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CA renter.
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July 11, 2013 at 10:25 AM #763454July 11, 2013 at 11:36 AM #763457
sdduuuude
Participant[quote=bearishgurl]… I don’t think boats getting lifted in La Jolla helps homeowners in Lemon Grove one iota …[/quote]
You took the phrase “a rising tide lifts all boats” and twisted it to suggest the original poster was saying “anything that lifts one boat lifts all others”
Please think a bit before you embark on one of your endless posts.
July 11, 2013 at 12:52 PM #763458moneymaker
ParticipantWhat lifted my boat was a house 3 doors down selling for 10k less than I paid even though my place is 50% bigger house and a bigger lot, thanks to that I was able to refi out of PMI and can now see a comfortable retirement with no mortgage on the horizon. I think that falls under the realtor mantra of “location,location,location”. I f the house had been more than a mile away it may not have had as big an effect on the appraisal.
July 11, 2013 at 11:11 PM #763464CA renter
ParticipantSK,
Delinquencies are down because prices are up. This has enabled people to sell or refinance at lower rates. Prices are up because interest rates have been kept at artificially low levels (for far too long!), and because investors have been chasing yield all around the globe…and have found U.S. housing to be one of the better bets in a world where yields do not match risks.
Inventory has been kept off the market for quite a few years now, and investors who’ve had access to “back-room foreclosure deals” have made agreements with lenders to keep properties off the market a specified period of time, giving the artificial impression that inventories are low/declining via “natural” means. These homes/statistics are not visible to the general public.
Various investors have been piling into the RE market for the past few years, many of them entering a market in which they have no experience, and in which there is a LOT of existing and future competition (all those other investors doing the same thing). In many areas, investor demand has made up 30-50% of the housing demand. More investors than ever have been getting into the “buy to rent” market, and they are over-estimating returns on these rentals for a variety of reasons. Just like I’ve warned in the past, those rosy returns are not coming in many cases. The smart money has already been moving to the sidelines.
So…if you remove ~20%++ of the demand from the market, and add to that the fact that many of these funds will be rushing to put homes on the market once the market turns down, (let’s not forget that interest rates are still at/near historical lows, and more likely to go up than down over the long term), it would seem that the risks to housing prices would be greater than many are anticipating.
——While this report only includes data through 2011, it shows that incomes and health insurance coverage have been declining since 2008, while poverty rates have been increasing. Yes, some segments of our society are doing better than they were in 2008, but they are few and far between.
http://www.census.gov/prod/2012pubs/p60-243.pdf
Again, the unemployment data doesn’t tell the whole story because it does not include discouraged workers (see links in my post above), those who’ve dropped out via disability (an all-time high, I believe), and those who are under employed in various ways (part time vs. full time, or working in positions well below what they were doing in the past).
We are eyeball deep in an even larger credit/asset price bubble, and nobody seems to see it. Just because we’ve largely shifted it from private to public debt does not mean that we are in a better place today, IMHO. Of course, it just makes it easier to blame the public sector workers for the crisis created by the financial sector…but that’s a whole ‘nother issue.
July 12, 2013 at 8:07 AM #763469SK in CV
Participant[quote=CA renter]SK,
Delinquencies are down because prices are up. This has enabled people to sell or refinance at lower rates. Prices are up because interest rates have been kept at artificially low levels (for far too long!), and because investors have been chasing yield all around the globe…and have found U.S. housing to be one of the better bets in a world where yields do not match risks.
Inventory has been kept off the market for quite a few years now, and investors who’ve had access to “back-room foreclosure deals” have made agreements with lenders to keep properties off the market a specified period of time, giving the artificial impression that inventories are low/declining via “natural” means. These homes/statistics are not visible to the general public.
Various investors have been piling into the RE market for the past few years, many of them entering a market in which they have no experience, and in which there is a LOT of existing and future competition (all those other investors doing the same thing). In many areas, investor demand has made up 30-50% of the housing demand. More investors than ever have been getting into the “buy to rent” market, and they are over-estimating returns on these rentals for a variety of reasons. Just like I’ve warned in the past, those rosy returns are not coming in many cases. The smart money has already been moving to the sidelines.
So…if you remove ~20%++ of the demand from the market, and add to that the fact that many of these funds will be rushing to put homes on the market once the market turns down, (let’s not forget that interest rates are still at/near historical lows, and more likely to go up than down over the long term), it would seem that the risks to housing prices would be greater than many are anticipating.
——[/quote]
I only read the part of your comment that I’ve quoted, because the rest didn’t seem to be the least bit pertinent to the discussion. (I’ll get to it later.)
The point of discussion is whether the market is at higher risk today than it was 4 or 5 years ago. Some of the things you describe are pretty accurate, though I’d take exception to your assertion that interest rates have been kept artificially low, and that’s somehow done something bad to the market.
Other parts of this comment are nothing more than conspiracy theory. Investors making back-room deals with lenders to keep inventory off the market and paying less than market prices would be a federal crime if the loans were owned by the GSE’s or federally chartered banks. A close friend did prison time for something similar in a deal with an RTC asset manager in the early 90’s. If you have any hard evidence it’s happened, I suspect the US attorney’s office would be interested in hearing about it.
And you kind of make your own two-sided argument with regards to investor influence. First they conspire keep properties off the market and buy at artificially low prices, and then they buy up all the properties on the market driving prices up. Either way, they have supplied capital to remove distressed assets from the equation.
If there ever was this “phantom inventory” you describe, eventually it would show up in the numbers of properties transferred. It hasn’t. It never existed. We’ve heard about it over and over again the last 5 years. Along with dire predictions that various dates will bring tidal waves of foreclosures as variable rate loans are reset.
Your description of the overall investor influence on the market sounds about right. But I don’t think it’s been a bad thing. As I said, it’s removed high risk capital from lenders and moved it to the private sector. And as much as I despise the economic influence of big banks, particularly of the TBTF variety, we need a healthy banking system. I think your predictions about what those investors will do with the properties remains to be seen. Most will not get the predicted returns, though I don’t suspect that any wholesale dumping of properties back on the market will occur. I would rather propose there will be both little incentive and too illiquid and inefficient a market for that to happen. (I expect more likely, the PE RE funds to develop a secondary market, where another round of smart money following less smart money will buy partnership interests at even deeper discounts.) I guess the key to the whole claim of higher risk today is centered on your prediction of mass dumping. Why and how do you think this will happen? And precisely what effect will it have on the market. Please show your work if it’s beyond speculation.
Interest rates that are charged on mortgages are real. My mortgage says right in the loan documents that my interest rate is below 4%. And that’s what I will pay until the loan is paid off. There is nothing artificial about that. You can argue that the market rates are manipulated. And you’d be right. Just as they’ve been manipulated at least since the mid-70’s, and somewhat similarly to how they’ve been manipulated since the Fed was established over 100 years ago. That’s part of the Fed’s job.
That’s not to say that all risk has been removed, it hasn’t. The general economic condition is still fragile at best, the recovery has been primarily for those at the top, and those at the bottom continue to be left behind. Monetary policy to stimulate improvement has all but been exhausted, and I doubt there will be much help from fiscal policy, as it’s frozen, both in the US and abroad, and “do less harm” is about as good as gets. Hopefully we’re at the end of the delta in public spending being a continued impediment to growth.
And back to the main discussion point, even if we disagree about some of the details on how the RE market got to where it is today, I’m still unclear on what evidence there is that the market is less healthy today that it was 4 or 5 years ago.
July 12, 2013 at 8:55 AM #763473FlyerInHi
GuestSK, good point on interest rates.
I have to admit that my understanding of the Fed was lacking but has much improved through reading. It’s their job to set interest rates as they have always done.
Therefore interest rates are neither artificial nor natural. In a fiat currency and a floating exchange rate environment, interest rates could be zero forever.
Mortgage rates may be historically low, but they are not artificially low.
July 12, 2013 at 11:38 AM #763477livinincali
Participant[quote=FlyerInHi]SK, good point on interest rates.
I have to admit that my understanding of the Fed was lacking but has much improved through reading. It’s their job to set interest rates as they have always done.
Therefore interest rates are neither artificial nor natural. In a fiat currency and a floating exchange rate environment, interest rates could be zero forever.
Mortgage rates may be historically low, but they are not artificially low.[/quote]
The fed primarily set the Federal Funds rate which is the overnight borrowing rate for big banks. They do not have the power to arbitrarily set us treasuries or MBS bonds rates although QE has been an attempt to bend the supply demand curve so that the price of those bonds goes up and the interest rates go down. The big bank business model is to borrow short and lend long and use the spread to pay their costs and make profits. You are somewhat limited in how low mortgage rates can go. 2-2.5% is probably as low as you could see a 30 year mortgage, although who knows what would happen if there was a severe supply constraint (nobody wanting to borrow anymore).
The biggest risk in my eyes is what really happens if we’ve hit the secular low in mortgage rates and are faced with a long term trend change where rates will generally rise rather than generally fall. We’ve had 30 years of down trend in rates and often we experienced severe economic problems when the rates have moved counter to that downward trend for any length of time. The logic in me says if we are faced with a world of generally rising rates all leveraged assets that are being purchased based on the carrying cost will fall in value over time. That would include houses, stocks, bonds, etc. because all assets experience some degree of leveraged speculation. Now we can obviously defy that logic for awhile and build a speculative bubble, but the math tends to win in the end.
If you haven’t lived in the world of rising rate and most of us haven’t then we might be in for a rude awakening when we take our previous experiences about how asset prices should function in our leveraged world and apply them to the future. In the 1930’s the debt bubble blew up and reset itself. We still haven’t seen that happen here yet. Japan hasn’t seen the debt bubble blow up but they have seen have 0 bound interest rates for a long time and asset prices in Japan have been flat at best. Why should we expect something different, although most of us probably need 5+% asset price inflation to make our retirement goals.
July 13, 2013 at 2:20 AM #763484ParticipantSK,
See here for off-market FHFA dispositions (including limitations on sales, holding durations, etc.):
http://www.fhfa.gov/Default.aspx?Page=360
And the “National Stabilization Program” and the “National Foreclosure Prevention and Foreclosure Task Force Response” info is here:
And Bank of America is not foreclosing on many homes:
“A disproportionate share of BofA mortgages in the 90+ days delinquent bucket — 62% — are there for more than three years. That’s biggest among Too Big to Fails.”
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This article pretty much sums up some of my concerns regarding all of the “investors” who’ve been entering the market in the past few years.
http://truth-out.org/news/item/15546-whose-housing-recovery
—————
The problem with the Fed keeping interest rates so low is that investors/speculators are forced to get into riskier and riskier assets in order to chase yield. This pushes the prices of these assets up well beyond what would be “reasonable” if the Fed were not engaging in ZIRP and QE. I would argue that risks are not being appropriately priced in…not by a long shot.
And I’m NOT saying that this housing “crash” will be worse than the last (not saying that it won’t be, either). Everything is connected, and the damage from this credit bubble might have even more dire consequences in areas other than housing.
July 13, 2013 at 7:55 AM #763486Participant[quote=CA renter]
The problem with the Fed keeping interest rates so low is that investors/speculators are forced to get into riskier and riskier assets in order to chase yield. This pushes the prices of these assets up well beyond what would be “reasonable” if the Fed were not engaging in ZIRP and QE. I would argue that risks are not being appropriately priced in…not by a long shot.And I’m NOT saying that this housing “crash” will be worse than the last (not saying that it won’t be, either). Everything is connected, and the damage from this credit bubble might have even more dire consequences in areas other than housing.[/quote]
At least now we’re past the faulty conclusion that there is not more risk in the market today than 4 or 5 years ago. But you’re still implying that there is a pending crash, which I don’t see happening with current conditions.
If I understand correctly, you think the cause for the looming crash is the investors suddenly dumping their properties on the market. Barring a life changing event (worse than the credit crisis of 2008) I don’t see a real world scenario where this is likely to happen. Let’s go through a few examples of the type of investors turned landlord that we have out there that might cause this crash:
Example 1: I’ll call this guy the Pig investor. He’s 30-45 years old, has a good paying job, maybe in tech, his family has owned rental properties before and he has a few extra bucks, so he scours the market to get a good deal that gives him a 7-8% cash on cash return with a 20% down payment. He dreams that it will be much higher, but he’s never been a landlord himself so he doesn’t really understand that shit happens. AC units break. There are uninsured water leaks. And his expenses are much higher than anticipated, but he got a good low interest rate so he can handle it, and unit is rented. He maintains a positive cash flow but nowhere near what he expected. As a result of market conditions, property values drop by 10-20%, but he still has equity because he bought below market. His unit is still rented at the expected rate, so his return on market equity is now in range he only dreamed of, just on a much lower equity. Barring a personal financial crisis, what is his incentive to dump the property?
Example 2: This is a real world example, a guy I met a few months ago. Very experienced RE investor, though mostly in the multi-unit residential and commercial markets. Net worth of about $250 million. He buys 400 homes for cash in 2011 and 2012 at prices 10-20% below today’s prices. Mostly SFH, but also bought the last 25 units in a new 150 unit condo complex for 1/3 of the 2008 asking price (coincidentally eliminating any chance of existing or new resident owners getting traditional financing with more than 50% of the units non-owner occupied). Takes him longer than expected to reach full occupancy, and now more than a year after he bought his last unit, his vacancy rate is still 10%. But since he has no debt, his cash flow is still huge, because on average, he only needs 2 months of market rent per year to pay all his expenses. If market prices fall even 40%, what other market conditions could change that would motivate him to dump his properties on the market?
Example 3: Private equity investor that’s bought thousands of homes across the country for cash. The money has been provided by investors who have invested based on prospectuses projecting 7-10% returns on their money. 100% of management responsibilities and control is maintained by the PE sponsor (think Black Rock). They’re lousy property managers compared to the first two examples, without the infrastructure in place, and their vacancy rate is as high as 30% for units owned more than 90 days. Cash flow doesn’t develop as projected, but it is still positive since there is no debt. Investors aren’t happy, but they have zero control. What are the market conditions that could develop that would motivate the mass sale of the units under management?
Maybe you have some other scenarios where there would be a mass liquidation by investors. Maybe you can identify some market condition in these examples that would lead to a mass liquidation by landlords. If so, I’d really like to know what they are.
July 13, 2013 at 8:31 AM #763488GuestLivin, what s scenario do you see rates doing up enough that would cause home prices to crash back to the 2009/2010 bottom?
July 13, 2013 at 11:57 AM #763491bearishgurl
ParticipantI think SK makes some good points here.
A 4th scenario he didn’t include are >59.5 yo “boomers” seeking yield on their spare cash lying around. Some are still working and others are semi-retired or fully retired and they often have access to one or more pensions. This cohort is attracted to “bread-and-butter” properties in neighborhoods they are already intimately familiar with which they can fix up to rent out and manage themselves. This buying cohort (male AND female) aren’t afraid of the hard work involved in readying a property to rent out, vetting an assortment of prospective tenants with wildly differing qualifications, possibly readying their propertie(s) to qualify for the Section 8 program and dealing with tenants on a weekly/monthly basis. Many in this group would prefer a tangible investment (housing) that everyone needs and that they have full control over as opposed to losing sleep over having too much exposure to the stock market lottery with zero time to recover from substantial losses. Even if this group of LL’s have 3-4 months vacancy per year (only likely if mismanaged or eviction becomes necessary, IMHO), they are still netting far more annual rental income than they could make from the same amount of money invested in safe CD’s and MM’s, for example. And they’re not paying PM companies for mgmt duties or paying for most repairs because they perform as much of these services as they can, themselves.
A “down market” or “crash” resulting from excess inventory can’t happen unless owners are forced to sell en masse. This only happens when would-be sellers are “distressed” and an all-cash buyer will never be in a position of distress unless they later take “cash out” in some way and cannot pay it back. In all four scenarios described here (SK’s 3 and my 4th), there is no emergency to sell, regardless of the direction mortgage interest rates take. These groups of recent investment RE owners have a commodity that everyone needs … housing … and from that commodity can derive income … even SOME income is better than that which current safe, passive investments offer. This income can be used to live off of, to reinvest or be used to pay dividends and earn a profit.
If “Black Rock” hasn’t yet gotten their PM process fine-tuned enough (totally expected) to not suffer from eviction costs or to successfully target and obtain appropriate tenants for their (wildly scattered) housing inventory and their investors aren’t happy with currently making just 3-6% on their investment (instead of ~7%), then so be it. They can’t make that in passive investments that they won’t lose sleep over.
July 13, 2013 at 4:04 PM #763492flyer
ParticipantInteresting analysis.
As some of you, I don’t see the “crash” scenario playing out under current conditions in the near future either. There are, perhaps, more inherent risks in real estate for those who are new to the game, vs. the risks for those of us who have been involved in commercial and residential investments for many years.
I have no doubt that there are extreme economic challenges coming our way as a country–“when” is the question. IMO, prudent positioning will be key to financial survival, if and when it all hits the fan. In the meantime–enjoy!
July 14, 2013 at 5:30 PM #763499ParticipantSK,
First, I want to make clear that I did not say that the housing portion of the coming crash/recession/depression would be worse than 2008. I do think that some other factors will make things worse for people and markets outside of housing…and housing will also become distressed, IMHO. This is more of a long-term issue, though; possibly happening over decades.
It is not the over-supply of housing that will cause the future house price decline, IMHO, but the reduced demand — particularly of those who are willing to pay current prices. If investors/speculators begin to think that the housing market isn’t really all they thought it would be, you could see a pullback in demand between 20-50%+ in some markets. And if traditional buyers see the slowdown, they will also not feel as compelled to pay the same prices that are seen today because of the incredibly hot market (thanks, in large part, to the Federal Reserve’s interest rate policies and price-setting mechanisms which affect prices/yields of all asset classes over time…and are being coordinated with central banks around the world).
Now, in addition to this possible (likely?) reduced demand, most funds who are investing in SFH real estate have disposition plans for these assets in 5-7 years. Not only that, but many of the current RE investment funds have multi-year lock-up periods. What happens when investors in these funds decide to redeem their funds? What if this coincides with time that the funds plan to sell off these properties? What happens if interest rates are higher and investment returns on lower than had been anticipated with these funds (which is what I’ve been saying for some time)? What if the economy *still* hasn’t picked up for Joe Sixpack when all of this comes about?
And then you have the “mom and pop” investors (your example #1, and BG’s example, for instance) who might be able to earn a decent/comparable yield on Treasuries or other “safe” investments, without all the hassles of managing rentals. What if their expenses are higher than anticipated (as often happens) and rents flatten or decline? How long do you think they will want to hold onto these homes if they are losing money every month, or if they could just cut their losses and invest in easier, safer assets instead?
Another article stating that the smart money is getting out, and that returns aren’t what they thought they would be:
July 14, 2013 at 6:22 PM #763501Participant[quote=CA renter]Now, in addition to this possible (likely?) reduced demand, most funds who are investing in SFH real estate have disposition plans for these assets in 5-7 years. Not only that, but many of the current RE investment funds have multi-year lock-up periods. What happens when investors in these funds decide to redeem their funds? What if this coincides with time that the funds plan to sell off these properties? What happens if interest rates are higher and investment returns on lower than had been anticipated with these funds (which is what I’ve been saying for some time)? What if the economy *still* hasn’t picked up for Joe Sixpack when all of this comes about?
[/quote]
Investors in these funds have no option to redeem their interests. They are at the mercy of the sponsors. If their returns are lower, then their returns are lower, there are no guaranteed returns. (At least not in any of the 1/2 a dozen prospectuses that I’ve seen.) If the economy hasn’t picked up in 5-7 years, then the investors probably made lousy investments. They’ll sell at market value, but they’re not fools. If they have sufficient inventory to materially affect any local market, then they’ll put them on the market slowly so that they get market prices without reducing the market prices. They have absolutely no incentive to do anything else.
July 14, 2013 at 6:31 PM #763502Participant[quote=CA renter]
It is not the over-supply of housing that will cause the future house price decline, IMHO, but the reduced demand — particularly of those who are willing to pay current prices. If investors/speculators begin to think that the housing market isn’t really all they thought it would be, you could see a pullback in demand between 20-50%+ in some markets. And if traditional buyers see the slowdown, they will also not feel as compelled to pay the same prices that are seen today because of the incredibly hot market (thanks, in large part, to the Federal Reserve’s interest rate policies and price-setting mechanisms which affect prices/yields of all asset classes over time…and are being coordinated with central banks around the world).[/quote]
The big investors are already out of most markets, and they have been for a few months. More in some markets. So far, resale numbers nationwide haven’t dropped significantly. June existing home sales is likely to be slightly lower than May and inventories only slightly higher. As I said here late last year, this summer is likely to show some moderation in the price gains over the last 18-24 months, and possibly even slight drops in some markets. Higher interest rates (which are likely to drop back 20-50% of the recent increases) are likely to put similar and additional downward pressure on prices. That said, demand will remain sufficient to support prices in most markets.
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