Because of the low interest rates (and the huge run-up in stocks and other asset classes), a lot of institutional investors have been getting into real estate over the past few years. Some markets are seeing 40%+ of their sales going to investors. That does not include the properties (the foreclosure tsunami) being sold to multi-billion dollar funds behind closed doors.
Some are flipping, but many are buying to rent for the short-medium term. It seems like most of them are planning to sell at a higher price “when the market gets better,” apparently missing the fact that the market is about as strong today as it was in 2004-2005.
These investors are finding a very strong rental market because of all the people who’ve been foreclosed on, but if the bulk of the foreclosures are behind us, this unusually high rental demand should taper off a bit.
Home prices are going up largely because of the investors (and the withholding of foreclosure inventory from the market), not because of true end consumer demand. With a few exceptions where job markets are extremely strong (Bay Area and some parts of San Diego, for instance), the vast majority of people are not in a better financial position today than they were in 2008.
Add to that all the talks of austerity, teetering Social Security and Medicare programs, increased pension contributions for public sector workers, severe cuts in private sector jobs that count on govt money in one way or another…and the picture gets even worse.
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“A Chronicle analysis of sales data compiled by San Diego research firm DataQuick showed that absentee buyers, who once bought about 10 percent of homes sold in the nine Bay Area counties, account for about a quarter of all purchases this year, more than doubling their share. Absentee buyers are defined as those who have property tax bills sent to a different address than the house they just bought.
Absentee buyers
Absentee buyers were most common in Solano County, where they accounted for almost a third of sales. Solano has by far the lowest median home prices in the Bay Area, weighing in at $200,000 in September, for instance.
…A year ago, Praxis started buying houses to hold onto and rent out because home prices finally made the math work, generating positive cash flow. It now has about 100 rental homes, with more in the pipeline.
For instance, it paid $182,000 at a foreclosure auction for a four-bedroom, two-bathroom Santa Rosa tract home that is now getting a $15,000 “cosmetic rehab” of new carpets, paint, flooring and landscaping. The house should rent for $1,950, Burke said. Once it’s rehabbed, he projects its market value will be $253,000. After renting this and similar homes out for five to seven years, Praxis will sell, hoping for significant appreciation.
Praxis has spent $15 million to date on both its flipped and rental properties, and is launching a fund in January focused just on buying homes to rent out. It hopes to raise $25 million, primarily from high-net-worth individuals in the region – winemaking families, small business owners and professionals who are looking to diversify their portfolios, Burke said.
Finding tenants is easy because so many displaced families need housing.”
One of the warning flags of the housing bubble this past decade was the dramatic increase in purchases of “investment” or “second” homes. It reached about 40-43%, IIRC, and that pretty much marked the top of the bubble.
IMHO, the artificially low inventory (banks not foreclosing, holding inventory off the market, and/or selling to large investment outfits behind closed doors) along with ZIRP make for a deadly combination for those who are expecting real estate to make up for the pithy earnings in other asset classes.
