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The West Continues to Lead in Home Price Appreciation

Home Prices Continue to March Upwards: Key Investor Takeaways

(Continued from Prior Part)

All real estate is local

Real estate recovery has been uneven, with some parts of the country outperforming others. Home prices in the Pacific and Mountain states have outperformed the rest of the country over the past two years. Meanwhile, the Mid-Atlantic and New England states appear to have underperformed.

We’ve seen a lot of foreign buying of residential real estate, especially on the West Coast and in the Mountain states. Many Chinese investors are looking to diversify their exposure to US dollar–denominated assets. This trend helped bid up property values in these locations.

Regulatory differences

The FHFA (Federal Housing Finance Agency) House Price Index breaks down home price appreciation by region and state. The Pacific states took the lead at 8.4%, followed by the Mountain states with a gain of 6.8% and the South Atlantic states with a gain of 5.8%. New England brought up the rear with a gain of only 2.5%. However, the dispersion between the top and bottom regions has been tightening.

While economic differences between the states explain some of this change, another important consideration is that some states have very borrower-friendly or creditor-unfriendly policies. These policies slow down price appreciation. For example, some states require a judge to approve all foreclosures.

The northeastern states of Connecticut, New York, and New Jersey have the biggest foreclosure pipelines due to a backup in the courts. These states are the most likely to have vacant homes in disrepair. This pulls down the value of homes in entire neighborhoods. As you can see in the above graph, the New England, the Mid-Atlantic, and the Rust Belt all underperformed the other regions.

Geographic exposure

Real estate companies such as Colony Capital (CLNY) and NorthStar Realty Finance (NRF) invest in non-guaranteed mortgage-backed securities. These companies take credit risk. This separates them from agency REITs such as American Capital Agency (AGNC).

Investors interested in trading the real estate sector through an ETF could look at the iShares Mortgage Real Estate Capped ETF (REM). Separately, investors who wish to make interest rate bets directly could consider the iShares 20+ Year Treasury Bond ETF (TLT).

While being underwater doesn’t necessarily mean a borrower will stop paying—in fact, the vast majority of underwater homeowners are current on their mortgages—it does mean that the severities, or losses, rise if the lender has to foreclose.

While examining these companies, investors should determine what sort of geographical concentration they have. Diversification can certainly help.

Browse this series on Market Realist:

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