Zillow's Bullish Forecast: What It Means for You 📈

Hey there, Key crew! 🗝️

Here are the top stories today:

• Granny flats are the new goldmine in real estate investing 🏡 

• The hidden costs of owning a vacation home 💰

• Zillow's bullish on 37 housing markets 📈

Granny Flats: The Hidden Goldmine 🏡

In the ever-evolving landscape of real estate investment, one trend that's gaining traction is the development of Accessory Dwelling Units (ADUs), colloquially known as 'granny flats'. These self-contained, compact homes, typically situated in the backyard of a larger property, are becoming a popular solution to housing crises in various regions, offering a unique opportunity for investors to capitalize on.

ADUs are more than just glorified sheds. They come equipped with living spaces, kitchenettes, bathrooms, and often a separate bedroom, providing all the comforts of a full-sized home within a smaller footprint. The size of these units usually maxes out at around 1,000 square feet.

The appeal of ADUs is not confined to any one region. In fact, California has legalized ADUs statewide, and other areas like the Pacific Northwest, Georgia, North Carolina, and cities like Denver, Boulder, Nashville, and the Washington D.C. metropolitan area are seeing a surge in ADU construction.

The cost of building an ADU can range from $120,000 to $150,000, with an additional 30% for site work and utility hookups. While this may seem steep, the return on investment can be substantial. The cost per square foot for an ADU is typically $300 to $400, but in areas where real estate is appraised at $600 to $800 per square foot, the increase in the property's resale value can more than offset the initial investment.

Moreover, ADUs offer a versatile solution to a variety of housing needs. They can serve as a rental unit, providing a steady stream of income for the homeowner, or as a separate living space for visiting family members or aging parents. Some homeowners even leverage their ADUs as Airbnb rentals, further enhancing their income potential.

However, building an ADU is not without its challenges. Financing the project can be a hurdle, and obtaining the necessary permits can take anywhere from one to nine months. But with the right planning and execution, the benefits can far outweigh the challenges.

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The Hidden Costs of Vacation Homes 💰

While the allure of owning a vacation home can be enticing, it's crucial to understand the financial implications that come with it. The costs extend beyond the initial purchase price and can significantly impact your investment strategy.

One of the primary financial burdens is the second mortgage. Lenders often require higher credit scores, lower debt-to-income ratios, larger down payments, and extra funds in reserve for second homes. The down payment is typically at least 10% (typically closer to 20%), and borrowers may need to save enough to cover two to six months of mortgage payments for both homes.

Maintenance and upkeep are other significant expenses. Regular tasks such as landscaping, cleaning, and repairs are necessary to keep the property in optimal condition. Additionally, security measures like alarm systems and property monitoring may be required, particularly if the property is vacant for extended periods.

Property taxes and insurance are other costs to consider. Taxes can vary depending on the location and value of the property, and insurance coverage is essential to protect against potential risks and liabilities.

Utilities and other services, such as electricity, water, gas, garbage collection, and internet connectivity, are ongoing expenses that need to be factored into the overall financial considerations of owning a vacation home.

If your vacation home is part of a planned community or a condominium complex, homeowners association (HOA) fees may apply. These fees contribute to maintaining shared amenities like swimming pools, landscaping, security, or common areas.

If you plan to rent out your home when you aren't staying in it, you might need to hire a property manager. Property management fees generally range from 8% to 12% of the rental income. Similarly, if you decide to rent out your vacation home through platforms like Airbnb or VRBO, be aware that they charge service fees or commissions that range from 6% to 20% of the rental rate.

Seasonal costs, such as snow removal or winterization services in areas with harsh winters, are other expenses to consider. Lastly, as weather extremes become more common, even vacation homes can become casualties of catastrophic weather, potentially incurring significant costs to mitigate or repair damage.

Owning a vacation home is a significant financial commitment that goes beyond the initial purchase price. It's essential to understand these hidden costs to make an informed investment decision.

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Zillow's Bullish Forecast for 37 Housing Markets 📈

As we navigate the post-pandemic real estate landscape, Zillow's economists are shifting their stance back towards optimism, predicting a 4.8% increase in U.S. home prices between April 2023 and April 2024. This forecast comes after a period of price reduction predictions due to the slump in the housing market caused by mortgage rates crossing over 6%.

Zillow's Home Value Index (ZHVI), which tracks national home prices, has averaged an annual appreciation rate of 5.08% since 2001. The predicted 4.8% increase aligns closely with this historical average, suggesting a return to a more stable market.

Despite the affordability challenges that led to a cooler second half of 2022, the spring season of 2023 has seen a remarkable turnaround. U.S. home prices are still 1.5% higher than one year ago and 38% higher than in April 2020, reflecting an 11% average annual growth rate over the past three years.

Among the nation's 400 largest housing markets, Zillow expects only 10 markets to see a home price decline between April 2023 and April 2024. In contrast, 390 regional housing markets are predicted to see a price increase. Of these, Zillow anticipates that 37 markets will rise by at least 7%.

The bullish outlook on these 37 markets is attributed to a variety of factors. These markets are spread across the country, and their growth is largely due to tight supply and favorable demographics. The first four months of 2023 saw about half a million fewer new listings than the same period in 2019, a deficit of 30%. Many potential sellers are hesitant to let go of their homes, especially when they would have to pay significantly higher mortgage interest on a new 30-year loan.

While Zillow and CoreLogic expect national home prices to rise over the coming year, other firms like Fannie Mae and Moody's Analytics still anticipate a mild correction. As always, the real estate market remains a complex interplay of various factors, and investors should stay informed to navigate it effectively.

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That's all for this week! Remember, the key to success in real estate investing is staying informed. Have a great long holiday weekend and we’ll see you on Tuesday!