[quote=CA renter]
The problem with the Fed keeping interest rates so low is that investors/speculators are forced to get into riskier and riskier assets in order to chase yield. This pushes the prices of these assets up well beyond what would be “reasonable” if the Fed were not engaging in ZIRP and QE. I would argue that risks are not being appropriately priced in…not by a long shot.
And I’m NOT saying that this housing “crash” will be worse than the last (not saying that it won’t be, either). Everything is connected, and the damage from this credit bubble might have even more dire consequences in areas other than housing.[/quote]
At least now we’re past the faulty conclusion that there is not more risk in the market today than 4 or 5 years ago. But you’re still implying that there is a pending crash, which I don’t see happening with current conditions.
If I understand correctly, you think the cause for the looming crash is the investors suddenly dumping their properties on the market. Barring a life changing event (worse than the credit crisis of 2008) I don’t see a real world scenario where this is likely to happen. Let’s go through a few examples of the type of investors turned landlord that we have out there that might cause this crash:
Example 1: I’ll call this guy the Pig investor. He’s 30-45 years old, has a good paying job, maybe in tech, his family has owned rental properties before and he has a few extra bucks, so he scours the market to get a good deal that gives him a 7-8% cash on cash return with a 20% down payment. He dreams that it will be much higher, but he’s never been a landlord himself so he doesn’t really understand that shit happens. AC units break. There are uninsured water leaks. And his expenses are much higher than anticipated, but he got a good low interest rate so he can handle it, and unit is rented. He maintains a positive cash flow but nowhere near what he expected. As a result of market conditions, property values drop by 10-20%, but he still has equity because he bought below market. His unit is still rented at the expected rate, so his return on market equity is now in range he only dreamed of, just on a much lower equity. Barring a personal financial crisis, what is his incentive to dump the property?
Example 2: This is a real world example, a guy I met a few months ago. Very experienced RE investor, though mostly in the multi-unit residential and commercial markets. Net worth of about $250 million. He buys 400 homes for cash in 2011 and 2012 at prices 10-20% below today’s prices. Mostly SFH, but also bought the last 25 units in a new 150 unit condo complex for 1/3 of the 2008 asking price (coincidentally eliminating any chance of existing or new resident owners getting traditional financing with more than 50% of the units non-owner occupied). Takes him longer than expected to reach full occupancy, and now more than a year after he bought his last unit, his vacancy rate is still 10%. But since he has no debt, his cash flow is still huge, because on average, he only needs 2 months of market rent per year to pay all his expenses. If market prices fall even 40%, what other market conditions could change that would motivate him to dump his properties on the market?
Example 3: Private equity investor that’s bought thousands of homes across the country for cash. The money has been provided by investors who have invested based on prospectuses projecting 7-10% returns on their money. 100% of management responsibilities and control is maintained by the PE sponsor (think Black Rock). They’re lousy property managers compared to the first two examples, without the infrastructure in place, and their vacancy rate is as high as 30% for units owned more than 90 days. Cash flow doesn’t develop as projected, but it is still positive since there is no debt. Investors aren’t happy, but they have zero control. What are the market conditions that could develop that would motivate the mass sale of the units under management?
Maybe you have some other scenarios where there would be a mass liquidation by investors. Maybe you can identify some market condition in these examples that would lead to a mass liquidation by landlords. If so, I’d really like to know what they are.
