About as crazy as ever

[SD Realtor]

It is ridiculous right now. Properties on the I15 corridor priced anywhere close to reasonable are seeing double digit offers. As crazy as it was in 03, I think it is harder now for buyers because of the tight inventory. I would not want to be a buyer at this time.

[spdrun]

Difference being that cash talks now, whereas BS talked back then.

[SK in CV]

Question for you, if you know….

What’s the availability of SFH rentals in the area? At times in the past it’s been very low in that area. I don’t know how much investor action there’s been there over the last couple years.

Over the last couple weeks I’ve touched base with about a dozen property managers here in Phoenix, and it’s not looking pretty. I’m sure there’s been a lot more PE money here than in SD (if there’s been any in SD?). But from what I’m hearing is all those great plans for sweet cash flow isn’t quite materializing. Rents have fallen in much of the west valley, and even softened in the higher rent east valley.

One guy I talked with said he thinks the PE guys are struggling to get 50% occupancy. Not horrible if they’ve been here for 90 days, but some have been here for more than a couple years already. Unlikely it’s a lot better for individual investors. And with spring upon us, we’re maybe a month away from turning the A/C on.

Inventory issues could reverse pretty quickly, though in a very different way than 5 years ago. Cash buyers don’t suddenly become distressed sellers. Just anecdotal, but I saw a lot more open house signs this past weekend than I’ve seen in more than a year.

[spdrun]

^^^

This makes me orgasmically glad that I didn’t buy in Phoenix, if 12% paper cap rates are turning into 6% in reality. Yeah, schadenfreunde, but so be it. It’s really a pestilential, mosquito-ridden (yep, they’re drawn to the moisture from swimming pools and irrigation), dusty, shitehole in the desert. There now, I said it.

Hoping at least one offer in SD that’s been “stewing” comes through this week, BTW.

[SK in CV]

[quote=spdrun]^^^

This makes me orgasmically glad that I didn’t buy in Phoenix, if 12% paper cap rates are turning into 6% in reality. Yeah, schadenfreunde, but so be it. It’s really a pestilential, mosquito-ridden (yep, they’re drawn to the moisture from swimming pools and irrigation), dusty, shitehole in the desert. There now, I said it.

Hoping at least one offer in SD that’s been “stewing” comes through this week, BTW.[/quote]

Nobody in their right mind thought 12%. 8% maybe. It may end up closer to zero.

[spdrun]

Re: Poenis, AZ:
There were houses in Deer Valley selling for $80k that would be usable with $20k of renovations. They’d rent for $1300/mo, minus $200 for taxes, minus $100 for insurance, tenant pays utilities. That’s 12% pro forma cap.

[SK in CV]

[quote=spdrun]There were houses in Deer Valley selling for $80k that would be usable with $20k of renovations. They’d rent for $1300/mo, minus $200 for taxes, minus $100 for insurance, tenant pays utilities. That’s 12% pro forma cap.[/quote]

Go for it. Only an extraordinarily naïve investor would think they might get 12%. Water bill is hard to get into a tenants name, most public utilities will only bill the legal owner. You want to trust the tenant to pay, go ahead. Gardner? You want to trust the tenant to mow the lawn and take care of the landscaping, go ahead. Dreamers think they’re going to get 100% occupancy. Almost never happens, specially in the year of purchase. I rented a house in SD from 2006 to 2011. I was the exception. Shit happens. Sometimes there will be a year with no repairs or unexpected costs in a rental house. Not often. If you’re lucky, they’re small.

[spdrun]

I was thinking more like 10% in the real world. I guess water really is the 1000-lb gorilla in the room, at least as far as Phoenix goes.

If there’s no HOA, would I actually give a aerial wank how the tenant kept the lawn?

[SK in CV]

[quote=spdrun]I was thinking more like 10% in the real world. I guess water really is the 1000-lb gorilla in the room, at least as far as Phoenix goes.

If there’s no HOA, would I actually give a aerial wank how the tenant kept the lawn?[/quote]

You never know. I’m the last person to ever tell you that it matters what the house looks like, except to the extent that it affects value. You could get lucky and get a tenant that likes and cares about the yard. Or you could get one that doesn’t give an aerial yank either (I love that, btw). That tenant is likely to stay a shorter time too. And when you have to release it, what it looks like DOES matter. So you either have a harder time re-renting it, rent for less money, or pay through the nose for instant landscaping.

I just did a little math. I’ve collected over 30,000 months of rent in the last 20 years. If there’s one thing I’ve learned, the unexpected WILL happen.

[SD Realtor]

SK you need to be more specific when you said the area. Also this post is for owner occupancy. SFH will get killed as a rental at the prices I am talking about.

[SK in CV]

[quote=SD Realtor]SK you need to be more specific when you said the area. Also this post is for owner occupancy.[/quote]

I-15 corridor. Scripps, PQ, RB, CMR, Poway. I know there’s always been more rentals avail in MM, particularly in the east, but more now I suspect?

[SD Realtor]

SK in the areas you mentioned no way you turn a positive cash flow on a SFH at 20% down. Also I am starting to see gaps in comps. For instance older homes in say Westwood of RB that we selling in the high 400’s and low 500’s are now gapping into the high 500’s rather then ramping. Another thing that has pushed some of the gaps is investors coming in and flipping. A home that sold for 430k in September just closed for 575k in February. Again, not fun being a young couple looking for a home to buy.

[bearishgurl]

[quote=SD Realtor]SK in the areas you mentioned no way you turn a positive cash flow on a SFH at 20% down. Also I am starting to see gaps in comps. For instance older homes in say Westwood of RB that we selling in the high 400’s and low 500’s are now gapping into the high 500’s rather then ramping. Another thing that has pushed some of the gaps is investors coming in and flipping. A home that sold for 430k in September just closed for 575k in February. Again, not fun being a young couple looking for a home to buy.[/quote]

That “young couple” needs to start shopping Lemon Grove or Chula Vista. I’ve seen some very high-quality flips sell recently in these areas for the $350K to $425K range. A couple of them recently sold VA/FHA so these “flipper-sellers” are accepting offers from buyers who don’t have a huge downpayment.

Yes, I KNOW what the properties were before so these flippers appear to have spent as least $25K in materials on them PLUS labor.

Of course, you’re aware, SDR, that it doesn’t matter what the flippers paid for the former sh!thole that no one but a cash investor would buy.

I think flippers doing good-quality work are actually performing a public service by revitalizing neighborhoods and upgrading and enhancing homes that otherwise would never sell and continue to be rental eyesores.

[Jazzman]

SK has it right. A year of nothing, and then boom! Everything can fly up in your face. The higher the cap rate, the greater the risk. If you don’t want the hassles invest into your demographic, and you might get one extra night’s sleep, but not the yield.

If I were a FTB, I’d stick with renting. The problem is that many are spurred on by the frustrations of buying in this market. The scratch begets the itch. It feeds on itself, and the obsession grows exponentially with the frustration.

Many overlook the costs of ownership, which are the same as they are for investors. Many of my young neighbors seem to be maxed out, just to get into the ownership game. Some now can’t afford a decent car, or nice furniture, or even to landscape their yards. It requires two incomes, even with kids, and many seem to hate their work. Is that a life?

[barnaby33]

Is that a life?

Boy there is a loaded question. Do most people ever really live? They shuffle through their years plodding from one experience to the next, never really questioning what it is they’re doing. It’s comfortable, I suppose. It’s not a life well lived.

This thread and the subtext of being a jealous frustrated (formerly bitter) renter prove that nobody seems to learn much of anything. Not only is there nothing wrong with renting, in times of uncertainty and these most certainly are, flexibility is key. Why is any young couple struggling to buy a home? Oh wait, first paragraph.
Josh

[zk]

.

[hmc]

Include yard maintenance fee in the rent and hire a gardener. You may include (flat) water fee in the rent also.

Explain this to the tenants. This is what I am doing.

[all]

A friend of mine made a cash offer 5% over asking price on a house in the area. The house went pending a week after hitting MLS and my friend is not the one who got it.

[spdrun]

I made an offer 10% below asking price on a condo, against my broker’s advice. Got a call back 2 months later that no one else had performed, I was next in line, would I like it? (Still in the SS process, but getting close to approval.)

[FlyerInHi]

[quote=spdrun]I made an offer 10% below asking price on a condo, against my broker’s advice. Got a call back 2 months later that no one else had performed, I was next in line, would I like it? (Still in the SS process, but getting close to approval.)[/quote]

Any news?

I made SS offers and they’re are still lingering after 6 months to one year
Most of them don’t get approved and get withdrawn.

I hope you get it. But if you don’t you might have missed the bottom

[spdrun]

Offer is moving along nicely in the process, wouldn’t want to jinx the thing by saying more 🙂

If I don’t get that one, there’s no shortage of interesting things going to REO (not trustee, they’re already bank-owned) auction locally (we’re either at the bottom in NY/NJ or maybe just past it), so no big deal.

Two non-auction examples:
(1) Estate-sale duplex listed at $130k, taxes+water+sewer+trash $500/mo, rents for $900-950 each unit. Decent shape, no critical work needed. In a “less-nice” area on the border of a very toney town. Put in an offer at $120k — executor is apparently away but will respond in a few weeks.

(2) Duplex listed at $300k, bank will accept $250k, decent mixed white and blue-collar town (actually the one where I grew up – 35 min from NYC by train and at the border of a rather nice state park). Taxes $600/mo, rents $1600/mo per unit, needs probably $50k of updates. Separate furnaces for both units.

I’m actually physically in NJ this month, since it’s a lot easier to take the electric train into the city for client appointments/work, than to leave the city at odd hours to chase often-unpunctual brokers. (The people with a lot of REOs seem to be bottom of the heap for some reason!)

[bearishgurl]

[quote=spdrun]Offer is moving along nicely in the process, wouldn’t want to jinx the thing by saying more 🙂 . . .[/quote]

spdrun, I wouldn’t want to jinx anything but I hope you are able to get a SS approval on an offer you placed in SD. You seem to have been very diligent, practical and patient and deserve to be able to close on an accepted offer in SD.

The SD residential RE market is no doubt very different from the east coast market in many ways.

[all]

When was your SS first listed? The environment changed a lot since spring of 2012. A condo complex that is taking cash-only offers due to litigation had 6-8 listings a year ago, down from 10-15 two years ago. Right now there are only two, both contingent.

[SDowner]

Very true SD Realtor. I have been searching for 1-1/2 years. Inventory is pretty tight now. PPSF is ridiculously high. Properties BOMK are raising their asking price by 30 to 50K. Last year I thought prices may still come down on some locations, but the whole situation just exploded in my face. Now, I really regret not closing on a home in mid 2012.

[SD Realtor]

Sorry to hear it SDOwner. Yeah prices are gapping but even getting in the mix is hard now. Listing in Poway at 535-545 came on market last week. Close to 16 offers. We came in over list price and got a counter back at 580k, no appraisal contingency, no termite, no repairs. Another listing on Kern Crescent at 550k, no showings unless you have an accepted offer, and they already have a bunch of offers well. It is a joke right now in that submarket.

[Scarlett]

Hello SDR, How about the North County area – Carlsbad, San Marcos, Encinitas? Is that market so crazy as well? Now that I have a job in Carlsbad we’re thinking of getting a house up there in the general area. I like those neighborhoods. Our limit is 600K and a cursory look on sdlookup yielded less than a dozen listings total (4 bdr SFH). But if it’s that crazy and have to offer above the LP and compete with cash offers…we’d rather rent some more than deal with that.

Thanks!

[skerzz]

San Marcos is showing significant price improvement this year as well, I believe this to be mostly driven by tight inventory. Prices in my immediate area have gaped up significantly since December/January. I viewed this as an opportunity, while prices are artificially high, to refi out of an FHA mortgage into a conventional 30 yr. Don’t think I’d be a buyer at current prices. However, I did purchase under similar, but less extreme, market conditions ( limited inventory/ multiple offer bidding wars) back in mid 2009 and don’t think I could have found a better investment considering the combination of leverage, appreciation, and tax efficiency. I’ve seen 30% + appreciation (based on recent appraisal) in less than 4 years on a 320k house I purchased with effectively 1% down ($8K FTB tax credit and a 3.5% down FHA loan). This all seems a little too good to be true and makes me a little concerned that a new bubble is forming.

[farbet]

Varadero Gated community off of Camino Del Arroyo off of Rancho Santa Fe Rd in the Lake San Marcos 92078.between 2 golf courses. Vista views of Ocean,lake and mountains.
Several bargains still exists. No Mello Roos, Vista Views.Built by California Cove in 2006.
We picked up a short sale 3950 Sq ft. The spacious plan 4 was going for 1.1mill.Job losses due to 2013 sequester cuts reason for drop in prices. 4 on market Better community than San Elijio Hills. 1 mile from Carlsbad line of Melrose and Rancho Santa Fe rd intersection.Below is an example
http://www.sdlookup.com/MLS-120059644-934_Camino_Del_Arroyo_Dr_San_Marcos_CA_92078

[skerzz]

Scarlett-

Here is an article about the North County, mostly San Marcos, housing market from a home builder/land development perspective. This particular organization is pretty optimistic about the San Marcos area.

San Diego Housing Market Continues to Rebound

[SD Realtor]

Pretty bad there as well Scarlett.

[SDowner]

what is the piggs opinion on the new homes built by Pardee and Pulte along the 56 corridor?

[ctr70]

Back to Phoenix….one good thing about rentals in Coastal CA is you get a lot of “pop” in rent. Rent in CA goes up over time nicely. Rents in endless suburban sprawls like Phoenix are not much higher then they were 15 years ago. Stucco box SFR’s in the burbs of PHX are still renting for $900-$950/mo.

You also get much better tenants & demand in Coastal CA (even in lower end neighborhoods) vs. places like Phoenix. With rentals in a lot of out of state areas with higher vacancy rates, you lose so much money on turnover, evictions, vacancies that what looks like a high return on paper turns out to be a much lower return in reality. In CA a lower return on paper can end up being a higher return as you have so much more demand for your rentals and better rent increases and appreciation over time. However I still would never buy a negative cash flow rental in CA just hoping it appreciates. That is bad business.

But that being said, the window has mostly closed to be able to cash flow a rental in Coastal CA with 20% down. Late 2008 to late 2011 there were a lot of opportunities to get great cash flow right in San Diego in great rental areas. But in those years the sentiment towards real estate was that it was “a bad investment that would never go up again”. LOL. So you had to go against the negative crowd mentality to be buying back then (like usual). And like usual, now that prices are going up, everybody wants it again. It’s “Animal Spirits” at work, just like Robert Shiller says.

[Anonymous]

You definitely get better demand and appreciation in Coastal CA. However, even in the depth of the slump, I was actively looking and didn’t see any property in South Coastal OC that I can cash flow with 25% down. So, like ctr70, since I would never buy a negative cash flow rental in CA just hoping it appreciates, I ended up buying in dusty ol’ Phoenix. So far, tenants have been good. I think making a broad statements about “better tenants” in CA is interesting, I think it depends on diligent screening and luck in either state.

Now if I had just bought something in South OC hoping for appreciation and put up with some cash flow losses, I’d be eating steak tonight! Or if I had looked in San Diego, doh!

[SK in CV]

[quote=Want_to_Retire]You definitely get better demand and appreciation in Coastal CA. However, even in the depth of the slump, I was actively looking and didn’t see any property in South Coastal OC that I can cash flow with 25% down. So, like ctr70, since I would never buy a negative cash flow rental in CA just hoping it appreciates, I ended up buying in dusty ol’ Phoenix. So far, tenants have been good. I think making a broad statements about “better tenants” in CA is interesting, I think it depends on diligent screening and luck in either state.

Now if I had just bought something in South OC hoping for appreciation and put up with some cash flow losses, I’d be eating steak tonight! Or if I had looked in San Diego, doh![/quote]

Most of Phoenix has appreciated at least as much as SD has over the last 15 months. So you should have both cash flow and appreciation, where in OC, you’d have negative cash flow and appreciation. I suspect you bought both at the right time and the right place. Particularly if you can keep it rented to the same tenant. (turnover kills)

[jstoesz]

These stories blow my mind. I have nothing to contribute but shock and disgust.

[Anonymous]

I did have some tenant turnovers in the last couple of years but all were orderly and I’ve been able to minimize vacancy and maintain a decent cap rate. Although Phoenix prices have risen pretty quickly (I think even rents gone up somewhat in central Phoenix), looking at the price history I also see they dropped to the mid 90s level (or worse) during the depth – much worse than Southern California. So I try to focus on the rental returns and if there’s price appreciation when the day comes it will be a bonus.

[SD Realtor]

Updating….

Definitely into uncharted waters (with regard to demand) for SFH for owner occupancy in desired school districts such as PUSD and TP. Also including Encinitas and Carlsbad. For the in between homes (maybe 500-800k) I am seeing pretty radical paradigm shifts. Homes that come on the market and are listed according to comps are getting swamped with multiple offers most of them overbid. Other sellers are simply listing several percent above comps. I can honestly say this is insanity. You can cross check this with JTR’s blog as he has similar data. For buyers I recommend you sit out for awhile or if you are going to go in, go in very strong and go in early. Forget about trying to get a deal, forget about trying to negotiate with counter offers because if your offer is not strong, you probably will not get a counter at all.

At some point prices will level off but right now the restricted supply has drastically altered market dynamics in these areas, (and probably many others)

[utcsox]

[quote=SD Realtor]Updating….

You can cross check this with JTR’s blog as he has similar data. For buyers I recommend you sit out for awhile or if you are going to go in, go in very strong and go in early. Forget about trying to get a deal, forget about trying to negotiate with counter offers because if your offer is not strong, you probably will not get a counter at all.

At some point prices will level off but right now the restricted supply has drastically altered market dynamics in these areas, (and probably many others)[/quote]

JTR had a post yesterday of CV heading for +20%.. Is that fairly close to what you are seeing also? I think the house on the post yesterday is either on Torrey Hills area or Carmel Country Highlands. South of 56, 4+ bedroom with one bedroom down stair.
If this is true, you will not be underwater if you bought it in 2011, 2012 time frame.

[SD Realtor]

Yes utcsox I have been seeing the same things as Jim. Anybody that bought in 2011 or 2012 is not underwater at all. There are people who bought in 2003-2006 who may still be underwater but those who state that this is some sort of great overhang, or a prelude to some drastic event are wrong. Similarly those numbers are decreasing daily. As I have said we have legged up sharply, I would expect that things will level off and then return to a more subtle appreciation rate. However in my opinion the only reversal of the trend will come due to sharp increases in interest rates. Again this is the sub market and types of homes I have been discussing.

[XBoxBoy]

SD Realtor,

I’d be interested in hearing why you feel things will level off as opposed to just blow up a huge bubble? Seems to me the fed is likely to keep printing money longer than currently expected, and rates will remain low for a long time. In that environment with rising house prices a person can make way more money borrowing money and buying up real estate than they can putting the money into savings. So why wouldn’t they? And why wouldn’t the current fed policy blow a bubble that dwarfs 2006’s bubble?

XboxBoy

[quote=SD Realtor]As I have said we have legged up sharply, I would expect that things will level off and then return to a more subtle appreciation rate. However in my opinion the only reversal of the trend will come due to sharp increases in interest rates. Again this is the sub market and types of homes I have been discussing.[/quote]

[SD Realtor]

xbox in the end it will all blow up. However this time around the blow up will be much more catastrophic because it will be the bond market that explodes. It will play out pretty much as you have outlined above. We cannot monetize our debt. Currently the fed has what, 16% of our bonds or something like that. It is, and we are nearing the end game. However, nearing the end game is relative isn’t it? Is the explosion going to happen in 1 year? 3 years? 15 years? That is really the only question in my mind. As you saw my caviot is and has always been rates. So yes yes yes the explosion will dwarf 06. Instead of taking our medicine then, we were told that the sky was falling so we implemented policies that in my humble opinion were much worse then dealing with the problem and letting the market crater. Now we are in a spiral that some like to think will be resolved by inflation and an increased GDP. Personally I don’t see that happening. Moreover I see what you implied, and the only question is, when.

So absent of that event or “until that event happens” the San Diego housing market will move forward, driven by an excessive demand that has far outstripped supply. Prices have chunked forward and an equilibrium will be reached as the buyers pool will simply be reduced by many being priced out. Then we will level out and the inventory will catch up. We may see a modest dip but that is just the settling to the new equilibium and then a more subdued appreciation.

Now when the explosion happens…. wowsers it will be ugly. Unless the govt pulls their heads out of their ass and figures out we need to reduce spending and increase taxes and stop monetizing our debt.

[SD Transplant]

Insane indeed in the PUSD. On my street, there were 2 houses for sale (1 in around 3,100 sqf & the other in the 1,600 sqf). They both went pending 1 day after having open houses. The asking prices (I thought) were insane. That doesn’t mean anything to young buyers who are fed up w/ the current market. I would not want to be a buyer in today’s RE market. Happy to have purchased a bit over 2 years ago.

NOTE: I’m in the refi process right now, and I should close this week. I’m telling you that I was shocked that my appraisal was about 45K higher than aticipated. Having the houses on my street for sale this month may soon set a new reality for priceses in this area…….crazy times are back again & low rates make it possible.

[livinincali]

[quote=SD Realtor]
So absent of that event or “until that event happens” the San Diego housing market will move forward, driven by an excessive demand that has far outstripped supply. Prices have chunked forward and an equilibrium will be reached as the buyers pool will simply be reduced by many being priced out. Then we will level out and the inventory will catch up. We may see a modest dip but that is just the settling to the new equilibium and then a more subdued appreciation.

Now when the explosion happens…. wowsers it will be ugly. Unless the govt pulls their heads out of their ass and figures out we need to reduce spending and increase taxes and stop monetizing our debt.[/quote]

I tend to agree. We’ll see the number of sales start to drop before you see any dips in prices. Probably better to look at the lower end markets for signs that sales are slowing down. That will mean the investors and FHA buyers just can’t make it work financially anymore.

The fear of inflation and search for yield are significant driving factors in today’s market. There’s plenty of people hiding out in real estate as a safe haven that would probably rather be invested in something else. I honestly think investor speculators looking for yield are probably much weaker hands than traditional owner occupiers. It will be the perfect storm when rates rise. Not only will mortgage rates go up but at the same time those that were looking for yield are going to try to exit.

[Anonymous]

[quote=SK in CV][quote=Want_to_Retire]You definitely get better demand and appreciation in Coastal CA. However, even in the depth of the slump, I was actively looking and didn’t see any property in South Coastal OC that I can cash flow with 25% down. So, like ctr70, since I would never buy a negative cash flow rental in CA just hoping it appreciates, I ended up buying in dusty ol’ Phoenix. So far, tenants have been good. I think making a broad statements about “better tenants” in CA is interesting, I think it depends on diligent screening and luck in either state.

Now if I had just bought something in South OC hoping for appreciation and put up with some cash flow losses, I’d be eating steak tonight! Or if I had looked in San Diego, doh![/quote]

Most of Phoenix has appreciated at least as much as SD has over the last 15 months. So you should have both cash flow and appreciation, where in OC, you’d have negative cash flow and appreciation. I suspect you bought both at the right time and the right place. Particularly if you can keep it rented to the same tenant. (turnover kills)[/quote]
Update from the ground in Phoenix: Closed on a house in Paradise Valley in February – 25% down, overpaid a bit compared to the market but was tired of getting cut off at the knees on my bids – hoped appreciation will allow me to catch up to the price – it’s close. Put it on the market for rent in April – still finishing repairs/cleanup – got 13 month lease in June. Cap rate (including repairs) – estimate 5% and up depending on turnover (10 month – at 12 month net rent the cap rate is about 9%). Most of the tenants stay past the year and finding new tenants have been fairly quick during the right time of the year. The economy appears to be booming here with news articles about new jobs being created – especially in the Chandler area – but given the appreciation in home prices and the feedback I got from prospective renters on how much they were looking to pay, I think the window for cashflowing investments is closing quickly.

[earlyretirement]

[quote=Want_to_Retire][quote=SK in CV][quote=Want_to_Retire]You definitely get better demand and appreciation in Coastal CA. However, even in the depth of the slump, I was actively looking and didn’t see any property in South Coastal OC that I can cash flow with 25% down. So, like ctr70, since I would never buy a negative cash flow rental in CA just hoping it appreciates, I ended up buying in dusty ol’ Phoenix. So far, tenants have been good. I think making a broad statements about “better tenants” in CA is interesting, I think it depends on diligent screening and luck in either state.

Now if I had just bought something in South OC hoping for appreciation and put up with some cash flow losses, I’d be eating steak tonight! Or if I had looked in San Diego, doh![/quote]

Most of Phoenix has appreciated at least as much as SD has over the last 15 months. So you should have both cash flow and appreciation, where in OC, you’d have negative cash flow and appreciation. I suspect you bought both at the right time and the right place. Particularly if you can keep it rented to the same tenant. (turnover kills)[/quote]
Update from the ground in Phoenix: Closed on a house in Paradise Valley in February – 25% down, overpaid a bit compared to the market but was tired of getting cut off at the knees on my bids – hoped appreciation will allow me to catch up to the price – it’s close. Put it on the market for rent in April – still finishing repairs/cleanup – got 13 month lease in June. Cap rate (including repairs) – estimate 5% and up depending on turnover (10 month – at 12 month net rent the cap rate is about 9%). Most of the tenants stay past the year and finding new tenants have been fairly quick during the right time of the year. The economy appears to be booming here with news articles about new jobs being created – especially in the Chandler area – but given the appreciation in home prices and the feedback I got from prospective renters on how much they were looking to pay, I think the window for cashflowing investments is closing quickly.[/quote]

Congrats. Just out of curiosity, what is the profile of your renter? Professional? Blue collar, etc?

I was amazed how quickly the market is rebounding there. AZ is not my cup of tea but if you can make the ROI that’s all that’s important.

[Anonymous]

The renter is a franchise business owner. The inquiring potential renters are all over the map for my slice of the market – self employed, office manager, professionals etc. I would say I’m mid market for Phoenix houses.

[SK in CV]

[quote=Want_to_Retire]The renter is a franchise business owner. The inquiring potential renters are all over the map for my slice of the market – self employed, office manager, professionals etc. I would say I’m mid market for Phoenix houses.[/quote]

Mid-market in PV? Seems unlikely. Average listing price in the region is about $320K. Average in Paradise Valley is about $2,400,000. According to Trulia, there haven’t been any SFH sales there for less than $500K this year. PV is an uppermost market in the region.

[earlyretirement]

[quote=SK in CV][quote=Want_to_Retire]The renter is a franchise business owner. The inquiring potential renters are all over the map for my slice of the market – self employed, office manager, professionals etc. I would say I’m mid market for Phoenix houses.[/quote]

Mid-market in PV? Seems unlikely. Average listing price in the region is about $320K. Average in Paradise Valley is about $2,400,000. According to Trulia, there haven’t been any SFH sales there for less than $500K this year. PV is an uppermost market in the region.[/quote]

Thanks for taking the time to provide that follow up info. I don’t know Arizona well at all but like SK in CV I’m a bit confused. Is this Paradise Valley (85253) or Paradise Valley Village (85032)? Because the demographics seem totally different.

The median income for 85253 looks to be about $154,676.

The median income for 85032 looks to be as low as $45,000 in some neighborhoods to about a peak of about $102,000 in the most affluent part of that zip code.

I was having lunch with some buddies today and both of them mentioned that they noticed more out of state license plates lately in San Diego. I noticed that as well driving around. Also, one of them mentioned that he noticed more people he knew that moved out before moving back to San Diego.

I also noticed that on some of the other message boards that I post on. Some people that “swore they’d never be back” are moving back now or planning to. He asked my opinion on what I’d attribute that to.

Here is my take on it. After the bubble bursted, people were in a LOT of pain. Not only did they discover their houses weren’t worth nearly what they thought…but many were using their houses as ATM machines. Yet others that weren’t taking out HELOC loans were hit VERY hard because even if you were well diversified in the stock market, everything took a hit (unless you were shorting the entire stock market).

Most people felt a lot of pain. And many moved out to lower tier, less desirable and lower COL areas. Places like Arizona, Las Vegas, Texas, and even Oregon and Colorado.

But now with the stock market higher than ever, many people have recovered much of their stock portfolio and they feel “richer”. So they are coming back. Even some people that don’t have good job prospects in San Diego are coming back feeling more optimistic and “wealthier” at least on paper.

Like CAR mentioned and a point I agree with is that many “cash buyers” are finding ways to leverage. I’ve heard of some crazy things like people tapping into credit card cash advance checks that are at a low balance for a limited period or even some of these checks that places like Citibank are sending out say “0% until the balance is paid off with a 3% fee”. People ARE using things like this which can be treacherous.

So although it looks like they are “cash buyers” they are really using leverage to buy. Yet others are cashing in part of their retirement savings or 401K’s to buy which isn’t always a good idea either. Yet others I hear about are getting loans from parents or family members.

I heard a CRAZY story from one of my buddies today. He works with a girl that bought in my neck of the woods. I guess her family provided much of the down payment she needed. After her mortgage closed only 6 months ago, she went out and they bought 2 new (and expensive) German cars, new furniture on credit and a bunch of other junk. She is already struggling. I honestly don’t know how people could get themselves in this situation so quickly after buying.

My friend that is a real estate professional. EXTREMELY smart guy that bought 30 houses last year. He said he is starting to sell off his portfolio. He said that several private equity companies are way over paying for properties in his area.

While I don’t think we will see ANYTHING like what we saw with the Great Recession any time soon…. I don’t think we are out of the woods. So many people piled into the stock market chasing yield.

I hope this all ends up well.

[Anonymous]

My bad – no I’m not landlording Phoenix’s rich and famous or local sports personalities – it’s Paradise Valley Village or HS area – 85032. Got carried away there a bit! In what I consider my general area it’s high $100s to mid $300s (track houses only – there are a few large landowners whose land makes them value themselves at $600 to $700) – I’m mid in this market. The prospective tenants that I actually get to have a conversation with are all firmly entrenched in AZ (jobs, families). To the extent we talk about CA they all like it and enjoyed visiting it.

I keep a tab on the home prices and in north and central Phoenix zips (eastern part of the valley) and it feels like the prices are stalling a bit now – not surprising given the magnitude and speed of the run up in the past couple years. As per my previous post I think the window to get a return on a rental here is narrowing due to the price rise. I’m not as worried about a bust as long as I can get a decent rental return (and it’s relatively easy to rent) and it’s cheaper to rent than buy. The other positive is it does feel like there’s an employment boom in the Valley and not just construction jobs – manufacturing, R&D, design and engineering – all good, especially for the southern part of the Valley, and I’m good with basking a bit in the reflected glow from Chandler, Ahwatuckee (oh and Scottsdale too!).

[earlyretirement]

[quote=Want_to_Retire]My bad – no I’m not landlording Phoenix’s rich and famous or local sports personalities – it’s Paradise Valley Village or HS area – 85032. Got carried away there a bit! In what I consider my general area it’s high $100s to mid $300s (track houses only – there are a few large landowners whose land makes them value themselves at $600 to $700) – I’m mid in this market. The prospective tenants that I actually get to have a conversation with are all firmly entrenched in AZ (jobs, families). To the extent we talk about CA they all like it and enjoyed visiting it.

I keep a tab on the home prices and in north and central Phoenix zips (eastern part of the valley) and it feels like the prices are stalling a bit now – not surprising given the magnitude and speed of the run up in the past couple years. As per my previous post I think the window to get a return on a rental here is narrowing due to the price rise. I’m not as worried about a bust as long as I can get a decent rental return (and it’s relatively easy to rent) and it’s cheaper to rent than buy. The other positive is it does feel like there’s an employment boom in the Valley and not just construction jobs – manufacturing, R&D, design and engineering – all good, especially for the southern part of the Valley, and I’m good with basking a bit in the reflected glow from Chandler, Ahwatuckee (oh and Scottsdale too!).[/quote]

Ahhhh. 😉 OK….now your post makes a lot more sense to me. I was confused for a while but figured that is what you meant. Thanks for taking the time to follow up.

[FishGuy]

My wife and I recently closed on a SFH in Northeast RB. We are a relatively young (34/35) couple and just had our first child last year. We weren’t looking to flip, just to buy a decent home in a nice neighborhood where we can raise our family.

We made our first offer back in September and the entire process was a nightmare. We made a total of 9 offers and lost out on every one, mainly to flippers and investors who were paying cash. We were the high offer on one property, but the seller accepted an all cash offer that was $5K lower than ours.

Ultimately the first property we made an offer on fell back into our laps, as the higher offers eventually dropped out due to the length of the SS approval process as well as some funny business by the sellers.

Patience and persistence, as well as a little luck, were the key to our successful purchase. We were also extremely fortunate that family allowed us to live with them from the time our home sold in November until now. Two adults, a baby, two big dogs, a 90 gallon reef tank and a 40 gallon frog tank is a lot to put up with for 6 months.

[flyer]

WOW! What a story, FG. You certainly hit the
jackpot–both in getting your offer accepted, and in the gracious behavior of the sellers. No doubt something you and your family will remember for all of your lives!

Congrats!

[FishGuy]

[quote=flyer]WOW! What a story, FG. You certainly hit the
jackpot–both in getting your offer accepted, and in the gracious behavior of the sellers. No doubt something you and your family will remember for all of your lives!

Congrats![/quote]

Sorry, I wasn’t very clear on that. My family let us stay with them.

The sellers were a real piece of work. No payments in 5 years, backed out of our deal to try a loan mod, and then came back to us when they were denied. Then they refused to leave at COE. On top of that we had to pay off a chunk of their 2nd and 3 years of back HOA dues.

Still got a great deal in the end.

[flyer]

Oh, I see–very nice of them–your family, that is. Still glad to know it all worked out for you!

[bearishgurl]

[quote=livinincali] . . . The fear of inflation and search for yield are significant driving factors in today’s market. There’s plenty of people hiding out in real estate as a safe haven that would probably rather be invested in something else. I honestly think investor speculators looking for yield are probably much weaker hands than traditional owner occupiers. It will be the perfect storm when rates rise. Not only will mortgage rates go up but at the same time those that were looking for yield are going to try to exit.[/quote]

livinincali, I disagree that free-and-clear RE owners are “weaker hands.”

It doesn’t matter that these “investors” were/are seeking yield. If it is not a good time to sell, they don’t have to. If rates go up, they can continue to rent their propertie(s) out in lieu of investing in something more passive. I just don’t see CD’s, MM funds and bond yields going so high as to rival rental income from an investment property purchased right and with all cash.

“Traditional owner occupiers” didn’t buy to “make the numbers work.” They bought what they liked where they personally wanted to live (within the confines of their qualifications).

[livinincali]

[quote=bearishgurl]
livinincali, I disagree that free-and-clear RE owners are “weaker hands.”

It doesn’t matter that these “investors” were/are seeking yield. If it is not a good time to sell, they don’t have to. If rates go up, they can continue to rent their propertie(s) out in lieu of investing in in something more passive. I just don’t see CD’s, MM’s and bond yields going so high as to rival rental income from an investment property purchased right and with all cash.

“Traditional owner occupiers” didn’t buy to “make the numbers work.” They bought what they liked where they personally wanted to live (within the confines of their qualifications).[/quote]

I honestly doubt most of the investor speculators are actually free and clear. Hedge funds and sophisticated investors tend to use leverage. They showed up with cash when they made the deal but I’d bet in a lot of cases they used those assets as collateral for more borrowing.

There’s some out there that are truly free and clear but I’d guess that it doesn’t represent most and certainly doesn’t prevent them from cash out refinancing at some point. If they end up with a bad experience dealing with tenants do they stay there when other yield investments start being more competitive. Maybe, I don’t know. I just feel like the emotional attachment isn’t there. People have drained retirement accounts to keep an owner occupied home. An investor probably has some kind of risk tolerance where they are prepared to exit even if it means a principal loss.

Just like there’s a flurry to get in right now there’s potentially a flurry to get out at some point down the road. Don’t be in the position of having to compete with them to sell at that point. I suppose you could hope that the bigger players unload in bulk sales that don’t hit the open market. I.e. hey CalPRES please be the bag holder for this short term leveraged investment we made.

[The-Shoveler]

On-Topic
So you think we will be able to buy SD property with Bitcoins?

If so I am in the wrong biz, I need to start mining bitcoins.

“The Bitcoin-to-USD exchange rate had been climbing steadily since January 2013,
from around 30 USD to over 250 USD only 24 hours ago. Now, the value bubble seems to have burst,
at least partially. The primary trading site MtGox reported a drop
in value all the way down to 140 USD today, a loss of almost half in real value.
With many sites unreachable or slow, there are also news of a possible DDoS
attack on MtGox:”

[all]

[quote=The-Shoveler]On-Topic
So you think we will be able to buy SD property with Bitcoins?

If so I am in the wrong biz, I need to start mining bitcoins.

[/quote]

You are likely late to that game. Planting bitcoin miner via malware is not new, but it has exploded in the past few days. The supply has to be going up quickly. On the other hand the number of coins that can be mined is finite, so your personal production might still be worth something when the limit is hit.

[Anonymous]

Sounds like a tulip craze to me. Just because there is a finite supply of something that does not inherently make it valuable. Just my 2 bit coins worth 🙂

[bearishgurl]

[quote=livinincali] . . . There’s some out there that are truly free and clear but I’d guess that it doesn’t represent most and certainly doesn’t prevent them from cash out refinancing at some point. If they end up with a bad experience dealing with tenants do they stay there when other yield investments start being more competitive. Maybe, I don’t know. I just feel like the emotional attachment isn’t there. People have drained retirement accounts to keep an owner occupied home. An investor probably has some kind of risk tolerance where they are prepared to exit even if it means a principal loss.[/quote]

I personally don’t know anyone who has “drained their retirement accounts” to keep their home. I think cash out refinancing is done by a very small minority of longtime owners. I don’t see this being done in the submarkets I follow which are heavy with free and clear owners. Some of the owners are occupying and some are not. These properties are in their estates and will ostensibly be passed down to children/grandchildren upon their death sans reassessment pursuant to Props 58 and 193.

If rates rise, LL’s will stay LL’s if it makes financial sense to do so. When rates go up on passive investments, a free-and-clear LL may decide to figure out if they will still be making more landlording than they would on investing in passive vehicles, which would have less work involved. They will have to also take into consideration what the price and likely terms would be at that time if they listed their rental property and figure out the cost of repairs and improvements they might have to make to it to market it successfully for the highest price in light of its current competition.

A LOT of longtime owners don’t have an “emotional attachment” to RE. I myself have never had an “emotional attachment” to RE whether the property in question was actually my home … or not. Emotional attachment and RE don’t mix well, especially when buying, selling, renting out and attempting to improve a property. Taking off the rose colored glasses and looking at the numbers in the light of day to see if they make sense or will make sense is what should always be done with a piece of RE, whether a longtime owner-occupier, investor or in buying one’s first principal residence. I think a lot of longtime RE owners feel as I do, especially in coastal CA.

[quote=livinincali]Just like there’s a flurry to get in right now there’s potentially a flurry to get out at some point down the road. Don’t be in the position of having to compete with them to sell at that point. I suppose you could hope that the bigger players unload in bulk sales that don’t hit the open market. . .[/quote]

I just don’t see this “massive exit” resulting in excessive inventory happening all at once. Just like the Big Banks, a free-and-clear owner doesn’t have to market his tract home if there are already 2-3 of the same floor plan as his in his subdivision currently listed for sale … or for any reason inventory is plentiful and/or the market is leaning towards a buyer’s market or is a buyer’s market.

The future residential RE market won’t have the same conditions as it did post millenium-boom, when nearly ALL recent buyers, recent cash-out refinancers and recent ATMer’s were “underwater” (comprised of “owner” occupants and mostly amateur LL’s.)

It seems some here are postulating a tsumani of sorts or a residential RE bust that isn’t going to happen, IMHO.

Nor do I think the sold comps will keep escalating into infinity. But it’s different this time because the recent purchaser-pool is vastly different from that in the millenium boom.

[The-Shoveler]

I am kind of with BG here,

The only mass exit I think that could occur would be caused by some economic catastrophe and it would be the leveraged players being forced most likely.
That said I do think there are a lot of LL who are leveraged to some degree, but most likely it will be the leveraged owner occupiers who will be hurt the worst in such an event.
I don’t see interest rates spiking all of a sudden, I think it will be a very gradual affair Accompanied by equal or more inflation.

All just my opinion of course

Also I will add an economic catastrophe could be a very local event (Natural disaster, qcom decides it would be better off moving to Mexico just kidding).
But it could be a very local thing as well.

[livinincali]

[quote=The-Shoveler]
The only mass exit I think that could occur would be caused by some economic catastrophe and it would be the leveraged players being forced most likely.
[/quote]

I personally don’t think it would take a catastrophe to end up with some hedge fund players getting overleveraged and blowing up. The past 20 years have seen plenty of examples of this. Fed lowers rates, people borrow at those low rates, and speculate with the money. Since that speculation doesn’t create any real economic growth or a sustainable environment it always ends up blowing up sometime. The fed says we’ll lower rates so businesses can invest but it’s far easier to borrow and speculate than it is to actually build a real business.

[quote=The-Shoveler]
I don’t see interest rates spiking all of a sudden, I think it will be a very gradual affair Accompanied by equal or more inflation.
[/quote]

I tend to think interest rates will stay low for awhile here in the US. Longer than most people think, but when they do move higher I expect it to happen relatively quickly. At least faster than what it took to get to these low levels. I.e. it will be shorter to go from 3.5 to 6 than the roughly 4 years it took to go from 6 to 3.5

[moneymaker]

It’s all about supply. I suspect a higher percentage of homes from deceased owners may be being lived in by heirs rather than being put on the market.

[SK in CV]

[quote=livinincali][quote=The-Shoveler]
The only mass exit I think that could occur would be caused by some economic catastrophe and it would be the leveraged players being forced most likely.
[/quote]

I personally don’t think it would take a catastrophe to end up with some hedge fund players getting overleveraged and blowing up. The past 20 years have seen plenty of examples of this. Fed lowers rates, people borrow at those low rates, and speculate with the money. Since that speculation doesn’t create any real economic growth or a sustainable environment it always ends up blowing up sometime. The fed says we’ll lower rates so businesses can invest but it’s far easier to borrow and speculate than it is to actually build a real business.

[/quote]

Historically, the term “hedge fund” has meant an investment group that played with other people’s money. They “hedge” their bets. They buy in a method that gives them most of the profits, but caps their losses.

These kinds of hedge funds haven’t been buying up real estate in droves. Much more traditional private equity funds have been. And they’ve been paying cash. Mostly all cash. And in doing so, they can’t be over-leveraged.

Someone suggested that these funds will eventually leverage their RE holdings. Not unlikely. But as a practical matter, they can’t do it cheaply with secured debt, because they cant get a single loan secured by thousands of properties. They would have to jump through similar hoops that small investors go through, financing each property individually. If it’s unsecured debt, then every penny of their asset value is at risk, and they have leverage, but no “hedge”.

I see no scenario where anything short of a catastrophic change in RE prices where PE investors could add to the catastrophe. They can’t create it. I’d certainly be open to suggestions of how it could happen. I just don’t see it.

[SD Realtor]

I am not sure I see it either. One of the problems is the misconceptions of what sort of properties are held by industrial players. If you think that some entity holds 2000 sfr homes in San Diego county and they are generating income through property rentals you are about as wrong as can be. I do know that there are plenty of investment groups that purchase properties for flips but that is immune to long term interest rate issues. Now if you are talking larger commercial holdings that have 100’s or 1000s of doors per project then you are getting to be more accurate.

Steering the conversation back to what is most important for the generic engineer looking for a home on the I15 corridor, or Carlsbad, or Carmel Valley or Encinitas… very tough times and these homes will not be affected at all by any perceived commercial activity. The demand for these homes will be set strictly by the affordability for that same engineer and that is strictly determined by interest rates as well as the overall supply/demand curve.

[SK in CV]

[quote=SD Realtor]I am not sure I see it either. One of the problems is the misconceptions of what sort of properties are held by industrial players. If you think that some entity holds 2000 sfr homes in San Diego county and they are generating income through property rentals you are about as wrong as can be. I do know that there are plenty of investment groups that purchase properties for flips but that is immune to long term interest rate issues. Now if you are talking larger commercial holdings that have 100’s or 1000s of doors per project then you are getting to be more accurate.

Steering the conversation back to what is most important for the generic engineer looking for a home on the I15 corridor, or Carlsbad, or Carmel Valley or Encinitas… very tough times and these homes will not be affected at all by any perceived commercial activity. The demand for these homes will be set strictly by the affordability for that same engineer and that is strictly determined by interest rates as well as the overall supply/demand curve.[/quote]

I think I mostly agree, though I’m confused about something you said here. I’m not aware of any big private equity RE activity in SD. Not saying it hasn’t happened, but it hasn’t been prominent in the news, nor have the numbers ever looked like they worked as well as they have in Phoenix, parts of FL, and some other small pockets across the country.

But this part…

Now if you are talking larger commercial holdings that have 100’s or 1000s of doors per project then you are getting to be more accurate.

seems to say just the opposite of what you said at the beginning of the paragraph. Are there a significant number of investors that have bought 1000 or more doors in SD, and are holding it? To add some context to what I’m talking about, I was told last week that there have been at least 100,000 SFRs acquired in the last 18 months in Phoenix by cash investors planning on renting and holding them. (I’m skeptical of the accuracy of that number, btw.)

Or are you talking about developers?

[SD Realtor]

The doors meant large scale multi-family apartments or townhome communities that are rental only. So you may have REITs that have investments in those sorts of holdings. As far as private equity activity at trustee sales alot of the competition that we would go up against would be groups of investors, sometimes large groups, that would make a couple of purchases per day to fix and flip. Note these were not Wall Street entities, just large groups of investors that had lots of money in their own “fund so to speak. None of these groups however were going for long term investment as a rental. If you go to say the Bruce Norris site, they will turn you on to longer term trust deeds that are targets for a long term rental holding.

I would also doubt a 100k home purchase as a hold for a rental. Once more, it is all market dependent right? Could it have happened in Phoenix? I guess. Could it happen in the areas I mentioned as a focus of this thread…not ever, even for 1000 sfrs.

[moneymaker]

I was talking to someone in the military yesterday that just moved into military housing and they said there was no wait list, so if the military vs. civilian market are in alignment that tells me there are plenty of rentals, just not enough SFH on the market to keep prices down.

[UCGal]

On the topic of hedge funds and bad real estate deals… Look at Stuyvesant Town in NYC and the big boys who bought it – then backed out of the deal, leaving CalPers, among others, holding the bag.

http://www.npr.org/2013/04/03/175511949/the-botched-ny-real-estate-deal-that-lost-other-people-billions

Not local… but it could happen on a smaller scale here.

[spdrun]

On the topic of hedge funds and bad real estate deals… Look at Stuyvesant Town in NYC and the big boys who bought it – then backed out of the deal, leaving CalPers, among others, holding the bag.

http://www.npr.org/2013/04/03/175511949/…

Not local… but it could happen on a smaller scale here.

Difference is that the SFR’s and condos in SD Co are typically offered at anywhere from 6-10% cap now. Same in many NJ towns that I’m interested in.

StuyTown — let’s do the math. They paid about $500k per apartment. Average rent was likely about $2000/mo, what with rent control and stabilization of quite a few tenants. Management, maintenance costs, and property taxes likely eat 50% of this, so we’re left with $1000/mo, or $12k/yr per apartment, if VERY lucky. Yeah, the fucking fools bought at 2.4% cap.

[SK in CV]

[quote=spdrun]

On the topic of hedge funds and bad real estate deals… Look at Stuyvesant Town in NYC and the big boys who bought it – then backed out of the deal, leaving CalPers, among others, holding the bag.

http://www.npr.org/2013/04/03/175511949/…

Not local… but it could happen on a smaller scale here.

Difference is that the SFR’s and condos in SD Co are typically offered at anywhere from 6-10% cap now. Same in many NJ towns that I’m interested in.

StuyTown — let’s do the math. They paid about $500k per apartment. Average rent was likely about $2000/mo, what with rent control and stabilization of quite a few tenants. Management, maintenance costs, and property taxes likely eat 50% of this, so we’re left with $1000/mo, or $12k/yr per apartment, if VERY lucky. Yeah, the fucking fools bought at 2.4% cap.[/quote]

They also did that in 2006. A few things have changed since then.

[livinincali]

[quote=SK in CV]
Historically, the term “hedge fund” has meant an investment group that played with other people’s money. They “hedge” their bets. They buy in a method that gives them most of the profits, but caps their losses.

These kinds of hedge funds haven’t been buying up real estate in droves. Much more traditional private equity funds have been. And they’ve been paying cash. Mostly all cash. And in doing so, they can’t be over-leveraged.

Someone suggested that these funds will eventually leverage their RE holdings. Not unlikely. But as a practical matter, they can’t do it cheaply with secured debt, because they cant get a single loan secured by thousands of properties. They would have to jump through similar hoops that small investors go through, financing each property individually. If it’s unsecured debt, then every penny of their asset value is at risk, and they have leverage, but no “hedge”.

I see no scenario where anything short of a catastrophic change in RE prices where PE investors could add to the catastrophe. They can’t create it. I’d certainly be open to suggestions of how it could happen. I just don’t see it.[/quote]

I don’t know I see articles like this Hedge fund Blackstone buying $100 million per week.

http://news.firedoglake.com/2012/11/15/hedge-fund-blackstone-buying-100-million-in-foreclosed-homes-every-week/

Look at BX balance sheet. 2 billion in cash 20 billion in investments. Looks like about 10 to 1 leverage to me.

Or Farallon group sets 300-400 million hedge fund using 60% leverage to buy real estate.

http://news.yahoo.com/exclusive-farallon-hedge-fund-raising-real-estate-fund-165122356–sector.html

Will it effect North County Coastal San Diego. Probably not. We haven’t seen much activity through the traditional channels. It would only be the case if they did some kind of bulk transaction that didn’t hit the court room steps. Probably the only way to know would be if there’s some kind of prominent management company in the North County Coastal rental market that has a large share of the rentals on the market.

[SK in CV]

[quote=livinincali]
I don’t know I see articles like this Hedge fund Blackstone buying $100 million per week.

http://news.firedoglake.com/2012/11/15/hedge-fund-blackstone-buying-100-million-in-foreclosed-homes-every-week/

Look at BX balance sheet. 2 billion in cash 20 billion in investments. Looks like about 10 to 1 leverage to me.

[/quote]

BX is a primarily an PE firm. “Hedge” doesn’t apply to everything it does. That’s kind of what I was talking about. “Hedge fund” is now too often used to refer to all private equity. “hedge fund” and “private equity” are not synonymous. It’s current debt to equity is about .5 (which is NOT highly leveraged). But more importantly, BX doesn’t own the RE. It manages funds that own the real estate. If it owned the RE, it would show up on its balance sheet. It doesn’t. As far as I know, all the specific financial info for their RE funds is private (hence “private” equity).

[livinincali]

[quote=SK in CV]
BX is a primarily an PE firm. “Hedge” doesn’t apply to everything it does. That’s kind of what I was talking about. “Hedge fund” is now too often used to refer to all private equity. “hedge fund” and “private equity” are not synonymous. It’s current debt to equity is about .5 (which is NOT highly leveraged). But more importantly, BX doesn’t own the RE. It manages funds that own the real estate. If it owned the RE, it would show up on its balance sheet. It doesn’t. As far as I know, all the specific financial info for their RE funds is private (hence “private” equity).[/quote]

Private equity often employs leverage. The concept of leveraged buyout was invented by private equity. Of course this thread is about North County Coastal so I probably shouldn’t have brought PE into the thread at all.

North County Coastal is a special sub market that is far more likely to be effected by the Sorrento Valley economic center of high paying jobs than anything else. QCOM’s health is probably much more important than what private equity is doing if anything.

Housing for the marginal buyer is a highly leveraged asset in most cases. As long as carrying costs stay low (interest rates) and leverage available stays high (5% down or less) the housing market will be fine. As soon as one of those things goes away it will have some difficulties.

[SK in CV]

And….

[quote=livinincali]

Or Farallon group sets 300-400 million hedge fund using 60% leverage to buy real estate.

http://news.yahoo.com/exclusive-farallon-hedge-fund-raising-real-estate-fund-165122356–sector.html

[/quote]

from the article:

With its new fund, Farallon will target shopping centers, office buildings, warehouses and apartments that fundamentally have nothing wrong with them, but might be over-leveraged or mismanaged. It will target deals that require the Farallon fund to invest between $25 million to $50 million, the source said.

Kind of standard leverage for commercial RE investments. But they’re not buying SFRs.

[earlyretirement]

[quote=bearishgurl][quote=livinincali] . . . The fear of inflation and search for yield are significant driving factors in today’s market. There’s plenty of people hiding out in real estate as a safe haven that would probably rather be invested in something else. I honestly think investor speculators looking for yield are probably much weaker hands than traditional owner occupiers. It will be the perfect storm when rates rise. Not only will mortgage rates go up but at the same time those that were looking for yield are going to try to exit.[/quote]

livinincali, I disagree that free-and-clear RE owners are “weaker hands.”

It doesn’t matter that these “investors” were/are seeking yield. If it is not a good time to sell, they don’t have to. If rates go up, they can continue to rent their propertie(s) out in lieu of investing in something more passive. I just don’t see CD’s, MM funds and bond yields going so high as to rival rental income from an investment property purchased right and with all cash.

“Traditional owner occupiers” didn’t buy to “make the numbers work.” They bought what they liked where they personally wanted to live (within the confines of their qualifications).[/quote]

I agree with BG on this point regarding cash buyers. I have a lot of experience dealing with cash buyers. I’ve purchased literally hundreds and hundreds of properties for investors in the past decade (all 100% cash). I’m speaking about hundreds of millions of dollars worth of properties.

These people are NOT “weak hands” for the most part. As BG correctly mentioned, they can ride out any ups OR downs. They aren’t forced to sell. The only few exceptions I’ve seen are people that had major life events that are not in the norm (i.e. finding out they are going to die and want to liquidate to make it easier on their family, major medical illness of them or a spouse/kid/etc, major loss from some uncommon event like their house or business burned down). And out of over 500+ people it’s only been probably 10 that I’ve known that were “forced to sell”.

But these things are VERY rare. Cash buyers are typically the total opposite of “weak hands” that would be forced to sell if prices dipped.

I agree with the various distinctions mentioned of “hedge fund, private equity fund, venture capital, etc”. Many of these funds ARE buying and much of it isn’t leveraged at all.

Also, it’s almost impossible to figure out what % is owner occupied vs. rentals in many cases. Many investors hire third parties to assist them purchase and the properties are put in the buyer’s own name most of the times. You’d think that if you were buying in cash you’d always use an LLC but many people don’t bother with this.

I own several properties in 5 different countries and some of them have had turmoil, high inflation, corrupt leaders and politicians, ups and downs but as a cash buyer I don’t care what happens locally and not having a mortgage I could care less what the “sales value” is. I just ride out any ups and downs and rent it out. Sure, cash flow can be reduced at times but no need to be “forced to sell” being a cash buyer.

I avoid all the “noise” mentioned above and just try to buy in the best areas and typically there is ALWAYS some demand for rentals. My main goal is cash flow not capital appreciation. (sure it’s nice and icing on the cake but that isn’t my goal) and probably it can be said of many cash buyers.

[bearishgurl]

Folks, I’m now seeing multiple posts on this site about recent SFR cash investors, big and small, at risk of implosion. I just don’t see this constellation. EVERYONE needs a place to live and there are a LOT MORE people now who can’t qualify for a purchase money mortgage and have no choice but to rent or stay with relatives and friends.

Certainly, we have all learned by now that free-and-clear owners can do whatever they wish in ALL markets. In the absence of CA coastal counties drifting off the mainland into the ocean, the vast majority of the free-and-clear RE owners within them can just tell everyone to take a hike as I believe they are truly immune from the vagaries in the broader economy.

Cash and equity talks and other stuff walks.

[bearishgurl]

Thanks, SK, for clarifying the difference between a “hedge fund” and a private-equity REIT. I read the links CAR provided on this thread below (repeated by livinincali here) but didn’t possess your body of knowledge to actually determine if leverage was actually used in Blackstone’s and Santa Monica-based Colony Capital’s acquisitions (for example) or the degree at which these (SFR) acquisitions could have later been leveraged.

February 2013 Resale Data Rodeo (Graphs Only)

My understanding is that properties within coastal CA counties are not included in the (previously distressed) buy-and-hold portfolios of these two giant REITs. I am unclear if Blackstone has actually made any bulk acquisitions in CA. My understanding from the two e-mail messages I rec’d to start the thread below is that Colony had purchased up distressed SFR’s in bulk in the inland Counties of San Bernardino, Riverside, Kern, Fresno, Merced, San Joaquin, Sacramento and possibly Stanislaus.

http://piggington.com/as_predicted_frannie_is_beginning_to_sells_blocks_of_assets_in_b?page=1

It doesn’t seem as if there would be a good reason for lenders or Fannie/Freddie to unload in bulk SFR’s which are situated in urban CA coastal counties at deep discounts to REITs. My reasoning is that these REO’s were/are very salable due to having a good local job market and also traditionally having an otherwise “captive audience.”

[The-Shoveler]

Funny I was in San Jose two weeks ago and my colleague was telling me that BlackStone was buying SFH on the open market in the area (Sunnyvale, san Jose, mountain view etc…) (there virtually are no distress sales there these days).

I thought that’s crazy, also I can tell you the start-up’s up there are going ballistic. I am seeing guy’s in their 50’s and working for large companies who have been there 10-15 years leave for start-up’s.
It’s crazy.

[bearishgurl]

[quote=The-Shoveler]Funny I was in San Jose two weeks ago and my colleague was telling me that BlackStone was buying SFH on the open market in the area (Sunnyvale, san Jose, mountain view etc…) (there virtually are no distress sales there these days).

I thought that’s crazy, also I can tell you the start-up’s up there are going ballistic. I am seeing guy’s in their 50’s and working for large companies who have been there 10-15 years leave for start-up’s.
It’s crazy.[/quote]

WOW, if I could move NOW, I would start interviewing in SV for a great job if old people are actually being hired in SV!

After all, I’m not dead yet :=0

I’m wondering what Blackstone is really buying in Santa Clara County. I can’t in my wildest dreams imagine that it is SFRs. Even as high as the rents are there, the acquisition cost and taxes of only a modest SFR are very, very high there.

Could it be condos or row homes? Or could it actually be on the other side of the Dumbarton Bridge (Fremont) or around the east side along the Nimitz fwy to SJ.

I’ll believe it when I see it.

There are still plenty of SFR’s to buy up in BK’d Stockton.

[Scarlett]

What segments of the sellers “demographic” have changed so dramatically? I mean, comparing to a more normal housing market. I am curious why is the inventory bottom low. It seems to me the prices have recovered quite a bit from the “bottom”, we’ve worked our way through most of the short sales and foreclosures – I think. Are that many more people still underwater? Are the banks holding on to the foreclosures “tsunami”?

Is the low inventory not as bad compared to normal market because even though at any given point not many houses are on the market, they go in escrow within days, compared to weeks in a more normal market?

[SD Realtor]

Those are good questions Scarlett. I don’t really have many answers for you. Agreed that we have seen strong price recovery, especially over the past 6 months. Yes there are still alot of people underwater but nowhere near as many as there were in 2009. Furthermore that number is being whittled down daily. No the banks are not holding onto foreclosures as well. The supposed tsunami believers who I always said were grasping at straws are totally empty handed. I didn’t quite get your last 3 lines. The low inventory is bad, as bad as it has ever been. Even in the bubble days we didn’t have inventory like this. It becomes challenging for everyone. It makes the decision making process border on irrational for some. Buying becomes fed by fear rather then logic. Appraisals become much harder becaue prices gap up rather then appreciate normally. It is just a situation that most buyers should not participate in unless they are adequately prepared.

[livinincali]

[quote=SD Realtor]Those are good questions Scarlett. I don’t really have many answers for you. Agreed that we have seen strong price recovery, especially over the past 6 months. Yes there are still alot of people underwater but nowhere near as many as there were in 2009. Furthermore that number is being whittled down daily. No the banks are not holding onto foreclosures as well. The supposed tsunami believers who I always said were grasping at straws are totally empty handed. I didn’t quite get your last 3 lines. The low inventory is bad, as bad as it has ever been. Even in the bubble days we didn’t have inventory like this. It becomes challenging for everyone. It makes the decision making process border on irrational for some. Buying becomes fed by fear rather then logic. Appraisals become much harder becaue prices gap up rather then appreciate normally. It is just a situation that most buyers should not participate in unless they are adequately prepared.[/quote]

I don’t think the banks that made loans back in 2005 and 2006 have much to foreclose on anymore. The only private loan I can think of during the bubble years that might not have defaulted yet is the 10 year Option ARM that Wachovia was offering (now it’s Wells). Most of the private sector bubble year loans were 5-7 option ARMs.

Most of the sales in the past 3-4 years are all cash investors (30-40%), FHA/VA (30-40)%, and then traditional 20% down loans (maybe 20ish%). Most of the recent defaults are FHA loans so if your going to see new foreclosure inventory that’s where it’s going to come from. I found this link which indicates 7K FHA loans in San Diego County that have been foreclosed already or are in some stage of foreclosure. Looks like around 300 so far in April.

FHA Foreclosure San Diego

[SD Realtor]

A prime example of the craziness. This was not happening in the prime bubble years.

Intensity Rising

[bearishgurl]

[quote=livinincali]I don’t think the banks that made loans back in 2005 and 2006 have much to foreclose on anymore. The only private loan I can think of during the bubble years that might not have defaulted yet is the 10 year Option ARM that Wachovia was offering (now it’s Wells). Most of the private sector bubble year loans were 5-7 option ARMs.

Most of the sales in the past 3-4 years are all cash investors (30-40%), FHA/VA (30-40)%, and then traditional 20% down loans (maybe 20ish%). Most of the recent defaults are FHA loans so if your going to see new foreclosure inventory that’s where it’s going to come from. I found this link which indicates 7K FHA loans in San Diego County that have been foreclosed already or are in some stage of foreclosure. Looks like around 300 so far in April.

FHA Foreclosure San Diego[/quote]

Nice link, livinincali, although some of these REO’s may have already been sold (I haven’t checked any MLS aggregators to see). Not sure if they’re all FHA loans, however, as “FHA.com” is not a government agency website.

I perused all five zip codes in Chula Vista on the site and found 44 REOs (SFRs AND condos) with 25 of them currently listed from $91,900 to $704,900.

I also perused same in all three zip codes in El Cajon and found 45 REO’s with 36 currently listed from $67,900 to $599,900.

The large amount of NODs is predictable, but in recent years usually did not result in foreclosure.

What is shocking to me is the HUGE amount of bankruptcy filings (doesn’t say whether Chapter 7 or 13s) in both cities. The vast majority have to be personal (individual and joint) BK filings, because they emanate from SFRs and condos, most of them no doubt from the same addresses (we can’t see exact address, just street) which are currently in default. A lot of home”owners” behind in their payments use a BK filing as a delaying tactic in foreclosure, but in CA, this seldom buys them more than 2 months more occupancy and eff’s up their credit even more.

A spot check in cities all over the county will reveal whether this (BK) phenomenon is widespread or just confined to some cites or communities within the City or County of SD.

If these 44-45 foreclosures in each city I ran a list on are truly FHA (HUD) foreclosures, it is a sad testament to a how the current FHA “guidelines” are way too lax. If this is the case, then all these properties were likely purchased in the last four years. In Chula Vista, the list of 44 REOs reveals that 5 of them (SFRs) are clearly executive-type homes situated in move-up and “luxury” areas.

The FHA has absolutely no business whatsoever “guaranteeing” a mortgage for this type of purchase, IMO. That’s not what the FHA was put in place for. The FHA was formed to serve moderate income purchasers shopping for a roof over their heads, the vast majority being FTB’s buying starter homes and/or in underserved areas.

The current FHA loan “ceiling” of $697,500 for a one-family SFR in SD County is turning out to be a bad joke … as predicted by a few of us here over the years. The joke is on ALL taxpayers, all over the country.

[livinincali]

[quote=bearishgurl]
The FHA has absolutely no business whatsoever “guaranteeing” a mortgage for this type of purchase, IMO. That’s not what the FHA was put in place for. The FHA was formed to serve moderate income purchasers shopping for a roof over their heads, the vast majority being FTB’s buying starter homes and/or in underserved areas.

The current FHA loan “ceiling” of $697,500 for a one-family SFR in SD County is turning out to be a bad joke … as predicted by a few of us here over the years. The joke is on ALL taxpayers, all over the country.[/quote]

FHA default rates are up around 10% right now. FHA MIP has been skyrocketing as that default rate has increased and FHA reserves have gone negative. The reason FHA got so popular is it was the only high leverage game in town when the bubble popped. The saving rate in the nation is a record lows. At some point you need the underlying economy and wages to push housing up. You can game it high with increasing amounts of leverage and lower rates but that only lasts so long.

That’s why I’m of the belief that right now or in the next year might be a really good time to sell. Almost every market condition in terms of rates, leverage, constrained inventory, etc. is in the sellers advantage right now. You’re looking for an improving wage and employment situation without any impact in rates to really push it higher on fundamentals.

[bearishgurl]

[quote=livinincali]FHA default rates are up around 10% right now. FHA MIP has been skyrocketing as that default rate has increased and FHA reserves have gone negative. The reason FHA got so popular is it was the only high leverage game in town when the bubble popped. The saving rate in the nation is a record lows. At some point you need the underlying economy and wages to push housing up. You can game it high with increasing amounts of leverage and lower rates but that only lasts so long.

That’s why I’m of the belief that right now or in the next year might be a really good time to sell. Almost every market condition in terms of rates, leverage, constrained inventory, etc. is in the sellers advantage right now. You’re looking for an improving wage and employment situation without any impact in rates to really push it higher on fundamentals.[/quote]

livinincali, I could understand why the Kansas City market has to cater to “high-leverage” borrowers in most areas there, but I don’t understand why CA coastal markets do. Why do “very desirable” markets with a “captive audience” (such as SD Co) need to cater to “high-leverage” borrowers? Before 2000?, FHA loans only represented <5% of overall purchases in SD County. Back then, the local FHA ceiling was set in line with the likes of SFR pricing in Spring Valley, Lemon Grove (just barely) and other similarly-situated communities in the county .... as it should be.

I don't understand why the ceiling EVER rose beyond $300K in SD County. Certainly, with the recent run-up in local home prices everywhere (2013), $400K should be the current max FHA mortgage available in SD County ... the absolute max. $400K is a HUGE mortgage for a moderate-income buyer.

In a nutshell, why is the FHA attempting to serve households with more than the "average income" in a particular county? It doesn't make sense. That is the sole purpose of fannie, freddie, portfolio lenders and the VA (for eligible vets only, regardless of income). It was never and is not today the FHA's role to provide this level of leverage.

[livinincali]

[quote=bearishgurl] I could understand why the Kansas City market has to cater to “high-leverage” borrowers in most areas there, but I don’t understand why CA coastal markets do. Why do “very desirable” markets with a “captive audience” (such as SD Co) need to cater to “high-leverage” borrowers? Before 2000?, FHA loans only represented <5% of overall purchases in SD County. Back then, the local FHA ceiling was set in line with the likes of SFR pricing in Spring Valley, Lemon Grove (just barely) and other similarly-situated communities in the county .... as it should be.

I don't understand why the ceiling EVER rose beyond $300K in SD County. Certainly, with the recent run-up in local home prices everywhere (2013), $400K should be the current max FHA mortgage available in SD County ... the absolute max. $400K is a HUGE mortgage for a moderate-income buyer.

In a nutshell, why is the FHA attempting to serve households with more than the "average income" in a particular county? It doesn't make sense. That is the sole purpose of fannie, freddie, portfolio lenders and the VA (for eligible vets only, regardless of income). It was never and is not today the FHA's role to provide this level of leverage.[/quote]

The entire bubble was built on increasing the available leverage. Back before 2000 you could save money at a bank by getting 5, 6, 7% CD rates that beat the 3-4% inflation and save your way to a down payment. Real household income was still increasing relative to inflation. Banks kept loans on their own books and actually had to price risk. It was when the banks figured out that they could move the risk onto investors and lie about the credit quality of the borrowers that 0 down came about.

The fed helping to drive investors into higher yielding riskier assets through suppression of rates helped as well. In essence they didn't want you to save, they wanted you to spend to "boast" the economy. It did boast the economy in the short term but now the long term impacts are being felt. People that didn't get into the system before the easy money policy of 2000's have had a hard time building the savings it would take to go back to the old system. Now that we're use to near 0 down it's hard to go back since building savings in ZIRP sucks.

So the people buying the hot markets right now with cash or decent down payments likely are older and enjoyed the benefits of the 1990's or happen to be in the top 20% of income. It will probably stay that way in certain areas of north county coastal for while as a wealthy retirement destination, but I don't expect it to apply to most of San Diego.

[zk]

[quote=SD Realtor] Yes there are still alot of people underwater but nowhere near as many as there were in 2009. Furthermore that number is being whittled down daily.[/quote]

[quote=utcsox]
JTR had a post yesterday of CV heading for +20%.. Is that fairly close to what you are seeing also? I think the house on the post yesterday is either on Torrey Hills area or Carmel Country Highlands. South of 56, 4+ bedroom with one bedroom down stair.
If this is true, you will not be underwater if you bought it in 2011, 2012 time frame.[/quote]

This is the house JTR was talking about:

http://www.redfin.com/CA/San-Diego/11220-Corte-Belleza-92130/home/6293649

It sold in March ’04 for 1.15M. March ’04 was a bit before the peak, but was fairly close to it, pricewise. So, if they get 1.2, which JTR says on the video he thinks they might, that’s peak pricing.

Here’s another one:

http://www.redfin.com/CA/San-Diego/10777-Spur-Point-Ct-92130/home/6315926

This one sold in Jan ’06 (two months after the peak) for just under 1.2M. The owners upgraded somewhat, and got 1.3M this month. The upgrades might’ve cost 100k, but wouldn’t be worth that much in resale. So, again, we’re at least at peak pricing for this house.

Are these outliers, or are we at peak pricing in Carmel Valley?

SDR, what are you seeing in CV and the other areas you’ve been talking about in regards to current pricing vs. peak pricing?

Once we’re at peak pricing, the only people left underwater are people who borrowed more than their house was ever worth. Are there very many like that?

[SD Realtor]

zk I am a bit to busy to go back and gather the data to determine what was peak pricing and then compare it to comps.

I prefer to think of the direct bottom line. Speculating about who is and who is not underwater is useless. People cling to the notion of the underwater inventory for reasons that elude me. Even if there is the vast underwater inventory that these people hope, for the govt has already shown us that there is no moral hazard and that these people will be bailed out through programs already in place.

So what does it matter?

I am seeing exactly what Jim is writing about. It is sheer carnage in the middle pricing tier under 1M.

The only real mystery is why the lack of inventory.

[zk]

[quote=SD Realtor]zk I am a bit to busy to go back and gather the data to determine what was peak pricing and then compare it to comps.

I prefer to think of the direct bottom line. Speculating about who is and who is not underwater is useless. People cling to the notion of the underwater inventory for reasons that elude me. Even if there is the vast underwater inventory that these people hope, for the govt has already shown us that there is no moral hazard and that these people will be bailed out through programs already in place.

So what does it matter?

I am seeing exactly what Jim is writing about. It is sheer carnage in the middle pricing tier under 1M.

The only real mystery is why the lack of inventory.[/quote]

I wasn’t asking you to pull comps. Just your general perception.

I disagree that speculating about who is underwater is useless. I know several people personally (so I’m sure there are a lot of them out there) who would sell if they weren’t under water. Whether it makes sense or not for them to be worried about it in light of the government’s willingness to bail them out is irrelevant. They don’t want to sell until they’re no longer underwater.

I’d be interested to hear other opinions on current market prices vs. peak prices.

[bearishgurl]

[quote=zk]…I’d be interested to hear other opinions on current market prices vs. peak prices.[/quote]

I agree with SDR that whatever “peak prices” were (during the millenium boom) has no bearing on prices today. The two periods of time are not related. And if they were related, “peak pricing” would be irrelevant as “peak pricing” was only obtained through the copious issuance of NINA mortgages to unqualified buyers.

Even though some homeowners made a (ill-gotten-but-perfectly-legal) killing off the sale of their properties between 2004 and 2006 (to the detriment of their buyers), the sold comps in this period of time should never be “studied” or used again for comparison purposes as they were all derived from “funny money.”

Peak pricing certainly happened but it wasn’t based on reality in any way, shape or form.

If you want to use past sold comps for comparison values, go back to 2002/2003 (depending on area). Homebuyers still had to traditionally qualify for their mortgages up until late 2003/early 2004.

[zk]

[quote=bearishgurl][quote=zk]…I’d be interested to hear other opinions on current market prices vs. peak prices.[/quote]

I agree with SDR that whatever “peak prices” were (during the millenium boom) has no bearing on prices today. The two periods of time are not related. And if they were related, “peak pricing” would be irrelevant as “peak pricing” was only obtained through the copious issuance of NINA mortgages to unqualified buyers.

Even though some homeowners made a (ill-gotten-but-perfectly-legal) killing off the sale of their properties between 2004 and 2006 (to the detriment of their buyers), the sold comps in this period of time should never be “studied” or used again for comparison purposes as they were all derived from “funny money.”

Peak pricing certainly happened but it wasn’t based on reality in any way, shape or form.

If you want to use past sold comps for comparison values, go back to 2002/2003 (depending on area). Homebuyers still had to traditionally qualify for their mortgages up until late 2003/early 2004.[/quote]

Whether peak pricing was based on reality or not isn’t relevant. What’s relevant, in my opinion, is the restriction on inventory due to underwater potential sellers. And if prices are back at their peak (I’m not saying they are; I’m asking if they are) then there would be very few underwater sellers. Regardless of what peak prices were “based on.” This would remove the restriction (if there is one. I think there is, but I could be wrong) on inventory caused by potential sellers who don’t want to sell if they’re underwater.

Edit: I guess they’d need what they paid (possibly peak) plus 5% or more for real estate commissions.

[outtamojo]

I never could understand this fascination with underwater owners as potential sellers without at the same time attempting to quantify potential buyers who held back/ or are still holding back buying to avoid bubble prices.Seems like they came out to be somewhat of a wash, no?
At this point in time, for those held off buying, the move off the bottom came too quick.
I wonder what the current frenzy will do to the psychology of home buyers/real estate investors. Will they view housing the same way many viewed stocks in the 90’s, buy the dips because prices ALWAYS come back?

[(former)FormerSanDiegan]

[quote=outtamojo]I never could understand this fascination with underwater owners as potential sellers without at the same time attempting to quantify potential buyers who held back/ or are still holding back buying to avoid bubble prices.Seems like they came out to be somewhat of a wash, no?
[/quote]

Agreed, pent-up demand is also very important.

I don;t know if it’s a wash.
My gut tells me that there is probably way more pent-up demand than pent-up inventory.

One (albeit somewhat weak and indirect) way to get a read on potential demand is by looking at household formation.

[outtamojo]

[quote=FormerSanDiegan][quote=outtamojo]I never could understand this fascination with underwater owners as potential sellers without at the same time attempting to quantify potential buyers who held back/ or are still holding back buying to avoid bubble prices.Seems like they came out to be somewhat of a wash, no?
[/quote]

Agreed, pent-up demand is also very important.

I don;t know if it’s a wash.
My gut tells me that there is probably way more pent-up demand than pent-up inventory.

One (albeit somewhat weak and indirect) way to get a read on potential demand is by looking at household formation.[/quote]

I bet Google knows how much relative demand there is.

[SD Realtor]

I think one of the things about piggs is that some of them overthink the situation. They go beyond the charts and dig up underlying causes for the chart movements, especially on the way down. Then when the charts change, even though some of the underlying causes may have remained in place, some of them did not waiver. Most of them did. Even Rich himself justified his purchase based on what the charts displayed rather then go well beyond those charts. Indeed the vast majority of the old schoolers who used to populate the forum here are long gone as they purchased based on that same data. The only regret I hear from many of them is that they didn’t buy more.

While things are moving fast now, it wasn’t like that. We came out of it in 09 slowly, ramped up, then dipped….. then came out of it slowly again. I don’t believe we have seen a surge in demand, (from the quantity of buyers) just a lack of supply that makes those buyer act in a more frenzied manner. Seems to me this started to happen around summer last year and started to pick up steam over the winter.

[SD Realtor]

Not sure zk. The pent up supply thing is a mystery. I think that if I were an underwater guy, and I saw other under water guys get loan mods, or forgiveness, or live for months or even years without paying a mortgage, perhaps I would think twice. Why sell? Even if the home appreciates to where you are not underwater why sell?

Sounds like we are the same. I have spent the last 3 years buying as much RE as I could however none of it is in Cali. By trade I am an engineer so it is my nature to try to figure everything out. However that is not always the case in RE especially in this situation. It could be a blend of alot of things. The stock market is rising but alot of people consider that riskier then then RE. If you buy 600k worth of equities and they depreciate by 200k you lost 200k. If the same thing happens to your home you get a loan mod or maybe some forgiveness.

Easy choice to make right?

Is RE a good hedge against inflation? Maybe…. only if there is wage inflation as well. So maybe it hedges maybe the asset depreciates but you are locked into a low rate that you locked in with yesterdays dollars…

I wish I knew the reason only because I could then give clients good advice as to when I think things will normalize again. Right now I get asked when will things normalize and all I can say is when we finish this leg. Maybe in a month or two, maybe end of summer… maybe longer. We just look at supply and DOM.

[zk]

[quote=SD Realtor]Not sure zk. The pent up supply thing is a mystery. I think that if I were an underwater guy, and I saw other under water guys get loan mods, or forgiveness, or live for months or even years without paying a mortgage, perhaps I would think twice. Why sell? Even if the home appreciates to where you are not underwater why sell? [/quote]
I concur with all of that except maybe the last part. People sell in a normal market for whatever reason they sell for (moving, downsizing, retiring, etc.) . People seem to hesitate to sell in those situations if they’re underwater, but might sell if they’re not underwater.

[quote=SD Realtor]Sounds like we are the same. I have spent the last 3 years buying as much RE as I could however none of it is in Cali. By trade I am an engineer so it is my nature to try to figure everything out. However that is not always the case in RE especially in this situation. It could be a blend of alot of things. The stock market is rising but alot of people consider that riskier then then RE. If you buy 600k worth of equities and they depreciate by 200k you lost 200k. If the same thing happens to your home you get a loan mod or maybe some forgiveness. [/quote]
Again, mostly concur. I’m not an engineer by trade, but I am one by way thinking. And by way of social skills. (No offense, I’m sure yours are great. Just a little joke at my own expense). The stock market is rising, which is part of the reason I’m staying out of it. We all know what Warren Buffett said about that. I don’t know if I’d count on government largesse in the event that my real estate investment failed. I guess I probably should. But I probably wouldn’t. Count on it, that is. Take advantage of, yes. Count on, maybe not.
[quote=SD Realtor]
Is RE a good hedge against inflation? Maybe…. only if there is wage inflation as well. So maybe it hedges maybe the asset depreciates but you are locked into a low rate that you locked in with yesterdays dollars… [/quote]
Ah, yes. Wage inflation. I have serious doubts about wage inflation. I see everything else inflating and our standard of living declining because wage inflation doesn’t keep up.
[quote=SD Realtor]
I wish I knew the reason only because I could then give clients good advice as to when I think things will normalize again. Right now I get asked when will things normalize and all I can say is when we finish this leg. Maybe in a month or two, maybe end of summer… maybe longer. We just look at supply and DOM.[/quote]

I wish you knew the answer, too.

[SD Realtor]

Agreed zk. Especially with the wage inflation part. I see everything but wages inflating. It has been happening for years. I am much more in the camp of Stockman rather then Krugs. What has been happening is criminal.

The banksters have never had it so well.

[zk]

[quote=SD Realtor]I think one of the things about piggs is that some of them overthink the situation. They go beyond the charts and dig up underlying causes for the chart movements, especially on the way down. Then when the charts change, even though some of the underlying causes may have remained in place, some of them did not waiver. Most of them did. Even Rich himself justified his purchase based on what the charts displayed rather then go well beyond those charts. Indeed the vast majority of the old schoolers who used to populate the forum here are long gone as they purchased based on that same data. The only regret I hear from many of them is that they didn’t buy more.

While things are moving fast now, it wasn’t like that. We came out of it in 09 slowly, ramped up, then dipped….. then came out of it slowly again. I don’t believe we have seen a surge in demand, (from the quantity of buyers) just a lack of supply that makes those buyer act in a more frenzied manner. Seems to me this started to happen around summer last year and started to pick up steam over the winter.[/quote]

I’ve been on this site since well before it had a yellow background. And I bought a lot of properties at a good time. So the charts have done well by me. I’m into the charts. I love the charts. But sometimes you have no choice but to go beyond the charts. The charts aren’t telling us why there’s a lack of inventory. Seems to me that’s a pretty important factor. I’m trying to figure out what’s going to happen next, and without a chart to tell me why there’s such a lack of inventory, I don’t see what to do but go beyond the charts and try to make an educated guess.

I’d be interested to hear other theories that might explain the lack of inventory.

[outtamojo]

[quote=zk][quote=SD Realtor]I think one of the things about piggs is that some of them overthink the situation. They go beyond the charts and dig up underlying causes for the chart movements, especially on the way down. Then when the charts change, even though some of the underlying causes may have remained in place, some of them did not waiver. Most of them did. Even Rich himself justified his purchase based on what the charts displayed rather then go well beyond those charts. Indeed the vast majority of the old schoolers who used to populate the forum here are long gone as they purchased based on that same data. The only regret I hear from many of them is that they didn’t buy more.

While things are moving fast now, it wasn’t like that. We came out of it in 09 slowly, ramped up, then dipped….. then came out of it slowly again. I don’t believe we have seen a surge in demand, (from the quantity of buyers) just a lack of supply that makes those buyer act in a more frenzied manner. Seems to me this started to happen around summer last year and started to pick up steam over the winter.[/quote]

I’ve been on this site since well before it had a yellow background. And I bought a lot of properties at a good time. So the charts have done well by me. I’m into the charts. I love the charts. But sometimes you have no choice but to go beyond the charts. The charts aren’t telling us why there’s a lack of inventory. Seems to me that’s a pretty important factor. I’m trying to figure out what’s going to happen next, and without a chart to tell me why there’s such a lack of inventory, I don’t see what to do but go beyond the charts and try to make an educated guess.

I’d be interested to hear other theories that might explain the lack of inventory.[/quote]

The new normal? Jim the realtor had an interview
w/ the Davidson homes guy a while back

Bill Davidson

There was a map showing how all the land for big projects is gone in S.D. County.

[bearishgurl]

[quote=outtamojo]The new normal? Jim the realtor had an interview w/ the Davidson homes guy a while back

Bill Davidson

There was a map showing how all the land for big projects is gone in S.D. County.[/quote]

I saw this video back when it came out last year. The developer is correct and all is as it should be. Enough is enough. SD County is grossly overbuilt and we were in danger of running out of water and had our landscape water rationed when it had less than half the population it does today. This situation with the State of AZ is still precarious. AZ is now grossly overbuilt as well and needs ALL of its share as is their right.

Short of having (ugly) desalination plants in the future on our bayfront and/or oceanfront (perhaps a huge one in Tijuana, BC to share with their residents … how’s that for “quality control?”), SD County residents have no guarantee how long our future rights to Colorado River basin water will last. The supply is certainly far from infinite.

And it is absolutely wacky to raze avocado groves and build huge subdivisions in Bonsall and surrounds (an idea I have been reading about). It is going to cost a FORTUNE to bring utilities to this area (read: VERY high MR). A good portion of the eastern section is covered with large boulders and is therefore unbuildable. If new home buyers want to live this far from SD, then TV will welcome them … that is, IF there are any new developments currently underway there.

TV is also grossly overbuilt. It is well past time for Big Developers to call it a day and leave SoCal permanently. Most already have.

[all]

[quote=zk]
I’d be interested to hear other theories that might explain the lack of inventory.[/quote]

Based on DataQuick data:

County NOD’s
2009Q2: 9,866 2011Q4: 4,813 2012Q4: 2,655

foreclosures
2009Q2: 3,518 2011Q4: 2,044 2012Q4: 1,285

Different source, similar drop in NOD’s, trustee sales (from 1,600+/month in 2008 to <400/month in 2013)

http://www.foreclosureforum.com/stats.html

[SD Realtor]

foreclosureforum = good place for stats.

[bearishgurl]

[quote=all][quote=zk]
I’d be interested to hear other theories that might explain the lack of inventory.[/quote]

Based on DataQuick data:

County NOD’s
2009Q2: 9,866 2011Q4: 4,813 2012Q4: 2,655

foreclosures
2009Q2: 3,518 2011Q4: 2,044 2012Q4: 1,285

Different source, similar drop in NOD’s, trustee sales (from 1,600+/month in 2008 to <400/month in 2013)

http://www.foreclosureforum.com/stats.html%5B/quote%5D

In looking at the chart, the large amount of trustee sales in January 2013 appears to be overflow from repeated sale postponements in 2012. We haven't yet seen the stats on completed trustees' sales for those (first) NOD's filed in 2013.

The lower number of current NOD filings in comparison to past years is NOT indicative of borrowers catching up on all their back principal and interest owed. It is indicative of borrowers cooperating with their lenders in a loan mod, many of which no doubt have "equity-sharing" arrangements built into them with their 1st or 2nd trust deed holder in exchange for being allowed to pay a 2% or 3% fixed rate and have some or all of their deferred interest and/or late charges forgiven. This deferred interest arose from when these borrowers' mortgages exceeded 125% LTV due to them choosing to pay Option 2 (insufficient to fully amortize) and/or Option 3 (I/O) and/or Option 4 (less than I/O - this choice was not avail on all Option ARMS) for a period of months or years. My guess is that these "equity sharing" provisions will be lifted or lessened if borrowers pay their mortgages under the new, modified terms for X amount of years faithfully, in full and on time.

The result is the same. These many thousands of properties are off the market for the foreseeable future unless these borrowers HAVE to sell for reasons of employment, death or divorce.

[zk]

[quote=outtamojo]I never could understand this fascination with underwater owners as potential sellers without at the same time attempting to quantify potential buyers who held back/ or are still holding back buying to avoid bubble prices.Seems like they came out to be somewhat of a wash, no?
At this point in time, for those held off buying, the move off the bottom came too quick.
I wonder what the current frenzy will do to the psychology of home buyers/real estate investors. Will they view housing the same way many viewed stocks in the 90’s, buy the dips because prices ALWAYS come back?[/quote]

I don’t think they come out to a wash at all. Today’s market indicates a lot more demand than supply. And it’s not a fascination. It’s an opinion reached after careful consideration, albeit with an acknowledgement of the possibility that it’s incorrect.

As for the psychology of this investor, I don’t view housing the way you describe, exactly. Nominal prices will always go up in the long run (a hundred years from now they’ll be higher than they are now), but that doesn’t mean that you will make money no matter when you buy.

[SD Realtor]

zk I don’t think we are at peak pricing but I don’t like to speculate on something that can be verified with data. I know plenty of people who are underwater as well. Again, that is fine anecdotally but it doesn’t matter. Back in 2009 and 2010 there were WAY more people underwater and people who could have bought back then but did not were foolish. However back then we DID know that the govt would backstop the entire real estate market. I posted that routinely as well as argued back then and well before that the tsunami was a pipe dream.

If you think it is relevant then that is okay, we are all entitled to our opinions. Mine is that it absolutely has no bearing on the market and I have been consistent in that opinion.

[(former)FormerSanDiegan]

People who are underwater are not likely to elect to sell their property.

This can (and IMO does) impact on inventory.

There have been periodic publish numbers regarding underwater owners, so there IS data out there that can be used to assess this.

http://www.usatoday.com/story/money/business/2013/03/19/rising-home-prices-reduce-underwater-borrowers/1997729/

[zk]

[quote=SD Realtor]zk I don’t think we are at peak pricing but I don’t like to speculate on something that can be verified with data. I know plenty of people who are underwater as well. Again, that is fine anecdotally but it doesn’t matter. Back in 2009 and 2010 there were WAY more people underwater and people who could have bought back then but did not were foolish. However back then we DID know that the govt would backstop the entire real estate market. I posted that routinely as well as argued back then and well before that the tsunami was a pipe dream.

If you think it is relevant then that is okay, we are all entitled to our opinions. Mine is that it absolutely has no bearing on the market and I have been consistent in that opinion.[/quote]

I’ve never been of the opinion that there’s a tsunami. I thought maybe some shadow inventory, but not a tsunami. I bought my primary residence in ’10 when the tsunami idea was still prevalent, and I’m pretty happy about it. I bought several investment properties last year (the bottom of the market (so far) in Georgia, where I bought them), and I’m pretty happy about that, too.

My point in this thread is not that I think there’s a tsunami of pent up supply due to too many potential sellers being underwater. My point is that I think there is some pent up supply for that reason. But even if there is, that would not cause a reduction in prices. Because if prices went down, they’d be underwater again, and we’d be back to where we are now.

I’m probably finished buying investment properties, at least for now. Because buying during a frenzy just seems like a bad idea. I’m trying to get a feel for what might happen next.

You mention that the real mystery is why the lack of inventory. I’m curious why are you convinced that it’s not at least partly due to underwater sellers. To me it seems as plausible as any other possible cause.

[(former)FormerSanDiegan]

Household formation…

http://soberlook.com/2013/02/us-household-formation-has-stabilized.html

[bearishgurl]

[quote=Scarlett]What segments of the sellers “demographic” have changed so dramatically? I mean, comparing to a more normal housing market. I am curious why is the inventory bottom low. It seems to me the prices have recovered quite a bit from the “bottom”, we’ve worked our way through most of the short sales and foreclosures – I think. Are that many more people still underwater? Are the banks holding on to the foreclosures “tsunami”?

Is the low inventory not as bad compared to normal market because even though at any given point not many houses are on the market, they go in escrow within days, compared to weeks in a more normal market?[/quote]

Scarlett, I’m not trying to be a pest, but I’m surmising from your earlier post on this thread:

[quote]Hello SDR, How about the North County area – Carlsbad, San Marcos, Encinitas? Is that market so crazy as well? Now that I have a job in Carlsbad we’re thinking of getting a house up there in the general area. I like those neighborhoods. Our limit is 600K and a cursory look on sdlookup yielded less than a dozen listings total (4 bdr SFH). But if it’s that crazy and have to offer above the LP and compete with cash offers…we’d rather rent some more than deal with that.

Thanks![/quote]

…that you and Rhett haven’t bought a home in SD yet?

I seem to remember that you posted as early as 2008 that you were looking for one to buy and several of us here tried to assist you in-depth as to your questions on financing, properties and areas on multiple threads here over the years.

http://piggington.com/what_is_the_catch_with_the_fha_loans

[bearishgurl]

[quote=livinincali]… Most of the sales in the past 3-4 years are all cash investors (30-40%), FHA/VA (30-40)%, and then traditional 20% down loans (maybe 20ish%)…[/quote]

livinincali, I think the “buying pool” in SD County in the last four years was a little stronger than you make it out to be here. I agree with the ~40% cash-buyer part, but do not agree that they were all “investors.” A percentage of this category of buyers – I’ll take a stab at it and say 8% (or 20% of cash purch) paid all cash for a personal residence.

With the other two categories, I think the answer lies somewhere in the middle. I personally know a few people who purchased a residence in SD County in the last four years and they put 25-80% down. Not everyone wants an 80% mortgage. A lot of people who know they will just work a few more years take out a 15 yr mortgage which will yield only as much MID tax writeoff for their current and projected taxable income as they know they will need in the coming years and not a penny more. For a lot of these people, that magic number is somewhere between a $5K and $12K annual interest writeoff. Beyond that size of mortgage, they’re just throwing money away on interest. At the time of retirement from their W-2 job, they typically plan to pay their mortgage balance off and remain in the property or sell their residence and move elsewhere.

So my rough (educated) guess is that the SD County buyer pool in the last ~4 years is comprised of 40% all-cash purchasers, 30% FHA/VA purchasers and 30% conventional purchasers of which 25% (83% of conv purch) put 20-80% down and 5% (17% of conv purch) put <20% down and used PMI.

[bearishgurl]

[quote=SD Realtor]…The only real mystery is why the lack of inventory.[/quote]

I don’t see any “mystery” here. Prospective sellers who hung on during the millenium boom, have equity and didn’t participate in the cash-out/HELOC party during the millenium boom have no doubt improved their properties over the years. Unless they purchased before 1997, a lot of them STILL can’t recover ANY of their cost of the improvements they made with their own money if they sold now. This is true in many micro-markets in SD County. It is not yet time for many homeowners in this category to sell unless their property is located in a “hot” zip code (where they can possibly now get up to 20% over asking price, possibly countering in a multiple-bid situation).

Many of the millenium-boom-era purchasers and owners who took “cash out” during this era and who still own their residences still cannot recover all of the cost of improvements or “cash-out” portion they took out of the property (some of which was no doubt used for improvements to said property), pay a RE commission and their portion of closing costs and still be “above water” at closing. If the market still seems to be rising and they are able to continue with their mtg payments (likely “modified” to lower monthly payments by now), they feel they can wait for a “better day” to sell.

In the “hot” areas, many prospective sellers may still have minor children in school since “schools” (and nothing else) seem to be the sole reason why these areas currently have a “hot” market and the sole reason for these prospective sellers’ purchase of the property in the first place.

And lastly, prospective sellers who have annual property taxes of less than $1000 are thinking twice about what their taxes would be if they bought another CA property which was NOT in a county participating in assessment transfers pursuant to Prop 60 (if they haven’t already taken this benefit). OR these same owners may just want to leave their unencumbered, low-taxed CA real property to their heirs, whether they currently occupy it or not. As well they should as long as the law allows this.

What say Piggs? If you had plans to move in the next 1-3 years, would you sell your home now … or wait? And if you would wait, how long would you wait to list it?

[bearishgurl]

I don’t know if SD County currently has more “buyer demand” than normal. Non-resident people who wanted to retire here always did if they could afford to buy a home here.

As far as new household formations, I don’t see that here, but it may be happening in areas I’m not too familiar with. New Gen Y college graduates, even if SD natives are all aware that they can make more money in LA and SF in their chosen fields. I’ve seen not only my kid(s) but many of their HS classmates flee the county for college to never return, except for holiday visits. Many friends, neighbors and former co-worker’s children left CA long ago (either before or after college) and are raising their own children in other states (where they were offered employment). I’m not sure that the SD County HS graduate or college graduate “resident-retention-rate” is that great. Even though SD has a well-paying high-tech sector, other industries, especially state and local government and FIRE industry jobs pay up to 40% less here than for an identical position elsewhere in CA.

I think the typical buyer pool in SD County is more “well-heeled” than those buyers emanating from “new household formations” as most in this group are renters.

I think the vast bulk of SD County buyers of personal residences are comprised of households with W-2 incomes over $150,000 (whether already a resident or a “transplant,” these are the buyers using PM mortgages), former SD residents/natives returning to live near family (some using PM mortgages of all levels), out-of-county residents moving here (or moving back here) to retire (using all cash and poss small PM mortgages) and out-of-state residents and foreign nationals buying vacation homes (all-cash buyers).

Then, there is the investor-buyer cohort, which I believe is about 32% of all buyers (the vast majority paying all-cash).

No charts or published facts to go on, all just my own opinions.

[all]

[quote=bearishgurl]
Then, there is the investor-buyer cohort, which I believe is about 32% of all buyers (the vast majority paying all-cash).

No charts or published facts to go on, all just my own opinions.[/quote]

It’s ok to be exact while having no data to back results – the study shows that 89% of all study results are made up anyways.

[bearishgurl]

[quote=all]It’s ok to be exact while having no data to back results – the study shows that 89% of all study results are made up anyways.[/quote]

I figured as much, all.

I’ve just been around long enough to understand how things work around here :=]

[SD Realtor]

The new normal is waiving your appraisal contingency. Seeing that much more. I am sure it is temporary until we get through this leg up.

[SK in CV]

[quote=SD Realtor]The new normal is waiving your appraisal contingency. Seeing that much more. I am sure it is temporary until we get through this leg up.[/quote]

So what happens when the property doesn’t appraise? Prospective buyer loses deposit? Is that happening much?

[SD Realtor]

All I can say is out of the past 8 properties my clients have bid on, 6 of them had counters that came back with a removal of the appraisal contingency. The seller also will move up the inspection contingency to 10 days knowing full well it is hard, but not impossible, to get an appraisal completed in the 10 days. This prevents the buyer from saying he will remove the appraisal contingency when in reality he has no intention to do so. In most of those same counters, the seller jacks up the good faith deposit to 3% as well.

Yes if the property does not appraise you the buyer must cover the shortfall with cash or back out. If you say you are backing due to the property not appraising when you waived that contingency in the RPA then yes you lose your deposit. If you back out and say you are doing so for other reasons but have not removed those other contingencies yet then you will not lose your deposit.

Hard for appraisers right now because the leg up is so steep that there are not enough reliable comps to justify the new prices. Soon there will be but and we are getting more solds to help them bridge the price gap. In the meantime sellers do this sort of stuff.

As for the property not appraising in the cases I have seen the buyer is covering the shortfall with a higher downpayment.

[CA renter]

Yep, the crazies are back in the housing market. IMHO, anyone waiving inspection or appraisal contingencies is a fool unless they are getting a steep discount.

I think all of this is going to end very badly. Hopefully, we won’t be asked to bail out this batch of fools…but I have my doubts.

[sym]

Is there any data on how many sfr’s are rental properties in San Diego? This is not quite scientific, but observing my circle of friends I can say about 80% of the folks who purchased a move-up house in the last few years converted their old house to rental.

[SD Realtor]

Don’t know the numbers however my advice to anyone moving up would be to do just what those 80% have done if you can swing it.

[bearishgurl]

I want to clarify that I didn’t “read too much” into the (scanty) stats provided by foreclosureforum.com when posting above.

Because I was following about 45 NOD’s in my local area from 2010 forward for almost two years, I realized only two of them ever went to trustees sale. After checking MLS aggregators and just intermittently watching the properties in person, I came to the conclusion that about eight of them sold short (more could have done so without puttting the property on the MLS – I didn’t check ARCC sales).

The majority of borrowers who had NOD’s filed from 2007 forward never got a Notice of Sale filed. And the ones that did had up to 12 postponements. So all of those thousands of remaining NOD’s filed were not acted upon by the lenders and a (good) portion of them (don’t know the percentage) were not sold short or taken back with a deed-in-lieu. The only thing to deduct from this study is that the trustor previously in default either still resides there or has tenants or relatives that do.

My guess is a portion of delinquent borrowers did not want to sell short and further ruin their credit so cooperated with a mod when it was offered to them.

[The-Shoveler]

I don’t think we will see another crash in the housing market unless there is another economic catastrophe (not caused by housing this time).

Which actually I think there is a fair chance of occurring, but the fed will do “EVERYTHING IN ITS POWER TO PREVENT” such a thing from occurring in the near future (Because it “the Gov” cannot afford another one right now).

Interesting times, the game is afoot (just look at Japan).

[kev374]

best to stay out of this market as it’s a mania right now and it is very dangerous to get caught up in these kinds of manias.

I saw a listing on Thursday, called the Realtor, he told me I needed to put in an offer for 15% over asking by Saturday and I can see the house from the outside only. WTF? Are these people crazy?

So, this house was sold on Saturday for 100% full cash at 20% over asking by someone who did not even care to see the inside…per the Realtor. Oh, and there were 45 bids on the property and it was priced at $250 sqft in La Habra, CA.

[bearishgurl]

[quote=kev374]best to stay out of this market as it’s a mania right now and it is very dangerous to get caught up in these kinds of manias.

I saw a listing on Thursday, called the Realtor, he told me I needed to put in an offer for 15% over asking by Saturday and I can see the house from the outside only. WTF? Are these people crazy?

So, this house was sold on Saturday for 100% full cash at 20% over asking by someone who did not even care to see the inside…per the Realtor. Oh, and there were 45 bids on the property and it was priced at $250 sqft in La Habra, CA.[/quote]

Hi again, kev! Just me again.

What does this “mania” tell you? Do you think a principal residence for yourself (and possibly your family) is going to get any cheaper in the OC in the coming years?

Uhhh, you DO realize that you can sort out the “inside” of the above listing with your inspector if your offer should be accepted with an inspection contingency, right??

What exactly are you waiting for to happen before you feel compelled to place an offer, kev?

[kev374]

[quote=bearishgurl]
What does this “mania” tell you? Do you think a principal residence for yourself (and possibly your family) is going to get any cheaper in the OC in the coming years?[/quote]

Tells me that it is a speculative mania and history tells us those always end very badly.

Yes, I believe there is a speculative bubble and it will pop. Unfortunately there are so many artificial parameters right now propping up the market, those can’t last forever…the higher the market goes the bigger the crash.

I will only believe in a recovery if wages grow and unemployment falls significantly. Without these developments the real estate market recovery is all smoke and mirrors.

Let me ask YOU – why is the speculative sentiment that prices will keep rising now any different from 2000-2006? At that time people like you were also saying the same exact thing – that prices will keep rising ad infinitum. People like you were proved very wrong in the last bust, why should this time be any different?

[CA renter]

Could not agree more, Kev. This is not a “normal” market, no matter how many times we hear otherwise.

Good luck!

[SD Realtor]

Really, I have not heard anyone use the term “normal” to describe this market.

[(former)FormerSanDiegan]

[quote=kev374]

Let me ask YOU – why is the speculative sentiment that prices will keep rising now any different from 2000-2006? At that time people like you were also saying the same exact thing – that prices will keep rising ad infinitum. People like you were proved very wrong in the last bust, why should this time be any different?[/quote]

This wasn’t directed at me, but there is a big difference.

In 2005/2006 the Price to income ratio in San Diego was at an all-time high of about 14. ( C-S price divided by per capita income).

As of 2011 (Last time Rich updated the chart) that ratio was at an all-time low. Today it is maybe 10-15 % above those all time lows, but below historical norms.

The primary lesson that made Piggington was looking at those fundamental indicators :

– House price to rent ratio
– Monthly mortgage payment to rent ratio
– Mortgage payment as percentage of income
– Price to Income

These are what really matter. It is dangerous to assume that recent price appreciation is either indicative of future increases or indicative of a speculative bubble without looking at the underlying fundamentals, such as the ratios listed above.

[SK in CV]

[quote=FormerSanDiegan]

This wasn’t directed at me, but there is a big difference.

In 2005/2006 the Price to income ratio in San Diego was at an all-time high of about 14. ( C-S price divided by per capita income).

As of 2011 (Last time Rich updated the chart) that ratio was at an all-time low. Today it is maybe 10-15 % above those all time lows, but below historical norms.

The primary lesson that made Piggington was looking at those fundamental indicators :

– House price to rent ratio
– Monthly mortgage payment to rent ratio
– Mortgage payment as percentage of income
– Price to Income

These are what really matter. It is dangerous to assume that recent price appreciation is either indicative of future increases or indicative of a speculative bubble without looking at the underlying fundamentals, such as the ratios listed above.[/quote]

Very nice job. That’s all.

[bearishgurl]

[quote=SK in CV][quote=FormerSanDiegan]

This wasn’t directed at me, but there is a big difference.

In 2005/2006 the Price to income ratio in San Diego was at an all-time high of about 14. ( C-S price divided by per capita income).

As of 2011 (Last time Rich updated the chart) that ratio was at an all-time low. Today it is maybe 10-15 % above those all time lows, but below historical norms.

The primary lesson that made Piggington was looking at those fundamental indicators :

– House price to rent ratio
– Monthly mortgage payment to rent ratio
– Mortgage payment as percentage of income
– Price to Income

These are what really matter. It is dangerous to assume that recent price appreciation is either indicative of future increases or indicative of a speculative bubble without looking at the underlying fundamentals, such as the ratios listed above.[/quote]

Very nice job. That’s all.[/quote]

Yes, thank you, FSD.

[kev374]

the phrase “this time is different” is the signature chant of a bubble. I have heard this in every single boom/bust cycle in the past. You can believe whatever you wish, I and many others have different opinions and we shall agree to disagree!

[jpinpb]

kev374 – I wish Rich had a “Like” button. I have been cursorily watching houses in 92117 and I am blown away. Very, very low inventory. Many places selling w/in days at much higher than asking price. I am scratching my head.

One in particular. I went to the open house. It was an oooold and outdated place. Trust sale. The realtor was talking to people, telling them he had 4 offers, one was by investors. I was skeptical, but walked around the house. Needed so much work. Walked outside. The investors were out there discussing how they were going to tear the place down, put subterranean parking, etc. etc.

It was listed for 499k. It sold for 662k 2856 Harford. Yes, the view was great and great potential. But how much is it going to cost to remove the old house and build a new one? We’ve got to be looking at, conservatively, about 400k or so?

Then the carrying costs while this gets accomplished and constructed. And they have to make a profit. This is not La Jolla. No matter how you slice it, it’s Clairemont. Is someone going to spend more than half a million dollars for a place in Clairemont?

IMO, this smells like a bubble. What worries me is that Clairemont is an older community, we’re talking a lot of seniors in my area. When they pass on or get put into homes, etc, there’s going to be a lot of places coming on the market. These kids aren’t going to hold on to them. They got their own houses they got to pay for, probably in 4S or Poway, Carlsbad, wherever. They’ve got kids in the good school district. They’re not going to move to Clairemont and they may not want to hassle w/rentals. Get their money while they can.

It’s going to be interesting to see how this plays out.

[outtamojo]

[quote=FormerSanDiegan][quote=kev374]

Let me ask YOU – why is the speculative sentiment that prices will keep rising now any different from 2000-2006? At that time people like you were also saying the same exact thing – that prices will keep rising ad infinitum. People like you were proved very wrong in the last bust, why should this time be any different?[/quote]

This wasn’t directed at me, but there is a big difference.

In 2005/2006 the Price to income ratio in San Diego was at an all-time high of about 14. ( C-S price divided by per capita income).

As of 2011 (Last time Rich updated the chart) that ratio was at an all-time low. Today it is maybe 10-15 % above those all time lows, but below historical norms.

The primary lesson that made Piggington was looking at those fundamental indicators :

– House price to rent ratio
– Monthly mortgage payment to rent ratio
– Mortgage payment as percentage of income
– Price to Income

These are what really matter. It is dangerous to assume that recent price appreciation is either indicative of future increases or indicative of a speculative bubble without looking at the underlying fundamentals, such as the ratios listed above.[/quote]

FormerSanDiegan gives the best free advice on the ‘net, time and again.

[bearishgurl]

[quote=kev374]…Let me ask YOU – why is the speculative sentiment that prices will keep rising now any different from 2000-2006? At that time people like you were also saying the same exact thing – that prices will keep rising ad infinitum. People like you were proved very wrong in the last bust, why should this time be any different?[/quote]

Actually, kev, when “people” were buying a painted-over-but-completely-dryrotted ~60 yo 1500 sf house with stuck sash windows, a broken wall heater and an unpermitted room addition down the street from me for $590K, I thought the market was nuts but wasn’t really paying attention at that time as to WHY it was nuts. It wasn’t until I found out from neighbors (after foreclosure of same property less than two years after its $590K purchase) that these buyers had occupations of landscaper and hotel housekeeper that I did some investigating of my own by viewing the trust deed that was foreclosed on. It was then that I realized that “creative financing” (exotic and/or usurious) was the sole driver of the unrealistic high housing prices I was seeing.

People like me are among the most pragmatic you will ever find, kev. This pragmatic nuts-and-bolts type has got a message for you. Since you (apparently) missed the excellent-RE-buying-opportunity train of the last few years (for whatever reason), you should now try to hitch a ride by crawling on the caboose at its next stop and holding on after the train leaves the station 🙂 Since you (apparently) are a day late and a dollar short, I would suggest you try to work out a deal on a OC house ASAP, condition be damned.

After closing, open up a 6-mos-0% interest account at Home Depot.

You need to make agressive offers ASAP, ESPECIALLY if you need to live in the urban OC. Unlike the SD burbs, most of these smallish cities are self-contained, extremely convenient and close to many well-paying jobs. The all-cash buyers you are seeing (sight-unseen or whatEV have likely all known this their entire lives … HELLO?). I don’t care if these ‘hoods are circa 1953 or 1961. Get over it. They’re not going to get any cheaper.

It’s different this time, kev. Why?? Because there is no comparison between the all-cash and <=80% LTV buyers of today and the zero-down-fog-a-mirror-get-a-loan(s) buyers so prevalent between 2004 and 2006. They are completely different animals. Buyers today aren't in danger of having to sell in a "down market," due to the fact that they used little or no leverage to purchase. You can't fix this. It is what it is. OR, you can rent into oblivion and continue to lament weekly here over how much properties that interest you have recently sold for to see if anyone will lament with you. It won't matter if you find a dozen or more Piggs here to hold your hand. The fact remains that YOU (and your family?) STILL won't have a house. Your choice.

[livinincali]

[quote=The-Shoveler]I don’t think we will see another crash in the housing market unless there is another economic catastrophe (not caused by housing this time).

Which actually I think there is a fair chance of occurring, but the fed will do “EVERYTHING IN ITS POWER TO PREVENT” such a thing from occurring in the near future (Because it “the Gov” cannot afford another one right now).

Interesting times, the game is afoot (just look at Japan).[/quote]

I think there’s way too much faith in the fed. When has the fed ever been successful at stopping the decline once the bubble popped. The fed creates the bubble but they can’t seem to do anything useful once it blows up. Their solution is create another bubble as soon as possible.

This time the bubble isn’t in housing per say but when the bubble pops it will bring housing down with it. That’s why you’ll probably see strength in the housing market for a bit of time after the bubble pops. People will initially feel smart for hiding out in real estate. It will be 6-12 months down the road after the bubble that we’ll see a liquidation phase in housing and I don’t know how bad it will be. I suppose it could be somewhat muted depending on the availability of financing and how leveraged people are. The low end will probably suffer the most in that scenario.

[spdrun]

livinincali —

My accepted short sale offer in CA is at a price that allows an ~8% cap at current rents. If rents fall 15%, I’ll still be slightly positive cash flow, and if prices fall 25%, I’ll just see it as one bad mofo of a buying opportunity.

As far as my offers in NJ, the market is near bottom with a bit of a spring bounce here. If I’m buying at close to bottom from the LAST recession, what makes you think that prices will fall any further?

[kev374]

See the documentary “Mind over Money” (search on Youtube) – it’s quite a fascinating look at how the bubble/bust cycle is in our psychology and how there is vehement denial during the bubble phase and then the eventual bust – it’s a pattern that’s repeated again and again and again due to irrational behavior exhibited in the rush to make money – the sentiment is everyone is onboard this train making money, I should join too. But in reality there is a saturation point at which the whole thing comes out of gear and falls apart.

[no_such_reality]

[quote=spdrun]livinincali —

My accepted short sale offer in CA is at a price that allows an ~8% cap at current rents. If rents fall 15%, I’ll still be slightly positive cash flow, and if prices fall 25%, I’ll just see it as one bad mofo of a buying opportunity.

As far as my offers in NJ, the market is near bottom with a bit of a spring bounce here. If I’m buying at close to bottom from the LAST recession, what makes you think that prices will fall any further?[/quote]

I’m curious what you think is going to depress rents 15% in Cali? Double digit unemployment for 4 years hasn’t stopped rent increases.

[bearishgurl]

[quote]….It was listed for 499k. It sold for 662k 2856 Harford. Yes, the view was great and great potential….[/quote]

That’s a nice house, jp. It’s technically in or on the border of “Bay Ho” but has a Clairemont zip code.

$662K is a lot for this size house, but it is a wonderful representation of a mid-century view home …. very rare on the market, I’m certain! I would buy it to live in and wouldn’t do too much to it except replace the carpeting and laminate with hardwood floors (or rip it out … maybe they’re already there in some rooms) and the replace the aluminum slider windows with low-e vinyl. The kitchen, paneling and even draperies and shutters are all fine (drapes may need cleaning).

It appears there may be a bit of room to widen the 1.5 car garage (typical for that era) but this would involve a roofline (partial truss) change.

By subterranean parking, are you saying the investors who made an offer on it want to dig the lot out further and put a SFR on top of the new garage … or build multi-family housing? I didn’t think 2-4 units was allowed up there.

Thanks for sharing, jp. That’s my kind of house!

[bearishgurl]

WOW, a 9700 sf lot??

Of course, the Hartford listing is worth more than $499K. Not sure about $662K, but I haven’t looked at the comps up there in awhile. I have friends who sold a one-story house which was bigger (1800+ sf?) up there but it had a smaller lot. This was in 2011, I think. I’m pretty sure they got between $610K and $630K.

This house, lot and view combination in the middle of SD is a very rare listing to come on the market at this price point as it appears to only need “cosmetic work.”

[kev374]

You should realize that there have been interesting articles in the press lately about investor enthusiasm dying down slowly. Do you know that rents are actually deflating now because there are simply too many rentals and it’s expected to get worse. Think about it logically, when rental supply increases rents WILL go down, this in turn causes investments to generate lower returns.

When investments generate lower returns the urge to cash out accumulated equity increases and people start dumping their properties. This dumping starts a deflationary cycle leading to even more dumping and even lower prices.

http://finance.fortune.cnn.com/2013/04/05/housing-rentals-investors/

http://www.cbsnews.com/8301-505145_162-57577568/investors-cooling-on-housing-market/

A mania cannot be sustained forever, this is common sense…eventually things cool off, some investors will get out in time and make a killing at the expense other POOR SOULS who thought paying half a million dollars for a dump in a blue collar neighborhood was a good idea!!!

The only shame is that these POOR SOULS will go crying to the government about how they are suffering because they are now losing their homes. They did not bother to use a thing called “Reason” that would’ve told them that an entry level house in a middle class neighborhood with teachers and accountants living in it should not cost half a million dollars!

[bearishgurl]

[quote=kev374]You should realize that there have been interesting articles in the press lately about investor enthusiasm dying down slowly. Do you know that rents are actually deflating now because there are simply too many rentals and it’s expected to get worse. Think about it logically, when rental supply increases rents WILL go down, this in turn causes investments to generate lower returns.

When investments generate lower returns the urge to cash out accumulated equity increases and people start dumping their properties. This dumping starts a deflationary cycle leading to even more dumping and even lower prices.

http://finance.fortune.cnn.com/2013/04/05/housing-rentals-investors/

http://www.cbsnews.com/8301-505145_162-57577568/investors-cooling-on-housing-market/

A mania cannot be sustained forever, this is common sense…eventually things cool off, some investors will get out in time and make a killing at the expense other POOR SOULS who thought paying half a million dollars for a dump in a blue collar neighborhood was a good idea!!!

The only shame is that these POOR SOULS will go crying to the government about how they are suffering because they are now losing their homes. They did not bother to use a thing called “Reason” that would’ve told them that an entry level house in a middle class neighborhood with teachers and accountants living in it should not cost half a million dollars![/quote]

Well, then, kev. I guess you are expecting to pay less rent in the near and far future (since it appears you will still be renting).

Your post would be more accurate if it was referring to Oklahoma City, OK … but alas, in San Diego or Orange County, CA …. not so much.

Carry on . . . .

[SK in CV]

[quote=kev374]You should realize that there have been interesting articles in the press lately about investor enthusiasm dying down slowly. Do you know that rents are actually deflating now because there are simply too many rentals and it’s expected to get worse. Think about it logically, when rental supply increases rents WILL go down, this in turn causes investments to generate lower returns.

When investments generate lower returns the urge to cash out accumulated equity increases and people start dumping their properties. This dumping starts a deflationary cycle leading to even more dumping and even lower prices.

http://finance.fortune.cnn.com/2013/04/05/housing-rentals-investors/

http://www.cbsnews.com/8301-505145_162-57577568/investors-cooling-on-housing-market/

A mania cannot be sustained forever, this is common sense…eventually things cool off, some investors will get out in time and make a killing at the expense other POOR SOULS who thought paying half a million dollars for a dump in a blue collar neighborhood was a good idea!!!

The only shame is that these POOR SOULS will go crying to the government about how they are suffering because they are now losing their homes. They did not bother to use a thing called “Reason” that would’ve told them that an entry level house in a middle class neighborhood with teachers and accountants living in it should not cost half a million dollars![/quote]

You have to be really careful when looking at national real estate trends and trying to squeeze the numbers in ANY locality.

San Diego, in particular, is NOT the rest of the country. Both the timing, velocity and degree of volatility is likely to be different. Others here are in a much better position than I to predict how different and which direction, but I guarantee you that SD will not match national trends in any of those variables.

My guess is that investors, particularly the large PE investors, never did much buying in SD with an eye on cash flow, particularly in the above median price ranges. (Recent data reflecting the cash-only buyer median prices paid in So Cal bear this out.) So I think it’s unlikely that SD area rents for above median SFR will suffer sharply, and even less likely to have any adverse affect on prices by liquidating their assets.

[CA renter]

[quote=kev374]You should realize that there have been interesting articles in the press lately about investor enthusiasm dying down slowly. Do you know that rents are actually deflating now because there are simply too many rentals and it’s expected to get worse. Think about it logically, when rental supply increases rents WILL go down, this in turn causes investments to generate lower returns.

When investments generate lower returns the urge to cash out accumulated equity increases and people start dumping their properties. This dumping starts a deflationary cycle leading to even more dumping and even lower prices.

http://finance.fortune.cnn.com/2013/04/05/housing-rentals-investors/

http://www.cbsnews.com/8301-505145_162-57577568/investors-cooling-on-housing-market/

A mania cannot be sustained forever, this is common sense…eventually things cool off, some investors will get out in time and make a killing at the expense other POOR SOULS who thought paying half a million dollars for a dump in a blue collar neighborhood was a good idea!!!

The only shame is that these POOR SOULS will go crying to the government about how they are suffering because they are now losing their homes. They did not bother to use a thing called “Reason” that would’ve told them that an entry level house in a middle class neighborhood with teachers and accountants living in it should not cost half a million dollars![/quote]

Stay strong, Kev. As you probably already know, these “all cash” buyers are often leveraged. Just because they aren’t using purchase mortgages, don’t be fooled into thinking they are actually using 100% unleveraged funds. Not only that, but they will have redemption requests at some point. If they are leveraged on top of that, look out.

IMHO, we are definitely in bubble territory because people are buying because they think prices will be higher in the future. Whether they are funds or individual investors or owner-occupants, the frenzy seen today is because people believe there will be a large pool of greater fools who will be willing to pay more for these houses down the road. I’m very skeptical about this.

We received a post card today about a house that was on the market around the corner from us. It backs up to a VERY busy 50+MPH road (~6+ lanes) and has fewer bedrooms/baths than our house. It sold for ~$100K more than we bought our house for 18 months ago (our house has a larger lot, much better location, and more beds/baths), and they received MULTIPLE offers in one week! This is NOT a normal market!

[SK in CV]

[quote=CA renter]
Stay strong, Kev. As you probably already know, these “all cash” buyers are often leveraged. Just because they aren’t using purchase mortgages, don’t be fooled into thinking they are actually using 100% unleveraged funds. Not only that, but they will have redemption requests at some point. If they are leveraged on top of that, look out.

[/quote]

Any evidence of this? I’ve only seen a few private equity prospectuses, and those that I’ve seen do have provisions allowing leverage, but there’s no indication it’s in their plans, and their structure makes borrowing highly problematic. And they have no redemption provisions. Sales of the properties lay entirely at the discretion of management. I don’t doubt it’s possible, I’m just curious why you think they’re leveraged and what the structure of that leverage is.

[CA renter]

[quote=SK in CV][quote=CA renter]
Stay strong, Kev. As you probably already know, these “all cash” buyers are often leveraged. Just because they aren’t using purchase mortgages, don’t be fooled into thinking they are actually using 100% unleveraged funds. Not only that, but they will have redemption requests at some point. If they are leveraged on top of that, look out.

[/quote]

Any evidence of this? I’ve only seen a few private equity prospectuses, and those that I’ve seen do have provisions allowing leverage, but there’s no indication it’s in their plans, and their structure makes borrowing highly problematic. And they have no redemption provisions. Sales of the properties lay entirely at the discretion of management. I don’t doubt it’s possible, I’m just curious why you think they’re leveraged and what the structure of that leverage is.[/quote]

Posted about it on this thread:

February 2013 Resale Data Rodeo (Graphs Only)

[quote=CA renter]Some good stuff on how the large investment funds are planning to take their profits while leaving the idiots to suffer the impending losses:

http://news.firedoglake.com/2012/08/26/the-worst-idea-in-the-world-securitizing-rental-revenue/

[You can be sure that the pension funds will inevitably be caught up in this one, too…and the public sector employees will be blamed for Wall Street’s mess, once again.]

The scale of the problem [think redemption and disposition time!]:

http://news.firedoglake.com/2012/11/15/hedge-fund-blackstone-buying-100-million-in-foreclosed-homes-every-week/

Understand that these investments will generally act like bonds relative to interest rates. As rates rise, the value of these securities will likely go down since rents (the ROI) are fairly fixed. I also seriously doubt that these funds have properly figured in the real costs of maintaining and managing these rentals over the years, so their assumed rates of return are probably unrealistically optimistic as this would increase the value of the securities that these fund managers and initial investors are trying to cash out of (totally IMHO).

—————

Private equity firm Blackstone Group borrowed $2 billion from banks to invest in single-family homes it intends to rent out. Someone thinks the housing rally will continue! The Wall Street Journal reports that “Blackstone’s agreement with Deutsche Bank, Bank of America, Credit Suisse, and other lenders more than tripled the size of its previous loan, to $2.08 billion from $600 million, a person familiar with the deal said. Deutsche, which had arranged Blackstone’s initial accord, will remain the lead bank on the bigger loan. Private-equity firms such as Colony Capital LLC and real-estate investment firm Waypoint Real Estate Group LLC have snapped up thousands of previously foreclosed homes in recent months to rent out as part of a strategy to take advantage of the recovery of the housing market.” It appears that leverage is alive and well. “Blackstone has said it is buying single-family homes at the rate of $100 million a week, a faster pace than any other buyer. The firm now owns around 20,000 homes, say people familiar with the matter. The firm expects to spend more than $4 billion on homes, and could seek additional loans related to fund these purchases, these people said.”

http://www.mortgagenewsdaily.com/channels/pipelinepress/03142013-blackstone-compliance-mba.aspx

Sometimes, “all-cash” is not really all cash.

—————-

A possible canary in the coal mine…are PE investors getting wise? [Note: this includes commercial, too.]

Private-Equity Property Fundraising at Lowest Since 2003

http://www.preqin.com/item/private-equity-property-fundraising-at-lowest-since-2003/102/6449%5B/quote%5D

[SK in CV]

Other than a reference to the same $2 billion borrowed by Blackstone a couple times, I don’t see much in there about debt. And that’s not debt secured by the individual properties. Blackstone has the wherewithal to repay $2B, so I don’t really think that can be called traditional leverage, at least not in the sense that it can create a distressed market.

[kev374]

Shiller nailed it in this latest video:

http://finance.yahoo.com/blogs/daily-ticker/future-housing-market-great-unknown-robert-shiller-133256983.html

In the past housing was viewed simply as a place to live in, now the they way houses are viewed has completely changed. Houses are now a “speculative asset” as Shiller called it, speculated on like stocks from professional investors to armchair investors alike. The result? Huge amount of volatility with spectacular booms and busts.

[kev374]

more bubble talk, this time by the Chicago Tribune:

http://www.chicagotribune.com/classified/realestate/sc-cons-0425-umberger-20130425,0,3011197.column

it’s amazing that even the press who are usually cheerleaders are skeptical of this sudden rise to the roof in prices!

[CA renter]

[quote=SK in CV]Other than a reference to the same $2 billion borrowed by Blackstone a couple times, I don’t see much in there about debt. And that’s not debt secured by the individual properties. Blackstone has the wherewithal to repay $2B, so I don’t really think that can be called traditional leverage, at least not in the sense that it can create a distressed market.[/quote]

SK,

I’m including stuff I’ve collected over the past few weeks regarding this. Some related, some not as much. This is just a small sampling of what I’ve been reading, but the underlying theme throughout is that these funds are using leverage, and that they have a 5-7 year disposition plan.

From everything I’ve seen, it looks like the norm for these RE funds is 60%-75% leverage. Of course, we don’t really know unless they are publicly traded, and most of them aren’t. Blackstone is purported to be the largest institutional purchaser of residential RE, and Colony is just behind them.

The following are snippets and links:

———————————————

Both institutional and retail investors have been smitten with mortgage REITs and the 10%+ yields available from AGNC, Two Harbors Investment (Ticker: TWO), Armour Residential REIT (Ticker: ARR), Western Asset Mortgage Capital (Ticker: WMC), and others. Yes, these have had a remarkable run in terms of share appreciation and total return from dividends, but it’s important to remember how this has occurred. The Fed has purchased well over $1 trillion of agency MBS thus far, and this figure is only growing with the QE3 plan of an additional $40 billion per month.
As stocks continued to deliver strong returns, mortgage REITs took advantage of this opportunity by selling additional stock. Because some of these companies are compensated by assets under management (AUM), they had every incentive to keep selling shares to grow the REIT as large as possible. The chart below from J.P. Morgan shows mortgage REIT MBS holdings over the past 10 years in a hockey stick–shaped chart. Does this look healthy?

http://blogs.cfainstitute.org/insideinvesting/2012/10/22/mortgage-reits-does-doubling-the-leverage-make-them-a-good-investment/

——————

“From the very beginning, we’ve thought of this as eventually becoming a public company,” says Justin Chang, a principal with Colony and acting CEO of Colony American Homes, the private-equity firm’s new rental REIT. “This is a big opportunity, the beginning of an asset class.”
In its early stages, Colony’s effort, which started buying up distressed single-family homes about four months ago, looks fairly similar to the strategy pursued by Beazer and other single-family rental investors.
Colony says it has raised about $750 million so far, mainly from institutional investors, and has bought about 600 homes s in Arizona, Nevada, California and Colorado. The company expects that by the end of June, it will have bought more than 1,000 distressed homes, and it plans to expand by the end of the summer to Texas, Georgia and Florida. An IPO could happen in the next 12 to 24 months.
The stats are similar, too. Colony is underwriting their purchases of distressed homes for rental at cap rates of about 7-9%. What that means is each house Colony American Homes buys is expected to produce an annual rental income equal to about 7% of the house’s purchase price. That is slightly higher than the 5-6% range of yields that most apartment operators in strong apartment markets are making today.
Assuming that rents and home values will both increase about 3-5% per year going forward, and as Colony is able to put some leverage on the homes it buys, the company figures that it can give returns of 15% or higher to its investors. These are similar to the types of projections from other single-family rental investor groups, including Beazer.

http://blogs.wsj.com/developments/2012/05/16/single-family-rentals-keep-pulling-in-investors/

———————-

Investors have always played a role in the housing market, but their presence was often small. Currently, cash buyers—largely investors—make up about 32% of sales nationally, according to the National Association of Realtors. In Southern California, a favorite target for investors, absentee buyers accounted for 31.4% of purchases last month, up from an average of less than 17% between 2000 and 2010, according to DataQuick MDA, a real-estate research firm.
While some firms have focused only on Sunbelt markets with newer housing stock, others are branching out. American Residential Properties Inc., which began amassing hundreds of homes in Phoenix four years ago, earlier this month bought 93 homes in Chicago’s southern suburbs, bringing its total there to around 300. On Friday, the company said it planned to raise $300 million in an initial public offering, according to a regulatory filing.

http://finance.yahoo.com/news/investors-pile-housing-time-landlords-030000004.html

——————-

Instead of raising a huge fund from institutions with the discretion to invest as he chooses, he now raises capital deal by individual deal from an array of deep-pocketed private investors. He has also given up on borrowing heavily and using short-term floating-rate debt to pay for at least 80 percent of a building’s cost — a strategy that got Broadway and an army of other real estate investors into trouble a few years ago.
Mr. Lawlor says he now obtains long-term, fixed-rate financing for just 60 percent of an asset’s total cost, including renovations.

http://www.nytimes.com/2013/03/27/realestate/commercial/scott-lawlor-adjusts-his-real-estate-investment-ambitions.html?pagewanted=all&_r=0

——————

The private equity real estate market placed a concentrated focus on fund management fees as a result of the economic crisis.
Fund managers face pressure to structure fees consistently with industry norms. Deal terms that were standard before the crisis have been challenged and modified as the sector moves into the post-crisis era.
The pendulum has definitely moved for many managers, although there is some evidence that it’s starting to swing back toward pre-crisis levels.
We’ve found that since the economic crisis, the average preferred return for real estate funds is 9%.

Leverage (maximum) Averaging in the 65%–75% range Averaging in the 60%–70% range

http://www.ey.com/GL/en/Industries/Real-Estate/Trends-facing-real-estate-private-equity—Changes-to-fund-structuring-terms

——————-

Leverage and its effect on performance measurement is the third big difference between
REITs and direct real estate. REITs, on average, carry leverage of roughly 50%, but it varies
across REITs and over time. By comparison, direct investors in property can decide exactly
how much leverage to assume and when; 65–75% of market value is typically available
on high-quality properties. For real estate open-end funds, leverage is more constrained
hovering currently around 25% for core funds. REIT returns incorporate the effect of
leverage. Direct real estate performance as portrayed in the commonly cited NCREIF-
NPI index does not; NCREIF returns as cited above are reported on an unlevered basis.
Investors in REITs have no control over the leverage assumed by REIT management; in
contrast, investors in direct real estate explicitly control leverage. Direct real estate fund
investors are somewhat in the middle in that they can select funds that make leverage
limits explicit in their investment strategies or not.

https://www.tiaa-cref.org/public/pdf/tcam_real_estate_and_reits_2012.pdf

————————-

[For smaller investors who want to “cash-out” the equity after making an all-cash purchase, Fannie Mae made it easier for them. IMHO, this wouldn’t have been done if people (“investors”) weren’t lobbying for it. -CAR]

Last month Fannie Mae made a little change in the rules for all-cash buyers to apply for mortgages. I don’t recall a press release, and I’m quite sure I’m on their mailing list. But there it is, “Announcement SEL-2011-5,” a “Selling Guide Update:”
Currently, Fannie Mae requires a minimum of six months to elapse between the time a borrower purchases a home and subsequently applies for a cash-out refinance.
The Selling Guide has been updated to allow a cash-out refinance within six months of a purchase transaction when no financing was obtained for the purchase transaction.

http://www.cnbc.com/id/43668757

[SK in CV]

CAR…what I questioned was this:

As you probably already know, these “all cash” buyers are often leveraged. Just because they aren’t using purchase mortgages, don’t be fooled into thinking they are actually using 100% unleveraged funds.

With the exception of the previously addressed Blackstone debt, I see nothing in any of those articles that would support what you said. Some are using cash, (a much lower % btw, than has been thrown around by some on this board) and some are financing their transactions. But none are claiming (pretending?) to be all cash buyers, and subsequently financing the properties. At least if they are, it hasn’t been reported.

And I’ve seen nothing anywhere about redemption rights of investors.

[CA renter]

SK,

I’ve never said that investors were pretending or claiming to be all-cash buyers. I’m referring to the never-ending stories we hear about “all cash” buyers from the MSM, NAR, etc. Yes, without looking at how these investors are coming by the money on the front end, it looks like there are a lot of 100% all-cash buyers. I’m saying that many of the buyers who *appear* to be using 100% cash (to those who are observing from the outside) are actually using debt…though the ratios that are being bandied about publicly do not look worrisome if taken at face value. Just because they are not using traditional purchase mortgages does NOT mean that they are unleveraged, either before or after the purchases.

Regarding the investors who are using cash up front, and then cash-out refinancing after the sale, I haven’t been able to find any specific information, which leads me to believe that this might not be followed in any specific way. But if this wasn’t on anyone’s agenda, why do you think FNMA made this change (it’s extremely rare for a change like this to be made without some pretty heavy lobbying)? It would be interesting if a realtor or someone with access to the records could cull through some of the all-cash purchases from 3-12 months ago to see if/how many have been mortgaged after the fact. I would be willing to help and/or pay someone a reasonable fee to find this information.

Not sure what you’re looking for WRT redemptions, but most of the funds that I’m hearing and reading about plan to sell in 5-7 years. Additionally, I’m hearing that many investors are looking for ways to make these more liquid (often by securitizing them in some way) so that they can get out earlier than they’ve been able to in the past.

Which of these things (or both?/something else?) do you want me to link to?

[all]

A friend of mine just bought a house in north county, primary residence, all cash. He plans to refinance with 50-60% LTV loan.

[bearishgurl]

[quote=all]A friend of mine just bought a house in north county, primary residence, all cash. He plans to refinance with 50-60% LTV loan.[/quote]

I’ve seen this a couple of times as well, craptcha. In these cases, they were native San Diegans (imminent retirees) intending on returning to their “home turf” to “retire.” They used all cash to purchase in order to get their offers accepted and then took out 30-50% mortgages after COE (while still *employed* in another locale and purporting to refi an “investment property” in SD) in order to have a small MID for a few years until SS kicks in. At that time, they intend to retire the mortgage.

Buyers in this category only want as much MID that they can use on their tax returns to shield income and not a penny more. If that number is $4K or $7K per year in interest, so be it.

[SK in CV]

BG, what would be the circumstances where someone still employed could only use $4K to $7K or mortgage interest? Are you saying it’s in addition to their other home in their previous locale, and the total debt would otherwise exceed $1.1M?

[bearishgurl]

[quote=SK in CV]BG, what would be the circumstances where someone still employed could only use $4K to $7K or mortgage interest? Are you saying it’s in addition to their other home in their previous locale, and the total debt would otherwise exceed $1.1M?[/quote]

The homebuyer is leaving their job soon but hasn’t yet applied for “retirement” so his/her employer doesn’t know their plans. But they want to qualify for a mtg for their “retirement home” while still employed. In recent years, it has been too hard for a borrower to qualify for a prime mtg on excellent terms while “cash-rich” but not able to document enough income to qualify for even for a ~$200K mtg. Thus, it is better to attempt to qualify while *still employed* but just take out enough mortgage to generate a MID to shield taxable retirement income and investment income (usually lower than income while still working).

Native San Diegans residing in other counties/states who wanted to return to SD weren’t and aren’t stupid. When they saw and heard of properties in their “home turf” being listed at prices often at or below the land value, many jumped in with offers, all the while knowing they had to be “all cash” in order to “win” the bidding wars. They figured they could “refi” to a mtg they were comfortable with in “retirement” AFTER COE and successfully did so.

[SK in CV]

[quote=bearishgurl][quote=SK in CV]BG, what would be the circumstances where someone still employed could only use $4K to $7K or mortgage interest? Are you saying it’s in addition to their other home in their previous locale, and the total debt would otherwise exceed $1.1M?[/quote]

The homebuyer is leaving their job soon but hasn’t yet applied for “retirement” so his/her employer doesn’t know their plans. But they want to qualify for a mtg for their “retirement home” while still employed. In recent years, it has been too hard for a borrower to qualify for a prime mtg on excellent terms while “cash-rich” but not able to document enough income to qualify for even for a ~$200K mtg. Thus, it is better to attempt to qualify while *still employed* but just take out enough mortgage to generate a MID to shield taxable retirement income and investment income (usually lower than income while still working).

Native San Diegans residing in other counties/states who wanted to return to SD weren’t and aren’t stupid. When they saw and heard of properties in their “home turf” being listed at prices often at or below the land value, many jumped in with offers, all the while knowing they had to be “all cash” in order to “win” the bidding wars. They figured they could “refi” to a mtg they were comfortable with in “retirement” AFTER COE and successfully did so.[/quote]

So it actually has nothing at all to do with being able to use $4K to $7K in mortgage interest, only the amount of the mortgage they’re comfortable with?

If they’re seriously “cash rich” and collecting SS, then they would have no problem qualifying for a $200K mortgage. They’d need income of less than $35K a year.

[bearishgurl]

[quote=SK in CV]So it actually has nothing at all to do with being able to use $4K to $7K in mortgage interest, only the amount of the mortgage they’re comfortable with?

If they’re seriously “cash rich” and collecting SS, then they would have no problem qualifying for a $200K mortgage. They’d need income of less than $35K a year.[/quote]

You might be surprised, SK. Mortgage lenders today are REALLY hung up on “monthly income” for qualification purposes. It’s not that easy to get a “prime” mortgage when one’s “monthly income” is unverifiable or they are primarily living off passive income … ESPECIALLY if they haven’t yet taken their pension or all of the pensions they are or will be entitled to take.

Lenders don’t seem to care about available assets as much as W-2 income because a borrower is free to deploy those assets as he wishes during his mortgage term. He/she could essentially take out a high-ratio mortgage with a very low documentable income (~$35K, as you stated) and then immediately thereafter “spend down” his/her assets for any number of reasons.

On an ARM or 30-due-in-5 (or 7) loan, yes, a portfolio lender will consider assets in lieu of monthly income. But “Frannie” lenders will not nor will VA/FHA lenders.

For instance, I know a few veterans nearing retirement who have not yet used their VA funding entitlement. They could feasibly use it to buy a retirement home but would need to do so while they can still qualify for it conventionally (through W-2 income). A LOT of the over-50 crowd falls in the category of having assets but insufficient income to qualify for a mortgage today.

In answer to your first question, it has to do with exactly how much MID they will need to shield income in retirement (for a set amount of time … usually 3-7 yrs). After that period, the borrower plans to retire their mortgage entirely.

[SK in CV]

BG, I just helped a friend get his retirement stuff in shape, which included refinancing his house. He’s retired, he was self-employed until December. (It would have been only mildly easier if he had done this before he retired.

His house in Mission Hills is worth around $1M.

He owes $300K on it, and just wants to refinance to a lower rate.

He has about $14K a year in SS benefits.

He has about $1M in cash/marketable securities.

He has an IRA with $450K in it that he doesn’t plan on touching until he has to.

We moved most of his cash/marketable securities into blue chip stocks yielding an average of 2.75%/yr, (which was NOT hard to do) so total income of $27,500. Just provided his monthly broker statement that showed the annual income, and they accepted it, irrespective of what his interest and dividends were in the prior year.

Total verifiable income of about $41K.

He got a 30 yr, fixed rate loan with payments of about $875 a month. Closed the loan in less than 30 days beginning to end with Quicken Loans.

[bearishgurl]

[quote=SK in CV]BG, I just helped a friend get his retirement stuff in shape, which included refinancing his house. He’s retired, he was self-employed until December. (It would have been only mildly easier if he had done this before he retired.

His house in Mission Hills is worth around $1M.

He owes $300K on it, and just wants to refinance to a lower rate.

He has about $14K a year in SS benefits.

He has about $1M in cash/marketable securities.

He has an IRA with $450K in it that he doesn’t plan on touching until he has to.

We moved most of his cash/marketable securities into blue chip stocks yielding an average of 2.75%/yr, (which was NOT hard to do) so total income of $27,500. Just provided his monthly broker statement that showed the annual income, and they accepted it, irrespective of what his interest and dividends were in the prior year.

Total verifiable income of about $41K.

He got a 30 yr, fixed rate loan with payments of about $875 a month. Closed the loan in less than 30 days beginning to end with Quicken Loans.[/quote]

That’s awesome to hear, SK. You’re a good “friend.” Luckily, for him, your friend was only seeking a 30% LTV mtg in a prime area of SD. Do you think he still would have “qualified” for the $875 (P&I only?) mtg had he been seeking a >=40% LTV mortgage in a 400-500K area?

I think there are many more in this group who don’t own homes worth $1M and still owe 40% or more of their home’s current appraised value. Hopefully, values will go even higher in the coming months to help these folks refinance or sell and recover all of their investment (purchase price plus cost of improvements).

[SK in CV]

[quote=bearishgurl]
That’s awesome to hear, SK. You’re a good “friend.” Luckily, for him, your friend was only seeking a 30% LTV mtg in a prime area of SD. Do you think he still would have “qualified” for the $875 (P&I only?) mtg had he been seeking a >=40% LTV mortgage in a 400-500K area?

[/quote]

Absolutely. This was a loan program that required 75% LTV or less. Incidental that it was in a prime area, it just had to appraise. If he could have somehow got his 20 troy pounds of gold into the bank, he would have qualified for a 15 year loan. (BTW, banks cannot, by law, have different lending standards based on things like “prime” v. “not prime” areas.)

[CA renter]

[quote=SK in CV][quote=bearishgurl][quote=SK in CV]BG, what would be the circumstances where someone still employed could only use $4K to $7K or mortgage interest? Are you saying it’s in addition to their other home in their previous locale, and the total debt would otherwise exceed $1.1M?[/quote]

The homebuyer is leaving their job soon but hasn’t yet applied for “retirement” so his/her employer doesn’t know their plans. But they want to qualify for a mtg for their “retirement home” while still employed. In recent years, it has been too hard for a borrower to qualify for a prime mtg on excellent terms while “cash-rich” but not able to document enough income to qualify for even for a ~$200K mtg. Thus, it is better to attempt to qualify while *still employed* but just take out enough mortgage to generate a MID to shield taxable retirement income and investment income (usually lower than income while still working).

Native San Diegans residing in other counties/states who wanted to return to SD weren’t and aren’t stupid. When they saw and heard of properties in their “home turf” being listed at prices often at or below the land value, many jumped in with offers, all the while knowing they had to be “all cash” in order to “win” the bidding wars. They figured they could “refi” to a mtg they were comfortable with in “retirement” AFTER COE and successfully did so.[/quote]

So it actually has nothing at all to do with being able to use $4K to $7K in mortgage interest, only the amount of the mortgage they’re comfortable with?

If they’re seriously “cash rich” and collecting SS, then they would have no problem qualifying for a $200K mortgage. They’d need income of less than $35K a year.[/quote]

I would argue that they are taking out a mortgage in order to preserve cash because they think they can earn more on that money than what they are paying in interest.

Contrary to the realtor rhetoric about the “benefits” of MID, it never makes sense to spend a dollar in order to save 30-40 cents (and that’s if you’re earning a pretty significant income) on taxes.

[SK in CV]

[quote=CA renter]
I would argue that they are taking out a mortgage in order to preserve cash because they think they can earn more on that money than what they are paying in interest.

Contrary to the realtor rhetoric about the “benefits” of MID, it never makes sense to spend a dollar in order to save 30-40 cents (and that’s if you’re earning a pretty significant income) on taxes.[/quote]

I agree entirely. The argument that an interest deduction is “needed” for taxes is stupid. It was stupid back when the top tax rate was 70%. Using the leverage to increase overall return might make sense for some people.

[bearishgurl]

[quote=SK in CV][quote=CA renter]
I would argue that they are taking out a mortgage in order to preserve cash because they think they can earn more on that money than what they are paying in interest.

Contrary to the realtor rhetoric about the “benefits” of MID, it never makes sense to spend a dollar in order to save 30-40 cents (and that’s if you’re earning a pretty significant income) on taxes.[/quote]

I agree entirely. The argument that an interest deduction is “needed” for taxes is stupid. It was stupid back when the top tax rate was 70%. Using the leverage to increase overall return might make sense for some people.[/quote]

I also agree, SK, but when retirees are just starting out and haven’t yet signed up for MC, they’re not yet sure exactly how much it will cost them to live every month. Many feel is better to have more cash cushion until they figure out the lay of the land, including how much their monthly health premium is going to cost going forward and how many hours they may still need to work.

After the dust settles (MC, SS and possibly other pensions kick in) and the retiree knows if they are going to move to or stay in a particular locale, it is easier to make decisions regarding refinancing or mortgage payoff.

IOW, taking out or keeping a small mortgage keeps the retiree’s options open.

Your “friend” is already 65 or older and is a bit more “well-heeled” than the average retiree (asset-wise). In addition, those behind him won’t get to collect their full SS until age 66-67.

[SK in CV]

[quote=bearishgurl]
I also agree, SK, but when retirees are just starting out and haven’t yet signed up for MC, they’re not yet sure exactly how much it will cost them to live every month. Many feel is better to have more cash cushion until they figure out the lay of the land, including how much their monthly health premium is going to cost going forward and how many hours they may still need to work.

After the dust settles (MC, SS and possibly other pensions kick in) and the retiree knows if they are going to move to or stay in a particular locale, it is easier to make decisions regarding refinancing or mortgage payoff.

IOW, taking out or keeping a small mortgage keeps the retiree’s options open.

Your “friend” is already 65 or older and is a bit more “well-heeled” than the average retiree (asset-wise). In addition, those behind him won’t get to collect their full SS until age 66-67.[/quote]

Concur. Flexibility is a GREAT reason to have a mortgage even if a retiree has the wherewithal to pay it off, recognizing that it does come with a price. In some cases it’s well worth it.

My friend is almost 63, and he is better off than most. He bought right, saved a lot (despite making almost nothing on his investments), doesn’t live beyond his means, and always borrowed appropriately. Now he’s just looking for hobbies.

[bearishgurl]

[quote=SK in CV]Concur. Flexibility is a GREAT reason to have a mortgage even if a retiree has the wherewithal to pay it off, recognizing that it does come with a price. In some cases it’s well worth it.

My friend is almost 63, and he is better off than most. He bought right, saved a lot (despite making almost nothing on his investments), doesn’t live beyond his means, and always borrowed appropriately. Now he’s just looking for hobbies.[/quote]

Oh, I “assumed” he was over 65 because you said he was collecting SS. If he is 62, he either took a partial SS early or will wait until age 66 to take it.

Or, perhaps I understood wrong and you meant “projected SS.”

Yes, there are a LOT of boomers like him who have always lived modestly within their means. It doesn’t matter if they own their residence in MH or ChulaV. What their houses are “worth” today has no bearing on what they actually paid for them.

[SK in CV]

[quote=bearishgurl]Oh, I “assumed” he was over 65 because you said he was collecting SS. If he is 62, he either took a partial SS early or will wait until age 66 to take it.

[/quote]

He opted to take his benefits at 62.

[earlyretirement]

[quote=SK in CV][quote=CA renter]
I would argue that they are taking out a mortgage in order to preserve cash because they think they can earn more on that money than what they are paying in interest.

Contrary to the realtor rhetoric about the “benefits” of MID, it never makes sense to spend a dollar in order to save 30-40 cents (and that’s if you’re earning a pretty significant income) on taxes.[/quote]

I agree entirely. The argument that an interest deduction is “needed” for taxes is stupid. It was stupid back when the top tax rate was 70%. Using the leverage to increase overall return might make sense for some people.[/quote]

I totally agree CAR and SK in CV! I’ve never seen so many people in the USA overjoyed at paying interest payments to the bank so they can take the tax “benefit”. I get overjoyed RECEIVING interest but I do NOT get overjoyed PAYING it out to someone else over multiple years/decades.

[SD Realtor]

I see more people overjoyed that the bank will loan hundreds of thousands of dollars at 3 or 3.5% as opposed to the write off.

[CA renter]

[quote=SD Realtor]I see more people overjoyed that the bank will loan hundreds of thousands of dollars at 3 or 3.5% as opposed to the write off.[/quote]

Most definitely.

[earlyretirement]

[quote=SD Realtor]I see more people overjoyed that the bank will loan hundreds of thousands of dollars at 3 or 3.5% as opposed to the write off.[/quote]

Oh no doubt SD Realtor. For savers like me it’s HORRIBLY painful seeing rates so low but definitely for the masses it’s true BLISS seeing rates this low.

Unfortunately for savers/retirees we’re probably stuck in this low interest rate environment for several more years to come.

[jpinpb]

BG – I am into some of the mid-century design. The interior of this home had no character worth preserving. The floor plan sucked, too.

The investors were planning on tearing down the place. I don’t think they were planning on a multi-family, as it is not zoned for that.

The 9700 sf lot is SLOPING in back. Unless you’re putting the house on stilts, much is not us able. You could maybe terrace a garden.

Whatever the investors build, it’s not going to be cheap. I said 400k to be conservative, but I can see them easily spent half a million to build something, on top of the 662 they spent and then sell higher to make a profit.

As I said, it will be interesting to see how it goes down.

[bearishgurl]

[quote=jpinpb]BG – I am into some of the mid-century design. The interior of this home had no character worth preserving. The floor plan sucked, too.

The investors were planning on tearing down the place. I don’t think they were planning on a multi-family, as it is not zoned for that.

The 9700 sf lot is SLOPING in back. Unless you’re putting the house on stilts, much is not us able. You could maybe terrace a garden.

Whatever the investors build, it’s not going to be cheap. I said 400k to be conservative, but I can see them easily spent half a million to build something, on top of the 662 they spent and then sell higher to make a profit.

As I said, it will be interesting to see how it goes down.[/quote]

jp, apparently these “investors” (or whoever is buying the property) believe that it is “worth” $662K in its current condition. Even if the lot is 1/3 sloping, the slope STILL affords privacy. And you can’t take away the sit-down view. Views like this were worth ~$100K in the nineties but seem to be “worth” much more now. This property is by no means a “typical Clairemont house” nor does it have a “typical” lot. It’s particular location is atypical and therefore “special” to a subset of buyers.

Here is a similar property with a sloped (corner) lot (with alley access) in a slightly better location than your Bay Ho listing which we discussed here back on 1/28/13:

http://piggington.com/perfectly_preserved_early_70s_high_end_interior

http://www.sdlookup.com/Pictures-120050000

The above link is not ’70’s (as the OP stated) but actually ’50’s era (“mid-century”). It appears to be currently off the market but has not yet closed. Here is a current (downhill but updated) closed comp on the same side of the street with a 7600 sf flat lot which sold in 11/12 for $829K ($441 sf):

http://www.sdlookup.com/MLS-120032457-1214_Moana_Dr_San_Diego_CA_92107

Yes, it will be interesting to see how much your Bay Ho listing eventually sells for if it is actually knocked down, a spec home is built there and it is subsequently flipped.

[bearishgurl]

SK, I think kev was shopping in the central (urban) OC market. He/she was distressed about the low inventory there, as well as the asking prices and the speed at which properties (in what he termed mediocre or “working class” areas) flew off the shelves.

The inventory situation is likely just as bad (if not worse) in the OC than it is in SD County. We addressed kev’s complaints in the thread below, showing that there WERE available listings to consider in the OC but it seemed he wasn’t interested in what was actually available in his/her price range.

http://piggington.com/tons_of_inventory_in_san_diego_none_in_orange_county

When a “disconnect” like this occurs in a prospective buyer’s mind, they likely won’t buy at all. This is a common problem in CA coastal counties and the sole reason why a lot of practitioners (agents/brokers) won’t work with buyers, even if well-qualified. They feel they will just end up working 100+ hours (usually running around burning gas previewing and showing) for nothing …. and they would be right.

I note that kev374 signed up here over 6.5 years ago. One has to wonder if he/she was ever a SoCal homeowner in that time frame and/or how long he has been “shopping” for a residence in that time frame.

[SK in CV]

You can quit picking on him. You’ve made your point.

[bearishgurl]

I wanted to add that I think the portfolio lenders have it right for this group. Many borrowers nearing retirement or who have taken early or deferred retirement can VERY EASILY pay PITI equal to 50% of their monthly income into oblivion. This group just doesn’t have the level of monthly expenses as do parents who are raising minor children. In addition, save for home maintenance and repairs, the majority of this group doesn’t really need anything. They already have everything they need and aren’t going to upgrade to all the latest gadgets/appliancess/vehicles, etc because they don’t care about such things. So they SHOULD be held to a different standard for mortgage – qualification purposes, especially if their credit is excellent.

[jpinpb]

BG – the investors are IMO gambling on the property. 662k + tear it down and rebuild as they intend to do, conservatively estimating costs to be between 400 to 500k. We are over a million dollars and haven’t even added in their profit they want to make on it.

The link for 1276 Moana is in 92107. Ocean Beach generally pulls in higher dollars than Clairemont/Bay Park.

[jpinpb]

I guess the main difference now is there is more skin in the game. http://www.latimes.com/business/realestate/la-fi-subprime-mortgage-20130427,0,6498564.story. People will be losing what they put down.

[bearishgurl]

[quote=jpinpb]I guess the main difference now is there is more skin in the game. http://www.latimes.com/business/realestate/la-fi-subprime-mortgage-20130427,0,6498564.story. People will be losing what they put down.[/quote]

…Today’s high-risk lenders differ from those during the housing boom in key ways. These lenders say the new subprime mortgages are actually old school — the kind of loans made in the 1980s and 1990s. In other words, a borrower’s collateral matters, down payments matter, income and ability to pay matter.

Subprime lenders care because they are holding the loans on their books rather than selling them to investors. They hope a private securities market for subprime loans, also destroyed in the meltdown, will reemerge soon.

For now, the subprime and alt-A business remains small, maybe $8 billion total, estimated Inside Mortgage Finance Editor Guy D. Cecala. That’s less than half of 1% of the $1.8 trillion in U.S. home loans last year.

Among those hoping to reverse the trend is the Polands’ lender, Citadel Servicing Corp. of Orange County. Chief Executive Daniel L. Perl said he has tested the water by making a few dozen subprime loans since late 2011, mostly with his own money rather than investment capital…

Yes, jp, and also these loans are kept in the lender’s portfolio. These types of loans have always been around and used to be referred to as “C paper.” They are nothing but short-term fixes for people that need them for purchase money, whether to enable a bidder to present a cashier’s check on the courthouse steps, or, as these buyers did, buy a personal residence with leverage while having bad credit, clean it up and improve it a little and have it re-appraised a few months down the road, where, hopefully, as they are rebuilding their credit, they will be able to obtain a mortgage on better terms (with Citadel, they had to put 35% down [borrowed from their IRA’s] and are paying a 10.9% interest rate).

Since there is no GSE involved, the gubment won’t be bailing out this mortgage bank if there is a default … in this case, Citadel of Orange County.

Back in the eighties, there were SEVERAL small lenders in town that specialized in C/D paper and each had a passel of investors who were only too happy to invest with them for 15%++ dividends. Some of these lenders no doubt ended up with properties, but in that era, they were happy about it, since the lender’s principal was ALWAYS a licensed RE broker who had numerous contacts in the trade and thus was able to foreclose upon and market the properties they took back himself in a timely manner.

In this article, I wonder why the Poland’s chose Temecula on the basis of appreciation needed to get out of their bridge loan within the year, since there are undoubtedly areas in SD, LA and Orange Counties which will appraise faster and higher than Temecula in the coming year. (This foreclosed-upon couple took this loan out strictly on the basis of believing what they buy would appreciate fast and they could get out their “subprime mtg” within the year).

The only reason I can think of why they would choose Temecula on the basis of appreciation is the lower price point and thus the lower amount of downpayment required (since they had to put 35% down).

[Author]

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