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What's going on with the housing market?


lookingstill
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Right now I'm on the market to buy a smaller rental property in a certain area of Southern California. Entered the market fully expecting to pick up a good deal, and found myself in the middle of the lowest inventory in 6-7 years, multiple offers substantially above listing price, bidding wars, listing prices rising by as much as 20%-30% and properties being sold within a few days of being listed. Agents having multiple buyers, including many cash buyers and nothing to offer to them. Refusing to accept back up offers on short sales and forclosures, because they already have 5, 6 sometimes 10 back ups. It is just crazy. Nothing I see in the broader economy justifies this (recovery is weak, unemployment is high, many homeowners are under warter), but nevertheless this is the situation in the local real estate market. And from what I read is true in many parts of the country. What is really going on?

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Market is firming in Minneapolis/St. Paul as well. Here is info from the weekly skinny from Realtor association (http://mplsrealtor.typepad.com/)

 

The report card for this week showed higher grades than last year at this time for both buyers and sellers. Activity levels are higher on both sides, which is indicative of recovering confidence in the local market. Prices in certain areas have already turned a corner, and it is not unreasonable to expect a continuation of this trend. As summer begins to swelter, also keep a watchful eye on active listings, absorption rates, days on market and percent of list price received. Being schooled in these metrics is like having an open book during the final exam.

 

In the Twin Cities region, for the week ending June 9:

 

• New Listings increased 0.4% to 1,582

• Pending Sales increased 29.4% to 1,231

• Inventory decreased 31.0% to 17,540

 

For the month of May:

 

• Median Sales Price increased 10.5% to $169,000

• Days on Market decreased 19.6% to 125

• Percent of Original List Price Received increased 3.8% to 94.6%

• Months Supply of Inventory decreased 44.7% to 4.6

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Right now I'm on the market to buy a smaller rental property in a certain area of Southern California. Entered the market fully expecting to pick up a good deal, and found myself in the middle of the lowest inventory in 6-7 years, multiple offers substantially above listing price, bidding wars, listing prices rising by as much as 20%-30% and properties being sold within a few days of being listed. Agents having multiple buyers, including many cash buyers and nothing to offer to them. Refusing to accept back up offers on short sales and forclosures, because they already have 5, 6 sometimes 10 back ups. It is just crazy. Nothing I see in the broader economy justifies this (recovery is weak, unemployment is high, many homeowners are under warter), but nevertheless this is the situation in the local real estate market. And from what I read is true in many parts of the country. What is really going on?

 

I was trying to buy a rental in Phoenix and was looking during 2011 and beginning of 2012.  By the end of 2011 things were really heating up.  Unless you were an all-cash buyer, and you put a bid in on the very first day a property was on the market, there was no chance of getting a good deal.  Ultimately I decided to stop looking because of the amount of time I was spending on it without any results. 

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http://www.npr.org/2012/06/21/155359393/bidders-get-feisty-over-foreclosed-homes

 

BTW... It really seems that people are doing really stupid things now. I won't be one bit shocked if there is another wave. In my hometown, there are too many people that are dealing with too small of margins.

 

Also noted by the NYTimes http://www.nytimes.com/2012/06/21/us/wests-home-prices-rebounding-as-availability-shrinks.html?hpw

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The lower end and the higher end here in the Bay Area are getting lots of bids and majority are above asking.  But I am still seeing some offers fall through because of financing problems or low appraisals.

 

I'm not worry about bidding above asking because I feel as long the "numbers" still make sense. I willing to buy in. I figure, with a 30 year mortgage and the current rates, I can still make a good, if not great, return on my money.

 

 

 

 

 

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"Right now I'm on the market to buy a smaller rental property in a certain area of Southern California."

 

Have you looked in inland empire area; or have you been looking in LA,OC ?

 

OC, don't really care for the inland empire area.

 

And I'm trying to figure out whether this is just the normal summer thing or there is some kind of deeper and more permanent change is going on. The agents are saying different things, of course. Some think that the market will cool off in Fall and mention that banks are holding back inventory because of some kind of handshake deal with the government to create an appearance of improving housing market to help current president to get re-elected (I'm not sure I buy that one. I can see banks not being that agressive on short sales, so they don't have to realize losses, but holding back foreclosed homes would cost them real money.) Some agents believe that the market is normalizing, the interest rates are so low, the rental market is so strong, and the prices are so attractive compared to rents that many investors that held back before are stepping in. I even heard talks about some hedge funds buying entire portfolios of distressed residential properties from banks, setting up or using existing property management companies and are renting those out or are flipping them. Sort of makes sense for the funds and for the banks.

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"Right now I'm on the market to buy a smaller rental property in a certain area of Southern California."

 

Have you looked in inland empire area; or have you been looking in LA,OC ?

 

OC, don't really care for the inland empire area.

 

And I'm trying to figure out whether this is just the normal summer thing or there is some kind of deeper and more permanent change is going on. The agents are saying different things, of course. Some think that the market will cool off in Fall and mention that banks are holding back inventory because of some kind of handshake deal with the government to create an appearance of improving housing market to help current president to get re-elected (I'm not sure I buy that one. I can see banks not being that agressive on short sales, so they don't have to realize losses, but holding back foreclosed homes would cost them real money.) Some agents believe that the market is normalizing, the interest rates are so low, the rental market is so strong, and the prices are so attractive compared to rents that many investors that held back before are stepping in. I even heard talks about some hedge funds buying entire portfolios of distressed residential properties from banks, setting up or using existing property management companies and are renting those out or are flipping them. Sort of makes sense for the funds and for the banks.

 

 

It seems like the Private Equity/Hedge Fund folks are running into some problems buying large bulks of homes.

 

http://www.bloomberg.com/news/2012-06-13/private-equity-has-too-much-money-to-spend-on-homes-mortgages.html

 

It's an interesting read.

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Interesting discussion. I agree about the multiple bids on houses in the LA/OC area. I am not in the market to buy a house right now , but one of my friends recently tried buying a single family home in OC (Irvine/Tustin). He bid on a total of 6 homes and every time he was outbid by multiple bidders. The final prices on almost all of them were 10K-30K above the listed price. Another friend in the South bay area in LA had a very similar experience last year. Both friends ended up abandoning their search after multiple disappointments and because they could not afford the increased home prices ( even with interest rates at historical lows).

 

 

Another story I heard ( this is totally anecdotal so treat it with a big spoonful of salt and a dollop of skepticism ) from another friend who works with a lot of chinese/asian colleagues is that in some chinese communities in LA, there seems to be some sort of a shadow banking/private lending practice in existence. Private lenders are willing to lend to members of their community, loans ranging from 7 to 10 times their gross annual salaries at decent rates. These loans are then being used to buy up 2nd and 3rd homes or other properties like land/foreclosed properties (a lot of these deals are all cash deals).  I don't know how far this is true and I doubt if that has any significant effect on the phenomenon we are observing around the country but I was wondering if anyone has heard anything similar in other parts of the country. I also remember reading sometime back about Brazilians buying up properties in south florida.

 

This makes me wonder ( as a naive observer who does not have much experience with real estate) about the emotions that are driving housing demand given that unemployment in the US is still high and there hasn't been a strong recovery in the economy . Could it be that the demand in housing is not from people buying homes for their primary residence but others trying to buy multiple properties more as an investment, hoping that the economy improves and they are able to sell them in a few years. If that is the case could there be a glut in the housing market in a few years when everyone tries to sell driving prices lower again and creating much better buying opportunity?

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You also have to remember that at the moment the amount of new houses being build is lower than the amount needed for replacement / new households, so at some point in time the excess capacity build before the GFC will be gone and housing will recover.

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Another story I heard ( this is totally anecdotal so treat it with a big spoonful of salt and a dollop of skepticism ) from another friend who works with a lot of chinese/asian colleagues is that in some chinese communities in LA, there seems to be some sort of a shadow banking/private lending practice in existence. Private lenders are willing to lend to members of their community, loans ranging from 7 to 10 times their gross annual salaries at decent rates. These loans are then being used to buy up 2nd and 3rd homes or other properties like land/foreclosed properties (a lot of these deals are all cash deals).  I don't know how far this is true and I doubt if that has any significant effect on the phenomenon we are observing around the country but I was wondering if anyone has heard anything similar in other parts of the country. I also remember reading sometime back about Brazilians buying up properties in south florida.

 

I heard of similar operations here in the Northern California/Bay Area. I don't know how extensive it is but that is interesting funding model.

 

I am closing in a 3-unit property right now. We are working on inspections/etc.  I probably did more than over 50+ bids by now. I started my search early this year. I am paying a few thousand above the list price. 

 

I am looking for more! I don't have an "elephant gun" but I do have a water gun! I just wish I had more capital...

 

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This makes me wonder ( as a naive observer who does not have much experience with real estate) about the emotions that are driving housing demand given that unemployment in the US is still high and there hasn't been a strong recovery in the economy . Could it be that the demand in housing is not from people buying homes for their primary residence but others trying to buy multiple properties more as an investment, hoping that the economy improves and they are able to sell them in a few years. If that is the case could there be a glut in the housing market in a few years when everyone tries to sell driving prices lower again and creating much better buying opportunity?

 

Well, I'm also looking to protect money from future inflation, which I'm sure will come with a vengence at some point after all this easing and money creation, as I'm sure many of these investors also trying to do. And prices are still at about 2003 levels. Have any of you, guys, observed similar picture last summer or is it different this year? I wasn't on the market last summer, so no clue there.

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Re: Lookingstill : "Have any of you, guys, observed similar picture last summer or is it different this year? I wasn't on the market last summer, so no clue there."

 

About this time last year, when we were looking to buy in walnut, diamond bar, chino hills area; we had plenty of choices. No bidding what so ever.

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Good post Ragnar I enjoy your blog.

 

Perhaps there is a flight to safety. If you buy a house with a 30 year mortgage if the currency is devalued the mortgage value drops. If inflation averages 4 to 5%  over 30 years and you lock in at a lower mortgage rate the price of the home will likely track inflation much of the mortgage is paid by negative interest rates.

 

More important is where else will it be safe to keep big money? If bonds are perceived as risky there are few places where that money can go. At least with houses in the US you can expect steady immigration and higher than average birth rates.

 

Finally, Wall Street is in the business of selling paper and it looks like somebody figured out how to sell paper for portfolios of rental properties. First the banks will sell the properties to the pools which are doing the buying now, second the banks will bump up the foreclosures to sell more and keep prices steady, and finally after the pools have finished buying the new product will be marketed to less well connected investors to drive up the price of the paper. In 2005 or so it was surprising how many suckers would buy the mortgage paper even after Prem warned of the moral hazard in 2003. REITs haven't worked for houses because it involves too much work. Maybe the economics work when the unemployment rate is high making the labour cheaper while technology is making it easier to deal with delinquent tenants. Credit ratings do a good job punishing delinquent borrowers so maybe there is a new system rating tenants which will punish bad tenants. Look what I found on a Google search- it looks like the credit rating agencies are working on a new line of business:

 

"UK’s leading credit reference agency launches Rental Exchange

 

Nottingham, UK – Several million people* living in private rented accommodation could soon get a welcome boost to their credit rating, following the launch of the new Rental Exchange service by Experian®, the global information services company.

 

While information about mortgages is included on credit reports, rent payment information currently isn’t. This means that someone living in a privately rented property who meets their rent payments on time hasn’t seen this positive information registered on their credit report – but this is about to change."

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Right now I'm on the market to buy a smaller rental property in a certain area of Southern California. Entered the market fully expecting to pick up a good deal, and found myself in the middle of the lowest inventory in 6-7 years, multiple offers substantially above listing price, bidding wars, listing prices rising by as much as 20%-30% and properties being sold within a few days of being listed. Agents having multiple buyers, including many cash buyers and nothing to offer to them. Refusing to accept back up offers on short sales and forclosures, because they already have 5, 6 sometimes 10 back ups. It is just crazy. Nothing I see in the broader economy justifies this (recovery is weak, unemployment is high, many homeowners are under warter), but nevertheless this is the situation in the local real estate market. And from what I read is true in many parts of the country. What is really going on?

 

California has always been a lousy market for real estate investment.  You only make money on California real estate by speculation, and with the hope that the next buyer is a greater fool.  Cash on cash returns for California real estate are typically 4% or lower.  Why would you take on an illiquid investment - where you are losing 6% on day one to brokers - to make 4% cash on cash returns?

 

The good US real estate investment markets are those where you can buy at or below replacement cost, with a growing economy, and cash on cash returns around 10%.  That's not California.

 

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Just to offer another anecdotal perspective (from Omaha).  The market here - and particularly for the types of homes typically used as rentals - has gone through a significant firming through the spring and into the summer.  Up through the first of the year, the game was being a discerning buyer in a market with lots of choices.  Now they are turning very quickly.  I have no perspective on whether this activity is the entire market or just the subset that I keep an eye on.

 

It is rather curious to see this here because although our home prices never fell (at least not more than single digit %'s), the average time they stayed on the market was still increasing late last year.  Now, boom, 180.

 

I don't wish anyone bad fortune, but I'd give my right arm for one more down leg in the RE market here in town...

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I was going to post about this on here, but decided to write it up.

 

http://ragnarisapirate.blogspot.com/2012/06/irrationality-in-residential-real.html

 

......Let's say that you turn it into a rental. I would think that it would take about $2K to do (mainly, wall repairs, paint, and minor things). The carpet and cabinets for example, still have a lot of life left in them, but it just isn't stuff that would help you in a sale situation. Say you bought it for $80K. You are looking at having $82K in a house that would probably generate $12K in revenue per year. If you are unlevered and have no expenses, that comes up to ~15% a year. Add in vacancy and repair allowances, plus, taxes, insurance and other items, and you are in the high single digits/low teens (but, do get the help of depreciation)... Granted, you could probably refinance out of it and pocket some money since appraisers generally don't know much when it comes to getting a good value on these things (I would generally trust Zillow over an appraiser, though, there are exceptions). But still, that reduces your margin of safety, and you will still have an asset that probably isn't worth what you owe against it. Inflation had better hit in a big way for you to do overly well. Even then, you may be left with no one that can afford to buy the house off of you since interest rates will likely be forced to rise to combat the very inflation that you are trying to protect against!

That said, the house still needs a fair bit of work at some point in the not so distant future... The new owners may not do it, but eventually, something will have to happen. Does anyone really want to move into a house that was recently a rental and still looks like it?

NO.

As such, it didn't do too much for me even at $80K. When I was going through it on the first day that it was listed, there were 2 other investors going through it... I decided that it really wasn't worth my while to even make an offer, as I probably would have come in at $70K for it, but still wasn't thrilled about it even at that price. I figured that it would end up going for something like $90K. As such, I didn't even bother making an offer.

So. What was the sale price of the house? $110K... That's right, it sold for more than 137% of it's list price.

 

Ok, Ragnar. But if we change the situation a bit. Let's say one buys with cash, no mortgage. And one is not looking for a flip, but a long term income producing asset, basically, a cash cow. Let's say something built in 2000s, so fairly new construction therefore less maintenance and something that is part of condo/townhome association (so exterior maintenance & repairs are covered). So, let's say this something is in the neighbourhood of $250K + let's say $10K in closing costs, inspections etc. So since it is a newer construction in a fairly decent condition, it'll need minimal work to prepare for a rental, but let's say another $10K to spruce it up. So, we have about $270K "out the door".  And let's say this something could be rented easily for $2100 per month.  So, further let's say monthly expenses will be $350 in homeowners association dues (which already includes insurance), plus let's say $400 in property taxes ($4,800 per year including melloroos (since it is a newer area with nice amenities), plus let's say $250 per month for things like home warranty and to fund unexpected expenses. So, we have $1,100 per month in cash. But if we want to be even more conservative, let's say $1,000. If rents rise over time, which they usually do, will be more than that. For the next 10, 20 years.  I don't think it is that bad at all. A little supplement to salary or retirement income. A little bit of diversification away from the stock market, to which let's say you are already substantially exposed. Definitely much better than cash in an inflationary environment. And not to forget that these property prices which are at 2003 levels are paid in 2012 dollars, not in 2003 dollars, which is a different thing. $270K now is not the same as $270K then, which to me is a substantial plus. So, basically, a not such a bad alternative to keeping substantial amount of cash sitting in the bank waiting to be eaten up by inflation or increasing already a substantial exposure to stock/bond markets. Residential real estate today is still a distressed asset, maybe not as cheap as it was yesterday, but still cheap. And if it provides steady monthly income - great, plus if it makes the principal more or less to keep up with inflation - even better, and if the angels sing and some day it appreciates above the "keeping up with inflation" level - icing on the cake.

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