What's going on with the housing market?

[lookingstill]

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.

 

Thanks for useful information, Investmentacct.  And many thanks to everyone for an interesting and useful discussion.

[ragnarisapirate]

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.

 

At the numbers you cite, it seems to me that one is paying a lot for inflationary growth... A good business that is already under valued and makes sugar water or candied fruit seems a lot more attractive to me... Better yet, buy stock in a company that invests in real estate, and do so below book value. You get the same protections that you cite, hopefully get a competent manager, and do ZERO work of your own other than occasionally log into your brokerage account from a beach somewhere. I can't say enough that there are a ton of people that think they know what a nice house is, but have no clue (and end up investing in them). You can't really get a full appreciation for this stuff unless you yourself are willing to actually crawl under the house to find out for yourself. Inspectors are generally idiots that just want to be called back to put their stamp of approval on the next sale.

 

I had one that tried to say that I was selling a house 3 months ago, with a receptacle that didn't work... Well, he was too dumb to stand up and flip the switch that the thing was on... that setup was something that was original to the house in 1970, and, was actually required by code! Alone, not a big deal, but, there were like 5 other items that he got totally wrong (for example, he didn't know how to test GFCIs, said my gutters were loose, etc). I literally fixed none of the problems that he cited, as they didn't exist. Even if wrong, those are cheap things to fix. There are other problems that are much bigger, often surrounding foundations and such.

 

Even new houses have issues that can be bad; contractors here are notorious for cutting corners on new construction.

 

Don't believe me? Take one from our own book as value guys. How many of you crawl into annual reports and don't trust what a bunch of the WS analysts say for forward P/Es and such? How many times do you find that people freak out about things they shouldn't, but don't have an appreciation for dangers that are very apparent to you when dealing with stocks?

 

My guess is pretty often. By extension, that is the same thing that I see with houses in my hometown. I don't think that it is too different from different places in the US, but, could be wrong. All I am saying is that I think there is a significant number of people that don't know what they are doing, and that they will get burned at worst and at best, will pass along a house to a greater fool at some point in the future....

 

Thoughts?

[value-is-what-you-get]

Don't believe me? Take one from our own book as value guys. How many of you crawl into annual reports and don't trust what a bunch of the WS analysts say for forward P/Es and such? How many times do you find that people freak out about things they shouldn't, but don't have an appreciation for dangers that are very apparent to you when dealing with stocks?

 

My guess is pretty often. By extension, that is the same thing that I see with houses in my hometown. I don't think that it is too different from different places in the US, but, could be wrong. All I am saying is that I think there is a significant number of people that don't know what they are doing, and that they will get burned at worst and at best, will pass along a house to a greater fool at some point in the future....

 

Thoughts?

 

I would say you have either been a landlord or have very good intuitive skills because you have described very accurately what it means to be a rental property owner. 

 

I would add that a structural problem with landlording is that you are trying to earn a return off an asset by renting the asset to someone who can't afford/qualify to buy it at these discounted prices either.

 

The tailwind for landlording right now is of course demographics.  Many Boomers who have insufficient savings/pension will be renting in the near future and of course will greatly reduce turnover because that is a one way street under the circumstances. 

 

A rental property is an investment, but it is also a part time job (per property).  That's the part people fail to realize, they just look at the numbers.

[fuluvu]

First of all, I agree with other’s comments on the warming up of the housing market. In D.C./Maryland/Virginia, a good short sale can get multiple offers with a day on the market.

 

Regarding to investing in the rental property, I ‘d like to make comments based on my own experiences. A little more than 2 years ago, I decided to get my hands dirty and started to buy distressed properties for rental. So far, I have bought 3 properties with leverage (mortgage) and have a contract to buy another. My total invested capital is $130K (including down payments, closing costs and repairs). Total market value of the 3 properties is about $680K. My annual net cash flow is $15000-$17000 depending on maintenance costs and $10000+  pay down of principle. The cap rate is more than 10%. If I use the cash flow to pay extra principle, the mortgage can be paid off in 10 years. In DC market, the appreciation potential is pretty good in the next 10 years. I expect my initial investment of $130000 will become $1.3 mil in 10 years.

My first property has been rented for more than a year. I manage the properties myself. So far, I have enjoyed the process. The only repair was to replace the dryer in the unit. The tenants all have paid their rent on time. The key is to screen out potential bad tenants at first place.

I do not consider myself real estate investor. I am just a capital allocator. The numbers were too good to pass by when looked at it two years ago. It is a good opportunity and I have not regretted.

 

[biaggio]

http://www.youtube.com/watch?v=Kq_JApaNam0&feature=related

 

"Warren Buffett - Investing in Real Estate"

 

Younger WEB talking about buying real estate outright as opposed to buying REIT with 8% yield.

[ragnarisapirate]

Don't believe me? Take one from our own book as value guys. How many of you crawl into annual reports and don't trust what a bunch of the WS analysts say for forward P/Es and such? How many times do you find that people freak out about things they shouldn't, but don't have an appreciation for dangers that are very apparent to you when dealing with stocks?

 

My guess is pretty often. By extension, that is the same thing that I see with houses in my hometown. I don't think that it is too different from different places in the US, but, could be wrong. All I am saying is that I think there is a significant number of people that don't know what they are doing, and that they will get burned at worst and at best, will pass along a house to a greater fool at some point in the future....

 

Thoughts?

 

I would say you have either been a landlord or have very good intuitive skills because you have described very accurately what it means to be a rental property owner. 

 

I would add that a structural problem with landlording is that you are trying to earn a return off an asset by renting the asset to someone who can't afford/qualify to buy it at these discounted prices either.

 

The tailwind for landlording right now is of course demographics.  Many Boomers who have insufficient savings/pension will be renting in the near future and of course will greatly reduce turnover because that is a one way street under the circumstances. 

 

A rental property is an investment, but it is also a part time job (per property).  That's the part people fail to realize, they just look at the numbers.

 

Indeed, I am a landlord.

 

It may be what I am looking at here, but, it is almost always, across the board cheaper to buy than rent. I don't know tha tI buy the baby boomer talk for now. Unless they lose their house.

[ragnarisapirate]

First of all, I agree with other’s comments on the warming up of the housing market. In D.C./Maryland/Virginia, a good short sale can get multiple offers with a day on the market.

 

Regarding to investing in the rental property, I ‘d like to make comments based on my own experiences. A little more than 2 years ago, I decided to get my hands dirty and started to buy distressed properties for rental. So far, I have bought 3 properties with leverage (mortgage) and have a contract to buy another. My total invested capital is $130K (including down payments, closing costs and repairs). Total market value of the 3 properties is about $680K. My annual net cash flow is $15000-$17000 depending on maintenance costs and $10000+  pay down of principle. The cap rate is more than 10%. If I use the cash flow to pay extra principle, the mortgage can be paid off in 10 years. In DC market, the appreciation potential is pretty good in the next 10 years. I expect my initial investment of $130000 will become $1.3 mil in 10 years.

My first property has been rented for more than a year. I manage the properties myself. So far, I have enjoyed the process. The only repair was to replace the dryer in the unit. The tenants all have paid their rent on time. The key is to screen out potential bad tenants at first place.

I do not consider myself real estate investor. I am just a capital allocator. The numbers were too good to pass by when looked at it two years ago. It is a good opportunity and I have not regretted.

 

You bring a good point of screening out bad tenants. I would think that DC would be great for rentals, just because you have a lot of people that by definition, may only be there for 4 (or fewer) years...

 

Out of question, what are you renting those properties that you paid 630K for?

 

 

[opihiman2]

Some more anecdotal evidence, but in my neck of the woods in Monterey, CA, houses on the lower end of the market are being gobbled up.  I see pending sales signs everywhere.  HOWEVER, even from 1-2 years ago the prices of homes around here have dropped.  A house that has been sitting on the market for over a year up the street from me has finally sold at 15% below their initial asking price.  I've read that in the Bay SF Area, though, there are bidding wars going on for homes with all cash offers.  I think the homes in the larger metropolitan areas are doing better simply because of their economic power.  They just have more jobs, and I think people gravitate to those areas.  My friend who is a senior loan officer is saying that the mortgage refi business is booming like never before. 

 

Anyways, regardless of all this, after several years of being on the fence about housing, I think houses are now very attractive in my neck of the woods.  I think they are probably the best investment out there.  It's now much cheaper to buy here than rent. 

[Rabbitisrich]

Just saw this interesting rental ask price comparison in Seattle:

 

http://www.urbnlivn.com/2012/06/17/seattle-rents-2002-2012/

 

 

 

Edit: It looks like the image function isn't working. Is there anything I should do aside from copy and pasting the image location?

[Crip1]

My professional business is mortgage lending, primarily to individuals on purchase transactions in 15 states. I state that in order to make clear the glasses through which I can see the Real Estate Market. That said, a couple of points:

 

* Real Estate markets are, in large part, localized. I live in Dallas which has been quite stable for the past 6.5 years since we moved here. My old neighborhood in Chicago, however, has not fared so well. The same model home that we sold before moving here is LISTED for 20% less than we SOLD our home for...suggests a 25% decline, more or less. And, this home has been on the market for a few months suggesting that homes are not flying off the market. Apparently, the market in suburban Chicago is not enjoying a resurgence. My point is simply that individual marketplaces are often unique unto themselves.

 

* Market data is, my nature, a rearview mirror. Most reports have been showing a nationwide leveling out of prices/activity for the past several months. The investor money which is apparently coming into some marketplaces (like So Cal, according to this string), will likely cause the numbers in coming months to improve.

 

* Real Estate appraisal, in large part, is akin to market data as it is a rearview mirror. It's interesting to note that the real estate markets are, almost across the board, in better shape than 3 years ago. However, we are encountering more instances of homes not appraising out now than we did then...that's a sign of an appreciating market.

 

* Now, looking into a crystal ball, where do we see things going from here. First, we'll assume the overall economy will be relitively unchanged for the next few years. Second, as stated here, the marketplaces indicated herein seem to be driven by investor activity. Investors have the benefit of low interest rates (low costs) and increased demand (people have to live somewhere, homeownership rates are down and it's STILL getting harder to get a mortgage loan for John Q Public). Furthermore, investors are not seeing other areas where they can put their money for attractive return as bonds are also yielding unacceptable returns. The question is...what happens if and when interest rates rise? First, investors have higher costs so, all things being equal, they will bid less on the existing inventory. Second, there will be fewer homeowner buyers since higher rates will force MORE buyers OUT of the marketplace. The double-whammy of fewer buyers will, I fear, tip the supply/demand law towards excess supply and, again, will stagnate or reduce pricing. The certainty of this, as is the timing, is totally unknown, but it suggests to me that "flipping" will soon be out of vogue but landlording will still work out for those who are good at it.

 

Is anyone here from Georgia? I kid you not, half of the loans we do in Georgia have not appraised out this year in Georgia. Agents are telling us that appraisers are out of touch with the market. I can understand that, but also know that agents have a vested interest in seeing things through rose-colored glasses, so I take that with a grain of salt. Any other observations?

 

-Crip

 

[ERICOPOLY]

Just saw this interesting rental ask price comparison in Seattle:

 

http://www.urbnlivn.com/2012/06/17/seattle-rents-2002-2012/

 

Seattle nearly led the nation in unemployment that year.

 

Rents were higher in 2000 vs 2002.  The tech bust was especially painful in Seattle.  I was a landlord of two single family homes at that time (Kirkland and West Seattle) -- I remember it well.

[Rabbitisrich]

Don't believe me? Take one from our own book as value guys. How many of you crawl into annual reports and don't trust what a bunch of the WS analysts say for forward P/Es and such? How many times do you find that people freak out about things they shouldn't, but don't have an appreciation for dangers that are very apparent to you when dealing with stocks?

 

My guess is pretty often. By extension, that is the same thing that I see with houses in my hometown. I don't think that it is too different from different places in the US, but, could be wrong. All I am saying is that I think there is a significant number of people that don't know what they are doing, and that they will get burned at worst and at best, will pass along a house to a greater fool at some point in the future....

 

Thoughts?

 

I would say you have either been a landlord or have very good intuitive skills because you have described very accurately what it means to be a rental property owner. 

 

 

 

He has some great stories on his website about the the investment process. I'm waiting for the next part of this ominously named series:

http://ragnarisapirate.blogspot.com/2012/05/sometimes-its-best-to-take-pass-40.html

http://ragnarisapirate.blogspot.com/2012/06/walking-away-from-few-million-dollars.html

 

 

[Rabbitisrich]

Just saw this interesting rental ask price comparison in Seattle:

 

http://www.urbnlivn.com/2012/06/17/seattle-rents-2002-2012/

 

Seattle nearly led the nation in unemployment that year.

 

Rents were higher in 2000 vs 2002.  The tech bust was especially painful in Seattle.  I was a landlord of two single family homes at that time (Kirkland and West Seattle) -- I remember it well.

 

Thanks for that detail. Looking at this chart on apartment vacancy rates, the recent recession wasn't even the worst period for landlords in the last several decades: http://www.duprescott.com/productsservices/articleinfo.cfm?ArticleId=575

According to the article, only 1800 units were opened in 2011, but a recent Bloomberg article referenced plans to build 4600 units in Downtown alone.

[Rabbitisrich]

Good article from Conor Sen on demographic pressure: http://www.minyanville.com/business-news/the-economy/articles/household-debt-mortgage-mortgage-debt-economic/6/25/2012/id/41956

 

Three comments: First, we're making good progress. Mortgage debt to GDP has been falling by roughly 1% per quarter. At this rate we'll be back to normal in four years. Second, interest rates, and hence mortgage payments, are far lower today than they were in the mid 1990's. Back then mortgage rates were around 8%. Today they're below 4%. Mortgage debt servicing payments as a percentage of DPI is at 9.18% as of Q1 2012, its lowest level since Q2 2002. The low over the past 30 years was 8.67% in Q1 2000, and it's likely that by the second half of this year household mortgage burdens will be at a 30-year low. And third, just as it's not helpful to think about a “national average temperature,” if you want to know the weather forecast, the breakdown of homeownership -- and hence mortgage debt responsibility -- matters.

 

By the mid-1990s, boomers had all hit age 35, so we weren't getting any new age 35-49 households. Instead, with the safety of a 10-year bullish trend behind them, boomers started increasing their homeownership rate. This peaked in 2005, but a once-in-a-lifetime credit boom led to exotic financing for subprime borrowers, pushing house prices and mortgage debt to unsustainable levels by 2007.

 

However, the number of prime age households had already peaked around the year 2000, the same time that robust economic growth did. Since 2007, boomers started retiring, easy credit went away and unemployment soared, financing a home purchase became difficult, home prices collapsed, households got scarred from the crisis, and Millennials haven't been quite old enough to step in and get things going again yet.

 

However, demographics have now troughed, and someday sooner than people think, Millennials -- on a debt-servicing basis probably the least leveraged group of 20-somethings in 40 years -- will take the jobs of their retiring parents and start forming households and buying houses.