from-home evolution mean for real estate investors? The COVID-19 pandemic has disrupted many things about our lives, and these changes run much deeper than wearing masks and social distancing. In the housing market, the pandemic has renewed a trend away from densely populated urban centers and toward more spacious dwellings in the suburbs. This trend is so significant that it is driving headlines in the industry and beyond. Zillow released research in August showing that rent prices are increasing in suburban areas while stagnating in urban centers. Researchers hypothesized that “suburban rentals may now be more appealing for renters who no longer need to commute or are temporarily unable to enjoy some of the amenities of urban living.” A Zillow survey from a few months earlier indicated that renters started considering moves based on the work-from-home freedom from commutes as well as requirements of a designated room to serve as an office. Those trends have certainly expanded through the third quarter of 2020. When you add the fuel of working from home to kids doing virtual learning, it’s no wonder that The New York Times is touting an unprecedented “surge that is unlike any in recent memory” out of New York City and into the suburbs. But this isn’t just a New York trend—it’s happening in big cities nationwide. Despite double-digit unemployment rates, the stock market has fully rebounded and continues to flirt with all-time highs. Both existing and new home sales have shown us what a true V-shaped recovery looks like. While we are still in the thralls of a pandemic, housing is one of the brightest segments of the economy, with incredibly low interest rates and buyer preferences demanding far more single-family properties than are currently on market. As we’ve seen many times before, just because the rules of the game change, it doesn’t mean real estate investors stop playing. They adapt to the new game and compete. Here’s what we’re seeing right now  with single-family rentals, new construction and fix-and-flip properties. Single-Family Rentals Inventory for single-family homes was tight before the pandemic, and the increase in demand from those fleeing to the suburbs—combined with record-low interest rates for homebuyers—means that demand far outstrips supply. According to the National Association of Realtors in August, housing inventory in the top 50 U.S. metros declined 38% year over year. This means investors will need to be more creative than ever in finding good investment properties. Investors are pros at using creative marketing strategies to uncover potential buying opportunities before they reach the MLS. Currently, we’re hearing of investors going back to grassroots door-to-door canvassing to network and learn who might be interested in selling their homes. Investors must not only be creative to expand their targets but also consider rehab-to-rent properties or even build-to-rent projects instead of simply buying existing housing stock. The good news for SFR investors is that if they can acquire a good property, the trend toward the suburbs and rental homes means that rent rates should remain solid for a long time. Despite eviction moratoriums being extended in many markets, investors are still buying properties where available. This is an area to watch though. As these eviction moratoriums expire and unemployment remains high, it’s important to conduct thorough application screenings to ensure tenants’ ability to make monthly rent. Investors need to move quickly when they find the right property to add to their portfolios, which means knowing they have the cash or available debt exposure to make a deal as soon as they’re confident the numbers pencil out. Ask your lender if they have a pre-approval program or line of credit you can get qualified for to ensure you have ready access to capital when needed. Fix-and-Flip Properties The tight housing market means that the need for affordable housing is stronger than ever. Fix-and-flip projects can help revitalize distressed properties and turn them into sought-after homes for sale or rent. Investors who find these properties and rehab them appropriately for the area will see after-repair values in a tight market remain strong. Investors who focus on fix-and-flip rehabs must understand trends that are driving buyer demand. As mentioned earlier, parents who are working from home or have kids learning virtually have a renewed interest in larger homes that include a dedicated home office and room for homeschooling. These features can differentiate one investor’s house over another and offer increased margin opportunity on larger projects. Whether these are separate dedicated spaces, finished attics or basements, or added ADUs and she-sheds, such rooms will drive up construction budgets. Still, they should provide a return on investment that is worth the initial outlay. The fix-and-flip and fix-to-rent investment strategy boomed out of the 2008 financial crisis. Many veteran investors are poised to capitalize if a similar surge of foreclosures happens in the coming months. This means many investors who believe the end of mortgage deferments and prolonged unemployment could open buying opportunities in the months ahead are keeping powder dry to be ready. But with home prices continuing to climb, demand at all-time highs, and under 4% of mortgaged properties with negative equity, the prospects of a buying opportunity like we saw for investors in 2008 seems unlikely at the moment. A September report from CoreLogic shows, however, a significant spike in delinquent mortgages. So, depending on the duration of the pandemic and prolonged unemployment for many millions, it’s certainly possible that distressed sale increases could follow. New Construction In a normal year, fall typically means a slowing trend of new home starts and sales, but 2020 bucks the normal trend. According to the National Association of Realtors, “the strong summer sales are an indication that the pandemic merely delayed rather thanobliterated the spring market. … There are no indications that contract activity will wane in the immediate future, particularly in the suburbs.” Land, labor and lumber prices continue to soar and are certainly adding to the cost of a newly

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What to Expect in Changing Times

When times change, people change too. Bob Dylan famously sang, “The times they are a’changin.’” We can certainly say they’re a’changin’ as a result of COVID-19’s business as unusual. Here are just a few. Impact of Working From Home People are becoming accustomed to working from home. This means we’re going to see a lot of open commercial spaces. Change always inspires creative entrepreneurs. We’re going to see a tremendous number of zoning changes primarily in commercial with mixed use. We’ll see shopping malls turned into condo projects, perhaps to accommodate people aged 55 and older, or perhaps a group of millennial entrepreneurs who envision a hub where everybody can share the space. We’ll see strip malls become mixed use, some even including residential space in order to get those properties filled.  Some families will continue to home school their children, which may impact the future location of schools. The Great Reckoning Because many more people are comfortable using their homes as satellite offices now, a trend that once saw people flowing to the city core will now see them moving back to the suburbs. People have realized they don’t mind an hour and a half drive because they’re not doing it five days a week. They want a better quality of life and work/life balance. They’re saying, “My world’s not the same anymore.” Years ago, my oldest brother was a nurse who ran a national home health care organization and was a former president of the American Nurses Association. In a quest for a better work/life balance, he left everything behind and moved to Costa Rica. He got a part-time job working six weeks on and six weeks off in California. His interesting and diverse assignments included working on an Indian reservation and in a hospital. He ended up making more money working this rotation and enjoying an excellent quality of life than he did running a national organization. He decided not to wait for the next thing to happen to actually live his life.  I’m witnessing this same mindset today as people around the world reassess what’s really important during this unusual time.  Like my brother, many people are saying, “I’m not going to wait to start living my life.” And now that they’ve been forced to reduce their working hours to 32 or 24 per week, they’re realizing they can actually make do on that income. Many will forego returning to the pre-pandemic hustle and choose instead to live simpler lives. Waking up to Community People move because of their circumstances. Traditionally, those circumstances included earning more or less money, relocating for a job, adding to their family or becoming empty nesters. But now people are analyzing their place in a world that became more humanized overnight.  People became neighbors again. They became part of a community. They were “all in this together.” There are countless stories of people genuinely helping and connecting with one another. Since they’ve been home, they’ve had time to think about: What do I really want for the rest of my life? What do I really want for my family? What do I really want my lifestyle to be? The right answer for some people is to move to a smaller home because they’ve realized they don’t need all their space.  For others, suburban McMansions will provide the solution. Instead of a cramped three-bedroom home, they will opt for a spacious home with four or five bedrooms so they can have a home office.  People will deliberately plan multigenerational households—and not just because their millennial kids moved back home.  Some Gen Xers will choose to live with their parents. After being separated from them during the pandemic, they will want to be close and not want to waste the time they have left. Generations will pull together. Opportunities for Real Estate Professionals Real estate brokerages and agents will shift to meet these needs. We’re certainly seeing more brokerage owners considering mergers and acquisitions because they don’t want to jump back into the fray. A lot of them with smaller brokerages simply don’t want to keep up with the lightning speed of technology. They’re tired. Now that they’ve experienced a lull in business, they’re looking for alternatives that allow them to transition successfully and ensure their agents are cared for. Agents, too, are moving because of their circumstances. Pre-pandemic, even if they were unhappy with the daily grind of making the next sale, they were reluctant to make a change. But the Universe forced us all to change. Suddenly we had to stay at home.  Character isn’t made in a crisis—it’s revealed. Many agents aren’t happy with the character they’re seeing in their leaders during this time. Because they don’t feel appreciated or heard, they’re assessing their options. Agents who didn’t produce or pay attention to market knowledge will disappear. Those who remain will need to leverage technology, stay current with knowledge of the market and learn to read trends. Those who are able to do so will be able to identify and seize windows of opportunity for their clients. Agents who are paying attention to the trends are keeping a close eye on planning boards and municipalities. As we see zoning changes, we’ll see business changes. Paying attention to zoning changes on shopping malls and being proactive might mean you can represent the condos.  Changes to businesses will impact employees, which may lead to an opportunity for a proactive agent to educate them about their home ownership and refinancing options. The next few months will shine a light on who has those skill sets. Agents will need to bring their A-game to be the solution for their prospects and clients. Accurate, thorough market knowledge combined with a focus on the needs of the person they’re serving will be key differentiators. For example, one of our agents was helping a client find the right location for retirement. The ideal spot happened to be out of town, so the agent referred the client

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Real Estate’s Short, Hot Summer

With any luck, demand will heat up the housing market this summer. Spring is a home-buying season. However, the 2020 season had a false start. 2020 started with new and existing home sales at a 12-year high. In late February to early March, mortgage applications were up, and the market looked optimistic. Then COVID-19 hit, and the U.S. sheltered in place. Open houses were canceled, and future homebuyers were suddenly unemployed. Homeowners who intended to list homes waited. Now homebuyers are proceeding with caution, easing into home searching, uncertain of the future. With any luck, the market will pick up this summer. Short Housing Supply, Pent-up Demand There is pent-up demand, and it is a seller’s market. With the shift to digitally enabled purchases and financing transactions, somemhomeowners rely on virtual searches, tours and secure financing online. According to the Mortgage Bankers Association, purchase applications increased 18% year over year. It is going to be a short, hot summer for real estate. Housing supply is constrained, and the pace of new construction is sluggish. The National Association of Builders/Wells Fargo Market Index (HMI), which measures confidence in the single-family market, was 37/100 in April, a five-year low. Housing statistics dropped to 30.2%, the lowest since 2015, according to the Commerce Department. On a positive note, the S&P CoreLogic Case-Shiller National Home Price Index showed prices increasing by 4.4% in March, the highest annual growth since December 2018. Sales dropped 8.5%, according to the National Association of Realtors, for the same period. After working and schooling from home, buyers are starting to look for their first or next home. States are beginning to open up, and so is the housing market in parts of the country. ‘Bright Spot’ COVID-19 has wreaked havoc on the economy and instilled a level of fear in consumers and businesses. The CARES Act provides temporary relief, but expanded unemployment benefits expire July 31. An extension by Congress of this benefit, which adds $600 to standard weekly employment, may incent workers to stay out of the labor force. Unemployment declined to 13.3% or 21 million people at the end of May, down from 14.7% in April. Many economists believe it will continue to climb to historic levels. It will be difficult to track those who have finished collecting unemployment and do not find a new job, which is not counted in official unemployment statistics. The actual unemployment rate is likely closer to 20%. The U.S. economy faces an uncertain and rough remainder of the year. Historically low-interest rates are a bright spot in the current environment. The 30-year fixed rate dropped to 3.15% at the end of May, a 50-year low, according to the Freddie Mac Primary Mortgage Market Survey (PMMS). Rates ticked up by 0.03 to 3.18% in the PMMS rate survey reported June 4. Low rates and affordability will hopefully induce the lagging purchase market. The lack of inventory will be a challenge for homebuyers, but signs show that the housing market is gaining momentum. Currently, 50% of mortgage debt is at a rate higher than 4%, and 24% is above 4.5%, which will continue to fuel refinance activity. Borrowers with positive equity are obtaining home equity lines of credit instead of a cash-out refinancing. Government-backed mortgage products will continue to dominate the lending activity. The housing market is a leading indicator of the country’s economic health, and real estate’s short, hot summer will contribute to the nation’s slow economic recovery, and likely extend until fall. With lower borrowing costs for builders and homebuyers, purchases of durable consumer goods should rise and drive gross domestic product (GDP). Consumers may choose to buy and remodel, and builders will likely increase activity to meet demandin both single and multifamily markets. The Federal Open Markets Committee meets June 9 and 10, and Jerome Powell is likely to leave the federal funds rate unchanged. The U.S. economy is still in crisis, and the Fed is unlikely to raise rates any time soon. Powell has a strong stance on negative interest rates, and the Fed will continue to employ other measures to push rates lower, such as quantitative easing (QE). The central bank is purchasing mortgage-backed securities, which is contributing to declining mortgage rates. Rates will remain at historic lows and may float lower due to monetary policy, investor confidence and exogenous forces. Mortgage Situation Non-qualified mortgage originators are adversely impacted by COVID-19, as holders of warehouse lines issued margin calls. Some lenders are waiting on the sidelines, holding off on lending, fearful of originating assets they cannot sell. The pandemic has negatively affected consumers of non-qualified mortgages, who are often business owners, self-employed or independent contractors. Private-label mortgage-backed securities issuers will need to collaborate and align to provide relief to borrowers impacted by the pandemic. Despite all these challenges, several private-label residential mortgage-backed securities (RMBS) were issued between April and the publication of this article, indicating there is still an appetite for higher yield RMBS. According to the Mortgage Bankers Association, from a single-family mortgage performance perspective, 4.2 million homeowners in May requested forbearance due to COVID-19, or 8.46% of all mortgages. On a positive note, data from Black Knight shows forbearances had the first decline since the beginning of the crisis. Whether this decline continues remains to be seen, as current political and social unrest will likely exacerbate economic conditions. From a rental perspective, 12 million renters have stopped making payments, which influences the multifamily mortgage market. Renters have also expressed apprehension about renewing leases, due to uncertainty. According to Datex Property Solutions, 58.6% of commercial renters paid their rent in May, making a significant impact on the commercial mortgage market. Bankruptcies and closures of some major retailers will also continue to pull down the CMBS market. Early in the crisis, HUD, Fannie Mae and Freddie Mac provided guidance for consumers facing impacts and are continuing to refine homeownership preservation programs. Forbearance and repayment options after forbearance are being rolled out in rapid succession. Other debt markets,

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The Personality of Real Estate Investors

What is your Advantage? For the past 20 years, I have worked with hundreds of entrepreneurs from all career backgrounds while being an executive at HomeVestors, The We Buy Ugly Houses people. Each one had a common desire to build a profitable business buying, rehabbing and selling single-family houses. I developed an assessment for those investors to complete as part of the application process. I also met with each investor and their partner to discuss the part of the business that would provide the best opportunity for success. My other passion was to review the results. What I learned from the process of tracking the more than 110,000 houses they bought during those 20 years is this: Some personality patterns tend to be more successful than others. I also learned that all entrepreneurs—no matter their personalities—can succeed if they recognize what their Advantage is and team with others who can do the parts of the business where they do not have an Advantage. The Three Levels My system, called Your Living Talent, presents choices on three levels: Feeling, Thinking and Acting-Advantage. The Feeling level is what you were born with. It determines why you do what you do. The Thinking level is developed by age six and determines how you think and communicate. You get that from your parents. Whatever they give you causes you to develop the opposite. For example, if they are very organized, then you tend not to be. This explains why grandchildren and their grandparents get along. You say I will never raise my children the way I was raised, and you don’t. The grandkids say to the grandparents: I’m OK and you’re OK. What is wrong with my parents? The third level is your Acting-Advantage. This is developed by age 15-16. By that age, you have a half dozen fiber connections in your brain that will always be your best Acting-Advantage. You develop this by choosing what you enjoy doing and through the recognition your family and friends give you for doing well. If you can spend 80% of your day doing what you have an Acting-Advantage to do, you will be energized by your work and you will energize the people you work with and serve. The Four Colors The four colors are Red-Doers, Yellow-Talkers, Blue-Thinkers and Green-Controllers. You can have one, two, three or four of these colors on each level. All businesses require all four colors to be successful. Red has an Acting-Advantage to focus on results. Yellow has an Acting-Advantage to connect with people. Blue has an Acting-Advantage to solve problems. Green has an Acting-Advantage to maintain a system. The two most essential Acting-Advantages for building a successful business are the Red Acting-Advantage that focuses on results (production of revenue and income) and the Yellow Acting-Advantage that connects with people. The key to buying houses directly from sellers who are usually still in their homes is being able to connect with them and helping them make the decision to sell at a fair price in exchange for a quick sale without having to make repairs. If you have a Blue Acting-Advantage and can solve problems, you are a good listener because you are listening for the problem. The risk is that you can spend too much time trying to solve a problem that cannot be solved. If you have a Green Acting-Advantage, you are great at analyzing the details of the transaction. The risk is you talk yourself out of the transaction because you are too focused on the details. Most investors who have the Red/Yellow combination are not good with details. So, it’s important for them to surround themselves with people who can maintain the system. We have found that the most valuable person you can recruit for your team is good with detail and people and has a sense of urgency. Anyone who has had a great personal assistant can attest to the fact that their ability to focus on results was significantly improved by that person. People with Red Acting-Advantage can get almost anything done through focus and force. But they tend to be do-it-yourself people and end up doing things they don’t have an Advantage to do rather than doing what they are the best at doing. Thinking and Communication Patterns It’s also important to understand thinking and communication patterns. Understanding how different people think is a key component of building a successful team that can think through the best strategies and tactics. There is a process for fully utilizing the thinking of all your team members. First, Yellow determines who should be involved in the discussion. Blue determines why we are having the discussion and focuses on the best alternatives for solving the problem. Before they engage the Red to determine what we need to do to execute, they need to select the best two or three alternatives to present to the Red. Reds do best when they have two choices. Once Reds have picked the best strategy or tactic, Green determines the process or the system to get it achieved and tracked to make sure it is performing as expected. Partners or teams that take advantage of the thinking patterns of their team will always get better results than those that do not. Understanding how people feel is very important because feelings determine their decision to buy or sell. We justify our decisions with thinking, but we make our decisions with feelings. Reds have a need to win, be in charge and make money. Yellows need to be recognized, to celebrate and to do things with others. They never like it if they win and the team loses. Many of them start a real estate investment business so they can do it with their relatives, friends or neighbors. Blues have a need to research better alternatives. They focus how they can make life better for themselves and the people they care about. Their challenge is that they get bored with others once they understand

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Are We Headed for a Corona Recession?

What that means for real estate investors? There might have been some question about whether the coronavirus would lead the U.S. into a recession. The hoarding of toilet paper makes me think it’s certain. Not because we’ll run out of toilet paper—the U.S. and Canada produce volumes of it—but because hoarding means consumers are really worried and are changing their spending behavior. That won’t just flip back in a few months. It’s consumer behavior—what consumers think and do—that grows or shrinks the economy, not bank failures or layoffs at airlines. Consumers are 70% of the economy, and they’ve already been on edge the last few years. Consumer debt, even after you consider inflation, is at the highest levels we’ve ever seen—$12,000 per man, woman and child. And the growth of jobs in 2019 was at the lowest rate since the last recession. So, it’s not surprising that the rate at which consumers have been spending was already slipping. I didn’t expect a severe slowdown this soon, but when the economy is fragile to start with, anything can happen. That’s why the coronavirus isn’t the cause of the recession that now seems inevitable; it’s the catalyst, suddenly accelerating a slowdown that was already in the works. Consequences for Real Estate Recessions produce government reactions and public responses that strongly affect real estate. This time we won’t see massive foreclosures and a wholesale drop in home prices as happened after 2008. In fact, it’s much more likely that the effects this time will actually be good for real estate investors. The government will push interest rates even lower. This means, for example, that financing an investment in rental property not only will be cheap, but the returns on alternate investments like bonds and CDs will remain poor. Investment funds and other sources of money will welcome real estate projects. Banks in particular are now so heavily dependent on consumer loans that they have a large incentive to shift more money into real estate. More consumers will need (and want) to rent. Homeownership for young adults has been declining for decades, to around 35%. With incomes stalled, home prices high and more people with student debt living in expensive big cities, that trend will continue. And after promoting mortgages and homeownership relentlessly for the past 50 years, the government may (that’s more of a guess) finally provide more policy support and tax breaks for renters. Specific Markets Some real estate markets were in a home price boom in the past few years. Think: San Francisco, Seattle, Denver, Miami, Las Vegas, Southern California and others (see Chart 1). Because the local economies were doing well, I thought the bubbles could end in a soft landing. Now I don’t think so. Eventually, these will be great places for investors in rental properties. After all, that’s why the bubbles happened—more demand than supply—but first we need to see where prices will settle. Some markets with large renter populations are better immediate bets, even though demand will flatten everywhere for a short while. They’re not high-growth markets, but they aren’t overpriced and the ratio of home prices to annual rents is favorable. Think: Chicago, Memphis, Detroit, Atlanta and others (see Chart 2).  

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