[Jazzman]

[quote=wallers]

The thing I am wary about (but again don’t know) is that if house prices were so investor driven what happens when investors start dumping and leave. Will they dump. Will they hold. Who owns what. Is the market really investor driven? It seems to me the housing market now is treated more like the stock market instead of people just buying homes. So are homes just like the stock market? Big ups and downs. Speculative driven. Then the Fed pushed all cheap money in. That is said to be unprecedented. What is that going to mean?

[/quote]
Reports abound of investors buying between 30-50% of properties is some markets. Some of these investors are large and bought anything and everything. They bid up the price quite a lot, but I expect are in the same boat as everyone else, i.e. waiting to see which way the tide turns. There has probably been some shedding of dead wood, but no stampede which is difficult to do with something as illiquid as RE. I don’t think there is much investing currently, as increased prices have put downward pressure on capitalization rates, and since prices have leveled off, overall returns on investments have wavered.

Another perspective to watch is shares and bonds. I believe many RE investors would prefer to be invested in traditional financial products (me included), and are waiting for a similar scenario to play out. With so much uncertainty, bricks and mortar offers a more tangible alternative to the volatility of paper. If you believe that the Federal Reserve holds the key to an unraveling of all over-valued assets, then at some point we will see a correction. Since things have held up pretty well so far, it may take a recession to jolt an undoing of all the ‘good’ work. Historically, one is due.

So a decision whether to buy, or not, revolves around either making the compromise you speak of by lowering your expectations, or sticking to your guns and allowing a principle dictate your actions. Which will be the more financially astute may not matter as you can’t blame yourself for not knowing the future. If it’s of interest, even during the trough of the crash I found property prices in soCal to be over-valued so voted with my feet and never looked back. The value you place on things doesn’t always need to be supported by clever numbers. If something seems expensive, it means you do not place an equal value on it. So you walk away.

[Jazzman]

[quote=wallers]Hi

Stage I: Hot to Cool: Active since Summer 2013*, Price growth is slides across the country as flippers lose money outright in the red-hot investor markets (NYC, San Francisco and Las Vegas); New home absorption rates – sales per community – are declining; investors slow their home purchases; total home sales decline year over year; developers lose pricing power, press outlets shift from positive to mixed about the health of the housing market.

Stage II: Demand to Supply: Small shocks convert demand pools into supply ripples. A first wave of investors begin trimming prices to get ahead of future declines; discounts increase to incentivize purchasers as purchasers increase their delays for better deals; developers reduce land budgets as cancellations tick up; major financial press outlets take a more negative tone toward housing lowering confidence overall.

Stage III: Deflation & Response: Falling home prices create a negative deflationary feedback loop that foreshadows a once-in-a-lifetime policy response. Deflationary economics take full hold; leveraged bets on real estate unwind in quarterly ripples due to the public reporting cycle & asset manager redemption schedules; willingness to lend shrinks; the broader consumer finally understands it is a bad time to buy a home, a shrinking housing market negatively impacts jobs causing recession; the estimated effects of never-before-seen public policy reactions determine when and where prices eventually trough.[/quote]

There is a lot of truth in the above that was particularly relevant to the previous housing bubble. I think what is different this time is the finger is very much on the pulse, or as some may argue, in the dike. 2012/2013 saw price increases reminiscent of 2004, but by 2014 it leveled off probably due to affordability issues. The point is it didn’t crash, or least it hasn’t yet. It is really anyone’s guess as to what happens from here on. There are too many variables to even take a stab at it. I personally would like to see a correction of the more recent gains, but in a civilized manner. If you look at everything that contributes to asset bubbles you need to ask two questions: What happens when they are removed, and when will they be removed? The logical answer is that the reverse happens—and possibly at a similar rate—when it is realized prices are neither sustainable, nor supported by fundamentals. For that to happen, things need to get heady. Since we just experienced the bubble of all bubbles, mini-me bubbles are met with complacency. So nailing down the inflection point, or turning tide, is much harder. Complacency, though, could be what continues to feed bubbles in other assets that then infects everything else. The writing is on the wall, but the script isn’t legible yet.

[Jazzman]

Rents in my neighborhood have gone bananas. It’s the same disease that afflicts house prices. Landlords just gouge the market and get away with it because there is so little to choose from. They can be the dumbest creatures preferring to let their investment sit empty than ask a reasonable rent. Some renters never even question it. They just pay. Unbelievable, really.

[Jazzman]

[quote=KristopherSD][quote=svelte]What you don’t mention is how long you plan on keeping the home and/or staying in San Diego[/quote]

I guess what puts me off buying now is what I consider very high prices. I cannot believe that fixer upper homes in Clairemont Mesa are going for $500k+ or $450k+ in La Mesa, not to mention $600+ in Ocean Beach. I wonder who is buying all of these homes, there cannot possibly be THAT many tech jobs around. Maybe I am wrong. I feel that I am in a very advantageous position with decent savings, no debt, and a stable job yet I somehow feel “priced out”. This leaves me wondering if others are stretching the budget to purchase.[/quote]

Right on the money. I’ve been saying this for years. In fact, even after RE bottomed I was still saying it and eventually voted with my feet buying where I found value. Of course, I’ve now seen huge appreciation and while my neighbors are jumping up and down, I skulk in the corner muttering “fools”. Huge efforts went into propping up prices when what should have happened is a full correction. You could argue the cost would have been a depression. Maybe. Maybe not. Incidentally, there is a movement in London called “Priced Out” where the next generation is taking action. It is very well organized and has attracted media attention. The problem is noble causes often get tarnished with political brushes where wealth is concerned. The next generation will eventually have their say, however.

[Jazzman]

[quote=deadzone][quote=bewildering][quote=Jazzman]I believe there is fair to good chance a convergence of factors will happen to bring about a correction in prices and when that happens you might expect the excessive 2013/14 gains to be wiped out. Those gains did not come about as a result of wage growth or a post bubble over-correction, so it is entirely reasonable to assume they are unsustainable.

[/quote]

I think Rich believes that the 2013 gains were not unreasonable in relation to rents, or income. Just a return to a normal market because few short sales/foreclosures. At least that is my reading of this blog.[/quote]

There is nothing “normal” about a market that is being fully sustained by the Fed’s zero interest rate policy.[/quote]
We’re at the monetary easing half way house. We now know what happens when it’s in progress, but the jury is out on what happens now it has stopped. Seems a delicate time where everybody is praying that nothing comes along to rock the boat.

[Jazzman]

Kristopher, you are only 26 so renting has many advantages. If you have a good salary and prices seem out of reach, then homes are clearly over-valued. Whether you believe we’re in bubble depends on your definition of a bubble.

Your instincts are sound and you seem financially responsible. If you choose to wait, the macro things I’d be watching are interest rate rises, increased inventory, and investor activity. If prices wobble, I’d focus on price reductions, list to sales ratios, number of days on market, Cash Shiller index, and median prices. I believe there is fair to good chance a convergence of factors will happen to bring about a correction in prices and when that happens you might expect the excessive 2013/14 gains to be wiped out. Those gains did not come about as a result of wage growth or a post bubble over-correction, so it is entirely reasonable to assume they are unsustainable.

While measures of value help explain ‘normal’ prices, over-inflated values are more explained by buyer behavior (irrational exuberance etc), IMO. The buy now decision ultimately boils down to whether you are eager to be a home owner and are prepared to take a risk and make compromises, or whether you are concerned about fair value and believe you can time the market. It seems to me your post has already answered that in part.

[Jazzman]

[quote=bobby][quote=doofrat]

Why do an all cash transaction when interest rates are so low? Looking at interest rates tracking house prices over the last couple of years, the monthly payment seems to have stayed the same, tracking the prices pretty closely relative to interest rates. If you do all cash, it seems you’re paying a premium price that’s premium due to low rates, but not getting the benefit of the low rate? Or is it because the rates on an investment property are too high?[/quote]

because I have the money sitting in a money market account earning 0.01% interest.
I think stock market is a bit frothy right now so don’t want to put money there.
we went to look at 3 properties this past weekend but were not interested in any of them.
will update in the future…[/quote]

My sentiments exactly. Share values are way too high. Bonds can only go one way from here. Cash earns nothing. What else is there? Hard money lending? Not for the timid. Sure you can get a loan, but the magnified gains on the capital you put in can just as easily be magnified losses. That’s the high risk nature of leveraged investing. Buying all cash is what many investors have been doing, because you are parking money in a tangible that is less volatile and a little more transparent than other forms of investment. The returns were (past tense) promising. Now it is more of a challenge thanks to a crowded market, but I believe not impossible.

Home prices are way too high in most of CA and other major metro areas, and I would steer clear of anywhere with herd investors. That is of course, unless you think prices will continue with an upwards momentum. Signs are, however, the tide may be turning. My rule of thumb is to aim for a cap rate of 5%. So for every $100k invested I want $1,000 rent a month. The lower price range (+/-$100k) can achieve this but the risk increases. The rent will cover all expenses (50% of income) including management (8-10%) and void periods (5-8%). With a CA budget you can buy multiple homes elsewhere and strive for a diversified portfolio. You will need time, patience, and expect a steep learning curve.

[Jazzman]

[quote=spdrun]

Really? And how is it you arrive at that conclusion?

Mechanical idiots who can’t be arsed to educate themselves typically get taken advantage of by tradesmen. And kudos to the tradesmen — if they can eat off the backs of clueless loser “investors”, more power to them.[/quote]

You have a axe to grind with investors, because they have squeezed inventory and forced up prices, yes? I understand that, but don’t discount that many are non-institutional, reluctant landlords, having had their hands forced by the lack of fixed income investments. I don’t think that makes people “mechanical idiots” (whatever that means), just a bit desperate. Getting back to using trades people, a property manager will have their own that they use. If you insist on pictures, invoices and if necessary alternative quotes you should be OK. The key is to manage your property manager, and budget for repairs an replacements. Home owners are as likely to be taken for a ride on their own properties than professionally managed investments.

[Jazzman]

[quote=spdrun]It’s not much of a challenge to find 6+% cash-on-cash in the US, as long as you don’t let fripperies like paying some parasites 8% of your income for management fees or paying some incompetent to maintain what you can do yourself eat into your bottom line.
[/quote]
Of course, yes, but the US is a big place and the OP was referring to the Bay Area, where the median house price is the highest in the US, which is always going make rentals a challenge.

The problem with the “cash-on-cash” ratio is it magnifies gains since it ignores the loan element of a property, which typically makes up most of the value of a home. Leveraged investments also magnify losses making them high risk. Whatever, I’m not convinced that is the best way to analyze an RE investment.

IMHO you are a bigger idiot for not sitting down with a spread sheet, than you are for using a property manager or tradesmen.

[Jazzman]

[quote=spdrun]

If you’re a wimp who can’t handle tools and tenants on his/her own, you shouldn’t be buying rentals.[/quote]

Really? And how is it you arrive at that conclusion?

[Jazzman]

I would think the only time to become a landlord in the Bay area was 20 years ago. The rent to price ratio is 20% above it’s historical average, and I’d suspect that is a very conservative number.

Here’s a hypothetical investment analysis. You can argue the variability of some the individual items, but for a home valued at $500k, with a rent of $2,000 a month, the picture may look some thing like this.

Market or Appraised Value”$500,000″
Purchase Price “$500,000”
Initial Equity

Down Payment 10%
Amount Financed “$450,000”
Down Payment Amount “$50,000”
Closing Costs & Fees “$3,500”
Total Cash Investment “$53,500”

Interest Rate (30 yr Fixed) 4%
Debt Service (P&I) Monthly “$2,021”
Debt Service (P&I) Yearly “$24,248”

Monthly Rent (GSI) “$2,000”
Annual Property Tax “$5,000”
Annual Utilities “$200”
Annual Landscaping “$500”
Annual Insurance Premium “$600”

Vacancy Rate (% of GSI) 8%
Maintenance Rate (% of GSI) 5%
Property Mgmt Rate (% of GSI) 8%

Gross Scheduled Income (GSI) “$24,000”
Less Vacancy Amount “$(1,999)”
Gross Operating Income (GOI) “$22,001”

Annual Operating Expenses
Property Management “$(1,760)”
Annual Property Taxes “$(5,000)”
Annual Utilities “$200)”
Annual Landscaping “$(500)”
Annual Insurance Premium “$(600)”
Repairs & Maintenance “$(1,100)”
Total Operating Expenses “$(9,160)”

Net Operating Income “$12,841”
Less Debt Service “$(24,248)”
Before-Tax Cash Flow (BTCF) “$(11,408)”

Cash-On-Cash ROI -21.32%

Last two years price increases make investing a challenge now even in places like Las Vegas, where prices corrected by 60%, which is twice the drop of metropolitan CA.

[Jazzman]

“[W]e have to live in a high valuation world from now on?” I think that is an interesting question, and the answer is probably that we have been for some time. Rich’s graph shows that US share values have forged ahead of other countries since 2011, and the question is why? When you don’t need to look hard to find confirmation bias, perhaps that’s because it is now just confirmation, and maybe that is all you need to know.

[Jazzman]

Economists? Too busy making up their mind …on the one hand this could make me fat, but on the other this could make me fatter.

[Jazzman]

[quote=FlyerInHi]

I personally regret not buying anything in the IE (mostly because I don’t really like the area, but business is not about personal like).[/quote]

Well, don’t regret to much. One of the favored adages of investing in RE is don’t buy where you wouldn’t live yourself. Regrets are the flip side of 20:20 vision.

[Jazzman]

[quote=spdrun]A few points.

(1) Why is international migration a bad thing? More foreign migrants probably start businesses than red-blooded Americans, who tend to want a “full time” job. California and NY have been ports of entry for migration for, oh, the last 100 years or so..

(2) Bigger cities have always been rental markets. Take NYC — most housing in Manhattan was BUILT as rentals, and only subdivided into owned apartments at a later date.

(3) There’s quite a bit of CA that isn’t LA, San Diego, or San Francisco.

(4) Renting out rooms via AirBnB is new. Renting out rooms is nothing new. I knew a elderly Austrian baroness in London who owned a gigantic apartment, and always had 10 or 15 foreign East-bloc students passing through. To some extent she needed the money to upkeep the place, but she also felt she was helping them by giving them cheap(er) housing in a convenient place.

People in cities have also rented out single back rooms for ages to help with the rent. Advertising via word of mouth or on paper.

The newer phenomenon is actually BUYING condos or homes to fully use as AirBnB hotels. Whereas renting out rooms doesn’t affect housing supply, or slightly increases it, renting out entire homes/condos/buildings as “hotels” eats away at supply, driving prices up. I can understand attempts to regulate it.[/quote]

I think LA is, or was about 50% renters. SF is crazy expensive, $900k median …the highest in the country so you might expect more renters. The interesting thing about AirB&B is whether it’s a response to high rents, hotels etc. Yet another indirect spin off from crazy RE. The point about foreign migration is the effect it has on RE prices. Where countries don’t have opportunities for investments (Russia/Asia), the super rich seek out, blindly it seems, other places to park their fortunes. Some countries have put a stop to it because it simply prices out the locals, and I can’t help feel some sympathy for that. If Californians are moving to cheaper states, or countries, then they are very sensible. Someday, maybe, people will wake up to the reality that paying a $1m for little shack surpasses all measures of rational behavior. How long does the elephant need to stand in the room to remind us of how puny our memories are compared to his?

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