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April 23, 2013 at 5:14 PM #761592April 23, 2013 at 5:39 PM #761593
SK in CV
Participant[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.
April 23, 2013 at 6:07 PM #761594bearishgurl
ParticipantSK, 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.
April 23, 2013 at 6:13 PM #761595ParticipantYou can quit picking on him. You’ve made your point.
April 23, 2013 at 6:42 PM #761596jpinpb
ParticipantBG – 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.
April 23, 2013 at 11:14 PM #761599CA renter
Participant[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!
April 24, 2013 at 12:56 AM #761600outtamojo
Participant[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 IncomeThese 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.
April 24, 2013 at 4:26 AM #761601Participant[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.
April 24, 2013 at 8:15 AM #761604no_such_reality
Participant[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.
April 24, 2013 at 9:19 PM #761619Participant[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:
[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!]:
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).
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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.
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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
April 24, 2013 at 9:58 PM #761622ParticipantOther 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.
April 24, 2013 at 10:09 PM #761624kev374
ParticipantShiller nailed it in this latest video:
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.
April 25, 2013 at 9:15 PM #761650Participantmore 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!
April 25, 2013 at 9:53 PM #761653Participant[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:
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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?——————
“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/
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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
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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.——————
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
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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
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[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.April 25, 2013 at 11:00 PM #761656ParticipantCAR…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.
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