San Diego Inventory Sucks…

[scaredyclassic]

It’s not like the matrix because we have no body being maintained anywhere.

We ourselves are just a simulation.

I hope someone somewhere finds all this amusing.

Bastard!!!

[CA renter]

Because of the low interest rates (and the huge run-up in stocks and other asset classes), a lot of institutional investors have been getting into real estate over the past few years. Some markets are seeing 40%+ of their sales going to investors. That does not include the properties (the foreclosure tsunami) being sold to multi-billion dollar funds behind closed doors.

Some are flipping, but many are buying to rent for the short-medium term. It seems like most of them are planning to sell at a higher price “when the market gets better,” apparently missing the fact that the market is about as strong today as it was in 2004-2005.

These investors are finding a very strong rental market because of all the people who’ve been foreclosed on, but if the bulk of the foreclosures are behind us, this unusually high rental demand should taper off a bit.

Home prices are going up largely because of the investors (and the withholding of foreclosure inventory from the market), not because of true end consumer demand. With a few exceptions where job markets are extremely strong (Bay Area and some parts of San Diego, for instance), the vast majority of people are not in a better financial position today than they were in 2008.

Add to that all the talks of austerity, teetering Social Security and Medicare programs, increased pension contributions for public sector workers, severe cuts in private sector jobs that count on govt money in one way or another…and the picture gets even worse.

—————

“A Chronicle analysis of sales data compiled by San Diego research firm DataQuick showed that absentee buyers, who once bought about 10 percent of homes sold in the nine Bay Area counties, account for about a quarter of all purchases this year, more than doubling their share. Absentee buyers are defined as those who have property tax bills sent to a different address than the house they just bought.
Absentee buyers

Absentee buyers were most common in Solano County, where they accounted for almost a third of sales. Solano has by far the lowest median home prices in the Bay Area, weighing in at $200,000 in September, for instance.

…A year ago, Praxis started buying houses to hold onto and rent out because home prices finally made the math work, generating positive cash flow. It now has about 100 rental homes, with more in the pipeline.

For instance, it paid $182,000 at a foreclosure auction for a four-bedroom, two-bathroom Santa Rosa tract home that is now getting a $15,000 “cosmetic rehab” of new carpets, paint, flooring and landscaping. The house should rent for $1,950, Burke said. Once it’s rehabbed, he projects its market value will be $253,000. After renting this and similar homes out for five to seven years, Praxis will sell, hoping for significant appreciation.

Praxis has spent $15 million to date on both its flipped and rental properties, and is launching a fund in January focused just on buying homes to rent out. It hopes to raise $25 million, primarily from high-net-worth individuals in the region – winemaking families, small business owners and professionals who are looking to diversify their portfolios, Burke said.

Finding tenants is easy because so many displaced families need housing.”

Read more: http://www.sfgate.com/realestate/article/Investors-rushing-into-real-estate-deals-4026281.php#ixzz2J2vn6QMX

————

And more large investment groups who intend to hold for 5-7 years.

http://www.azcentral.com/business/realestate/articles/20121005phoenix-housing-investors-market.html

————–

One of the warning flags of the housing bubble this past decade was the dramatic increase in purchases of “investment” or “second” homes. It reached about 40-43%, IIRC, and that pretty much marked the top of the bubble.

IMHO, the artificially low inventory (banks not foreclosing, holding inventory off the market, and/or selling to large investment outfits behind closed doors) along with ZIRP make for a deadly combination for those who are expecting real estate to make up for the pithy earnings in other asset classes.

[carlsbadworker]

Good post, CAR. I think you have some valid points:
1. This is definitely an investor driven recovery so far. However, I think behind the investor driven surface, we now have a “shadow demand” from VA/FHA buyers who cannot win any bid.
2. I do think the strong SFH rental market is driven by people who had foreclosure or shortsale. I heard that the SFH rental is getting pretty weak in Murrieta where the peak of foreclosure/shortsale wave is behind us. If you have it in the employment center such as MM, then the demand is more sustainable.

The question is however whether it will be a virtuous cycle going forward or at near future, it will crash again. I don’t see any evidence of the latter yet. Just because investors bought these homes, doesn’t mean it will crash. They are better than the deadbeats some years ago. Which is better? “True end consumer demand” from people with liar loans? Or the current demand from investors who have cash reserve to handle adverse scenario? And if employment will recover, then the investors would as a whole made some pretty smart move.

All the talks of austerity are just talks. The central banks everywhere are busy deflating their currency. Real estate as an asset class has its attractiveness precisely because of that…unless you believe those in power will suddenly decide to have fiscal/monetary disciplines onto themselves.

[CA renter]

Good points, carlsbadworker.

You are right that there is healthy end-consumer demand that has been unable to compete with the investor demand. But the reason they are FHA buyers is because they (usually) are having a difficult time coming up with the ~20% down payment on these homes. These aren’t the kind of people who are able to get into ridiculous bidding wars, which is why they’ve been losing to the investors as of late. While it’s certainly possible, and desirable, that the job market for these buyers will be getting stronger in the future, I’m not seeing anything on the horizon to indicate more and better-paying jobs for the general population.

As for there being a virtuous cycle, I’m not of the belief that buying and selling existing homes increases general wealth because for every winner/seller, there is a loser/buyer with an equal amount of debt, plus interest, that will reduce demand and economic growth going forward.

The existing housing market is a Ponzi scheme that requires an ample supply of new entrants at the bottom of the pyramid in order for the rest of the market to be pushed up. In our increasingly bifurcated economy with a tiny upper class with increasing wealth, a shrinking middle class being pressured by increasing costs of basic necessities, and a growing lower/lower-middle class that is steadily losing ground, I’m not sure how the housing market will strengthen unless we make significant concessions in our living habits and become more like those in developing nations where we house more and more people in smaller and smaller spaces (entirely possible, and something we’re already seeing, BTW).

For as long as interest rates are suppressed at these levels, there will likely be fairly strong investor involvement in the housing market. What should be concerning to those who want to see higher housing prices in the future is the 5-7 year disposition plans that these large funds have (and many banks who’ve been holding off on foreclosures). This will also coincide with more Baby Boomers entering a stage where they realize their pensions/retirement accounts won’t be able to sustain them over the years, and they, too, will be looking at liquidating their houses in order to provide cash for living expenses.

If interest rates rise, the investors making 5-10% the hard way (and I think they are underestimating what it will cost them to maintain these rentals) will want out of these funds. Will the funds be forced to liquidate their inventory if this happens? All at the same time? With higher interest rates, new owner-occupant buyers will also be willing to pay less for the same properties at the very same time that these investors are looking to exit. Sure, the investors can hold and accept lower than expected/desired returns, but there are weaknesses in these plans that many people aren’t acknowledging, IMHO.

Something for these new landlords to think about are the statistics about the percentage of income renters are already paying for rent. It’s unlikely they’ll see rising rents over the years (assuming foreclosure numbers continue to dwindle to more normal levels) unless the renters start adding more people per unit…which will increase turnover, late payments/no payments, maintenance costs, etc.

IMHO, this strong housing market is just another symptom of the credit bubble that the central banks and world governments refuse to acknowledge or resolve. I could definitely be wrong, though!

——————-

“Meanwhile wages for the vast majority of workforce renters remain fairly stagnant, setting the stage for a broad affordability crisis. Fifty-three percent of renters now pay more than 30 percent of their household income for their housing, while 27 percent of renters pay more than half. These are both sharp increases in the numbers of cost-burdened households since 2001, when 40 percent of renters paid more than 30 percent of their household income for their housing, and 20 percent paid more than half.

These increasingly unaffordable rents depress demand for goods and services beyond the housing market. One analysis found that lower-income families in unaffordable housing units spend 50 percent less on clothes and health care, 40 percent less on food, and 30 percent less on insurance and pensions compared to families in affordable units.”

http://www.americanprogress.org/issues/housing/report/2012/12/10/47408/the-housing-market-is-not-only-for-homeowners/

[bearishgurl]

[quote=CA renter] . . . For as long as interest rates are suppressed at these levels, there will likely be fairly strong investor involvement in the housing market. What should be concerning to those who want to see higher housing prices in the future is the 5-7 year disposition plans that these large funds have (and many banks who’ve been holding off on foreclosures). This will also coincide with more Baby Boomers entering a stage where they realize their pensions/retirement accounts won’t be able to sustain them over the years, and they, too, will be looking at liquidating their houses in order to provide cash for living expenses.[/quote]

I agree with this and also agree that there could be a LOT of inventory on the market at the same time equity sellers will be trying to unload. Most of these REITs DO have a ~5-7 year “buy-and-hold” window. HOWEVER, I have no doubt that the bigger ones will be in positions to change their minds and hold out their properties for lease/rent (at least the many that are near job centers) and/or stagger their listings so as to not flood the market (just like the REO lenders did) and thus obtain a higher price for each one.

[quote=CA renter]If interest rates rise, the investors making 5-10% the hard way (and I think they are underestimating what it will cost them to maintain these rentals) will want out of these funds. Will the funds be forced to liquidate their inventory if this happens? All at the same time? With higher interest rates, new owner-occupant buyers will also be willing to pay less for the same properties at the very same time that these investors are looking to exit. Sure, the investors can hold and accept lower than expected/desired returns, but there are weaknesses in these plans that many people aren’t acknowledging, IMHO.[/quote]

Rental properties CAN very well be “labor intensive.” The REITs are no doubt using local property mgmt companies in each area they have a concentration of rental properties. Higher mortgage interest rates are a two-edged sword. Be we must remember that with each mortgage rate hike, another subset of potential buyers remains renting, thus fueling rental-unit demand. In mtg-rate-hike periods of decades past, homebuyers would simply buy a smaller property or a property in a lesser area than they could previously qualify for … or both. Today’s renters who are used to living in a particular area that they are happy with will generally NOT step down in size/location just to become a “homeowner.” Their “lifestyle” is far more important to them than owning a home.

[quote=CA renter]Something for these new landlords to think about are the statistics about the percentage of income renters are already paying for rent. It’s unlikely they’ll see rising rents over the years (assuming foreclosure numbers continue to dwindle to more normal levels) unless the renters start adding more people per unit…which will increase turnover, late payments/no payments, maintenance costs, etc. . . .[/quote]

I don’t know about other states, but in CA coastal counties, three or more salaries per rental household is not uncommon. This could either be one or more of the renters with two paying jobs or three or more adults or young adults (typical children of renters) contributing to household bills. This is the way it’s always been.

If YOU, as a LL, have a rental which rents for $2600 or more per month and are concerned that it will take up too much of a “nuclear” family’s income, then it might behoove you to entertain only the rental applications you receive which use three or more incomes by the tenant group (whether a related family … or not) for rental qualification and thus living expenses. This also cushions against job loss by any of the tenants or loss of ONE job by a tenant who has two jobs.

[sdduuuude]

[quote=flu]San Diego Inventory Sucks[/quote]

[quote=Fineas and Ferb]Yes. Yes, it does.[/quote]

[carlsbadworker]

CAR, whether baby boomers will be looking at liquidating their houses does not matter. They are switching from one form of housing (owner) to another form of housing (renter). It doesn’t change the overall demand for shelter. Real estate investors as a supply of these shelters (again either in the form of landlord or seller) would benefit if the demand grows.
By default, the demand will grow due to new household formation. Renter affordability will slow the household formation but I don’t see it will reverse the trend.

[bearishgurl]

[quote=carlsbadworker]CAR, whether baby boomers will be looking at liquidating their houses does not matter. They are switching from one form of housing (owner) to another form of housing (renter). It doesn’t change the overall demand for shelter. Real estate investors as a supply of these shelters (again either in the form of landlord or seller) would benefit if the demand grows.
By default, the demand will grow due to new household formation. Renter affordability will slow the household formation but I don’t see it will reverse the trend.[/quote]

I agree with this, except for the part about “baby boomers” selling to become “renters” after living in their “own” homes for nearly their entire lives.

Ain’t going to happen.

They may or may not stay in the same county or state but the majority of them (who DON’T have “artificially-low” property taxes under Prop 13) will likely sell and downsize.

Boomers value home-ownership. They look at buying a primary residence as shelter … NOT as much a “lifestyle” purchase (as younger generations do).

I don’t agree that the majority of boomers won’t be able to buy a (smaller) replacement home with the proceeds of their (often high-maintenance) former “family home” which is no longer needed.

[CA renter]

[quote=carlsbadworker]CAR, whether baby boomers will be looking at liquidating their houses does not matter. They are switching from one form of housing (owner) to another form of housing (renter). It doesn’t change the overall demand for shelter. Real estate investors as a supply of these shelters (again either in the form of landlord or seller) would benefit if the demand grows.
By default, the demand will grow due to new household formation. Renter affordability will slow the household formation but I don’t see it will reverse the trend.[/quote]

Yes, you are correct, CBDW. I meant that they would likely sell and move to a more affordable area. I know many, many people (quite possibly, the majority of people I know who have retired in recent years) who’ve moved to “flyover” states the moment they retire.

The investors who are buying in areas like Detroit, etc. may very well be better off in 10 years than the ones who are buying relatively expensive rentals in low-income areas in California. The rentals in low-income areas, especially if they really stretch the budgets of the renters, will probably end up being a much larger burden than most of these investors expect.

If/when the renters realize that their landlords are large investment funds — who are often thought to be responsible for the “foreclosure crisis” that has forced many of these people to become renters, the off-shoring of decent American jobs, and general decline in quality of life for most working Americans — these renters may feel strongly compelled to burn these investors as badly as possible. I don’t think these investors really understand what they’re getting into.

I think the long-term trend of people moving from the interior of the country to the coasts just might reverse over the next few decades as more and more people seek to buy their own homes, but can only do so in these cheaper states. As many have pointed out in other threads, incomes in other areas are about the same, while the cost of living is often substantially lower. If someone doesn’t have family and/or deep roots here, the “sunshine tax” argument becomes less compelling, especially if people are not able to buy their own homes here.

[Coronita]

.

[CA renter]

C’mon, flu. Share your thoughts. 🙂

[sdduuuude]

Calculated Risk posts this data, related to new household formation, regularly. It is always interesting:

http://www.calculatedriskblog.com/2013/01/new-home-sales-and-distressing-gap.html

If you assume that the sale of a new home (not a resale home) represents a new household formation, you can see the difference in hew household formation on his graph. New household formation rate is way down from the peak. Even down from well before the peak.

[bearishgurl]

[quote=CA renter] … I think the long-term trend of people moving from the interior of the country to the coasts just might reverse over the next few decades as more and more people seek to buy their own homes, but can only do so in these cheaper states. As many have pointed out in other threads, incomes in other areas are about the same, while the cost of living is often substantially lower. If someone doesn’t have family and/or deep roots here, the “sunshine tax” argument becomes less compelling, especially if people are not able to buy their own homes here.[/quote]

I agree here, CAR, and it won’t be just “boomers.” A lot of native Cali recent college grads are no doubt going to have to relocate to find jobs in their fields which pay a living wage … even if just for the first few years of their career. The problem is that (not sure it IS a problem for all) if these recent grads end up staying on these distant jobs and “settling” in a “flyover state” to raise a family there, it is very often too difficult to duplicate the “lifestyle” in CA coastal counties that their families will enjoy elsewhere … even if they get a job in Cali which pays a little more than the one they have.

I myself raised my family in a region (SD) in which I (and my then spouse) had (and have) zero local family-member residents. We/I traveled often to see them and vice versa, but it wasn’t the same lifestyle as my friends and neighbors experience (with family constantly all around them for support). Thus, I’m one of those people (boomers :)) who will have no problem with blowing SD as soon as the last kid leaves the nest …. SOON for me, YAY! Even though I love parts of SD (which I could never afford to buy into by myself), after nearly 40 years here, I’m mainly disenchanted with SD’s unbridled growth (lowering every resident’s quality of life) and in my profession, I’ve seen way more than enough :=0

If I just need a “SD fix” in the future, there’s always friends to stay with and/or the Best Western, lol …

I’ll likely be moving to a town/city (not a “suburb” but semi-rural/rural) with a population of 1K to 50K (leaning towards <20K).

Hopefully, I will be able to find a nice log cabin to buy :=]

[Coronita]

[quote=CA renter]C’mon, flu. Share your thoughts. :)[/quote]

I’m throwing down the white flag here. RE prices are going higher. I can’t float with good cash flow at this point. Sucks that I didn’t buy more. Also, equity markets are going to float higher…Sucks to be in cash 40% too instead of previous 90%…

My last option is to buy a new primary..Which I will have to wait. Higher end homes haven’t gone *that* much higher, but at the same time neither has my budget.

No point wasting my time thinking RE prices are going to fall or correct in a meaningful way. Gotta think of other areas/ways to generate income.

Sometimes the biggest hazard to one’s wealth is one’s own pessimism….so I’ve learned.

Missed the boat bigtime…Oh well.

[The-Shoveler]

[quote=flu][quote=CA renter]C’mon, flu. Share your thoughts. :)[/quote]

I’m throwing down the white flag here. RE prices are going higher. I can’t float with good cash flow at this point. Sucks that I didn’t buy more. Also, equity markets are going to float higher…Sucks to be in cash 40% too instead of previous 90%…

My last option is to buy a new primary..Which I will have to wait. Higher end homes haven’t gone *that* much higher, but at the same time neither has my budget.

No point wasting my time thinking RE prices are going to fall or correct in a meaningful way. Gotta think of other areas/ways to generate income.

Sometimes the biggest hazard to one’s wealth is one’s own pessimism….so I’ve learned.

Missed the boat bigtime…Oh well.[/quote]

Sometimes it can save your Butt too.

[Author]

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