Zelman on housing

[ERICOPOLY]

So, in theory, would single family housing rental stock increase as homeowners with the 30 yr fixed 2.8% mortgages choose to hang onto those homes and rent them out instead of sell them?

 

 

Edited August 20, 2022 by ERICOPOLY

[changegonnacome]

52 minutes ago, ERICOPOLY said:

People have this notion that housing follows inflation but it follows income.

 

Exactly right - income, interest rates, demand & lending standards determine aggregate house prices.........$20m beachfront trophy homes in Florida homes are determined by a whole other different set of variables IMO.................the school book says inflation is good for hard assets and housing is used as an example and your told you should be owning them RIGHT now....its half right but it hasn't got the all important timing caveat piece in there.........I think its good for housing exactly when we saw it be good for US housing at the very START of an inflationary cycle just as prices are starting to accelerate but interest rates remain low & household balance sheets & FCF are still in good shape, this is the goldilocks period of an inflationary cycle.....as expected this occurred in 2020/21 which was just monster for housing.....COVID of course was a unique accelerant given additional household formation and people looking to hold two properties simultaneously (NYC/Miami etc)......but high inflation is followed by higher interest rates in the mid-late part of the inflationary cycle (the Houston we have a problem part when the Fed starts to steps in)........ two things happen......the Fed raises rates (1) reducing the overall amount each buyer via a mortgage, at each income level is given to "shop" for a house & (2) the mortgage shopper themselves has strong headline income but begins to fail the underlying payment capacity tests banks (post-GFC) have to run to show debt servicing capacity......and as the average basket of goods feeding off that income has gone up more and more...... folks are failing this debt service test on the house they 'feel' or envisioned that they should be able to own based on their socio-economic strata.

 

I have friends in the industry and this second part is becoming a big feature they tell me for why folks aren't qualifying for the mortgages "they want" for the types of houses '"they need" based on their income strata......and so you get what we potentially have emerging right now a "buyers strike"......I'm a bull on rents (own CLPR) as a buyers strikes = booming rental demand......I'm a bear on nominal/real house prices.......this is until inflation is brought under control, rates fall again, house prices fall or stay flat but fall in real terms such that affordability is restored & buyers call off the strike........over the long pull rents & house prices are usually fairly correlated, they are going to de-couple I think for the next while.

[Gregmal]

Heres another good one to watch in real time, just listed today. 

 

https://www.zillow.com/homedetails/439-Montigo-Ave-N-Santa-Rosa-Beach-FL-32459/67187460_zpid/

 

$300k in 2014. $700k YE 2020. Will almost certainly see some price cuts. But either way should easily sell at a big premium to last sale. Folks can focus on what they wanna focus on.

 

Housing has almost always been about regional markets. Trends that have existed and been prevalent will simply continue on. It doesnt take a rocket scientist to see that there is still a massive housing shortage and somehow the Fed thinks pricing the fringe people out solves it....Builders are in better shape and will just slow things down, which is ironic because the only answer to the supply/demand equation is to build more. Unlike in 2004, folks just want a home to live in, rather than to speculate on and flip for a profit in 6 months. And that, to the real, normal, non hedge fund dork doing Excel models on imaginary home equity +/-'s that trigger margin call like selling/supply of existing homes occurring, is not a financial venture. 

 

Either way, I dont feel any different than I have for years. The rent/buy equation is really just gonna see saw back and forth, upward, with each taking turns being the "value prop" relative to the other. So just be long both and shift weighting. 

[ERICOPOLY]

32 minutes ago, changegonnacome said:

.....and so you get what we potentially have emerging right now a "buyers strike"......

 

There's no question that payments are like 35% higher with the interest rate spike.  But there should be fewer sellers willing to sell as well, because selling one home means finding another and they may not qualify for as nice/large a home, so that can make them sit tight.

 

Which should impact labor mobility and keep a lid on selling pressure.

Edited August 20, 2022 by ERICOPOLY

[changegonnacome]

7 minutes ago, ERICOPOLY said:

and they may not qualify for as nice/large a home, so that can make them sit tight.

 

True until the alternative home gets cheaper.......no movement right now as you said cause the alternative is unattractive but you wait till house prices fall in nominal or real terms.........then the move makes sense again and you rent out your 2.85% mortgaged home and cash flows support that move.

Edited August 20, 2022 by changegonnacome

[Gregmal]

The benefit of owning is so multifaceted but basically when times are good you do very well with housing and when they aren’t you just kind of bide your time. Especially the average person who simply wants a place to live. The underwriting process for mortgages, at least when lending standards aren’t super loose, virtually assures it. 
 

No one who buys right before a theoretical 10% decline in average home sale prices feels much pain. Most are simply living in it and paying their monthly bill, or renting it with the cash flow being largely what drove the underwriting and purchase decision. 

[changegonnacome]

11 hours ago, Gregmal said:

No one who buys right before a theoretical 10% decline in average home sale prices feels much pain. Most are simply living in it and paying their monthly bill, or renting it with the cash flow being largely what drove the underwriting and purchase decision. 

Yeah it’ll be wash…..the folks who bought last year paid a high price for the property but a very low price for the mortgage……folks in a year or two will pay a lower price for the home but a higher price for the mortgage……both those households monthly mortgage payments for housing in the short to medium will probably converge at the same monthly outlay…...…it’s just the variables (rates / prices / incomes) that shifted around….but the most important variable in the long pull in housing is always income or more correctly net income after tax, food & energy….this number assuming system wide prudent lending drives aggregate house price levels over time….……with some oscillations around that trend line as lower or higher rates are in effect..….undoubtedly in my mind we’re in a period of falling or flat (but falling in inflation adjusted terms) aggregate house price levels such that ‘affordability’ is returned to the market reflecting higher overall rates & reduced net income after tax/food/energy.

 

(The above describes aggregate prices…..the caveat to the above of course are micro or hot markets…..where migration flows from HNW locations to MNW locations distort the equation above for a while acting like an exogenous shock….case in point Manhattanites migrating to Florida. )

Edited August 20, 2022 by changegonnacome

[ERICOPOLY]

My house is on the market because we don't need the extra bedroom anymore and don't like living with an HOA and don't like gated communities.  We are downsizing from a 5 bedroom owned home to a 4 bedroom rental.

 

If it doesn't sell for close to asking price I'm contemplating renting it out.  Zillow's rental estimate is like $6,600 per month for the house we are selling, and the rental house a few miles away that we're beginning to move into this weekend is $3,800 per month with landscapers included.

 

Our mortgage is $3,600 a month.  So if we can truly get $6,600 a month for the one we own, our rental income would almost cover our mortgage and the rent on the home we'll be living in.  This is only possible because our mortgage rate is around 2.8% and because we have about 60% equity in the home -- those two factors are keeping our mortgage small relative to prospective rental income.

 

And a lot of families DO have at least 60% equity in the home.  

 

Anyways, if the buyers are on strike (and it increasingly looks like they are), I am contemplating waiting them out instead of giving them their price.  What motivates me to go through the hassle of being a landlord again is this juicy 2.8% rate that I don't want to let go of. 

 

So I'm projecting this mentality when I ponder whether sellers will decide to rent out their homes and keep their low mortgages instead of dumping their homes onto a soft market.

 

 

 

 

[crs223]

12 hours ago, ERICOPOLY said:

 

There's no question that payments are like 35% higher with the interest rate spike.  But there should be fewer sellers willing to sell as well, because selling one home means finding another and they may not qualify for as nice/large a home, so that can make them sit tight.

 

Which should impact labor mobility and keep a lid on selling pressure.

 

There is a similar phenomenon in California.  Prop 13 dictates that property tax is essentially “frozen” when you buy your house — the dollar amount of the property tax bill doesn’t go up over the decades.

 

So CA ends up with large houses that have just one person living in them - typically an old widow unwilling to sell to avoid “resetting”’ the property tax bill to current levels.

 

This is most pronounced during sellers markets when the buyers mutter to themselves about old people “hoarding” their square footage.

[changegonnacome]

28 minutes ago, ERICOPOLY said:

Anyways, if the buyers are on strike (and it increasingly looks like they are), I am contemplating waiting them out instead of giving them their price.

IMO giving up a 2.85% mortgage on any financed cash flowing asset one owns would be an act of insanity……everybody’s situation is different….but given what you described and depending on your appetite for friction……I’d seriously consider renting out the home you don’t need now but has the 2.85% mortgage on it….create a cash flow stream there……which you then use to subsidize rent on an appropriately sized ‘bridge’ home, this income stream can be lent against in the future by a bank...…..this rental can be your ‘waiting in the long grass’ home which has a say 3-month break notice period built into the lease…….when the time is right and appropriate affordability has been restored to the market then you swoop in to buy.

Edited August 20, 2022 by changegonnacome

[ERICOPOLY]

7 minutes ago, crs223 said:

 

There is a similar phenomenon in California.  Prop 13 dictates that property tax is essentially “frozen” when you buy your house — the dollar amount of the property tax bill doesn’t go up over the decades.

 

So CA ends up with large houses that have just one person living in them - typically an old widow unwilling to sell to avoid “resetting”’ the property tax bill to current levels.

 

This is most pronounced during sellers markets when the buyers mutter to themselves about old people “hoarding” their square footage.

 

My house is in California.  The property tax would be 50% higher if I bought it today (I bought it 3 years ago).

[ERICOPOLY]

9 minutes ago, crs223 said:

 

There is a similar phenomenon in California.  Prop 13 dictates that property tax is essentially “frozen” when you buy your house — the dollar amount of the property tax bill doesn’t go up over the decades.

 

So CA ends up with large houses that have just one person living in them - typically an old widow unwilling to sell to avoid “resetting”’ the property tax bill to current levels.

 

This is most pronounced during sellers markets when the buyers mutter to themselves about old people “hoarding” their square footage.

 

You are correct about the hoarding.  My parents are doing that (they bought in 1970 in Los Altos Hills). 

 

The step up in basis for the capital gains tax is the icing on the cake -- when the first spouse dies the surviving spouse can sell the home free of capital gains tax.

[changegonnacome]

34 minutes ago, changegonnacome said:

IMO giving up a 2.85% mortgage on any financed cash flowing asset one owns would be an act of insanity……everybody’s situation is different….but given what you described and depending on your appetite for friction……I’d seriously consider renting out the home you don’t need now but has the 2.85% mortgage on it….create a cash flow stream there……which you then use to subsidize rent on an appropriately sized ‘bridge’ home…..this can be your ‘waiting in the long grass’ home which has a say 3-month break notice period built into the lease…….when the time is right and appropriate affordability has been restored to the market then you swoop in to buy.

One addition to the above …..is the question of the RoE your going to get on this rental and if it’s attractive relative to other opportunities to deploy capital….this depends on the LTV etc.

[ERICOPOLY]

18 minutes ago, changegonnacome said:

One addition to the above …..is the question of the RoE your going to get on this rental and if it’s attractive relative to other opportunities to deploy capital….this depends on the LTV etc.

 

We already have a $90,000 house in Dunsmuir in a great location that we bought with cash earlier this year. 

 

What we want to do is purchase a second home in San Luis Obispo, walking distance to downtown, ideally a 2 bedroom with about 1,000 sqft with a small mortgage (so the rate doesn't really matter).  We can buy that home only if we sell our current one.  And that's the dilemma.  

 

 

 

 

Edited August 20, 2022 by ERICOPOLY

[changegonnacome]

1 hour ago, ERICOPOLY said:

We can buy that home only if we sell our current one.  And that's the dilemma.  

 

Got you - don't have the numbers so cant be precise...... but lets say your dream home dropped in value in the future (or your income rose and that future dream house price stayed flat) such that the equity required to secure it by you came down too...would something like that work?.......additionally your current home turned into a rental and rented out for a full tax year and producing cash flow/income and showing up in your in tax returns as such....creates an incremental income stream that would allow a bank underwriter to extend credit against this too........so without any employment pay increase.......your current home turned into a rental bumps up your income and by extension your borrowing capacity.......another year or two also should see some incremental equity being built up in your current home as you pay down the mortgage and it too could potentially be used via HELOC to port some equity to the your dream house (this of course is counter to what we've talked about earlier which is the possibility that nominal house prices fall but this would work in a world where nominal house prices stay flat, which I think is very likely, and inflation does the work of reducing their real cost over a number of years).

[crs223]

@ERICOPOLY FYI I refinanced my rental home January 2021 with AIM Loan.  They “count” rental income only if it’s been coming in for 24 months or more.

[Gregmal]

The number of low probability events that need to occur for a “forced sale” with housing is insane. And even then, the process takes 6-12 months at least. There are many reasons folks ignored risks leading into GFC, but the underpinnings of the institutional belief that housing only goes up were solid. Obviously this doesn’t mean there won’t be stops and starts such as in the early 90s. But it’s just so hard to get things to a widespread point of distress. What is even more telling now is the same shit that unfolded after COVID is taking place. Where tons of people are cashed up on the sidelines waiting for bargains. Which almost always is a sign that you won’t get them. You get them when no one expects it. But further for a case study on why it’s all about simply weathering the storm, check out what occurred to the values of some of the Citi and Lehman holdings. Or go see what the history of the Howard Hughes company was. Even those “problem assets” really just needed some time. Probably the only rule I’d say is steadfast for someone with housing is don’t be a forced seller.

[Gregmal]

The gift with being a rational investor is that since GFC you have this huge percentage of folks who are influenced by or suffering from PTSD due to it. There’s a whole generation of investors who have wild misconceptions about housing, irrational needs to hoard cash, and just a general belief that this sort of thing is always right around the corner. Literally every two years or so since GFC there’s been massive opportunities in the market because these people take over the narrative and scare people for a little bit. Europe in 2H 2011, China in maybe august or so 2016, in between oil and gas contagion, Trump election, then basically “the punch bowl” thing every 6 months since 2017. 

[crs223]

@Gregmal I have been assuming the opposite.  I would guess that anyone under 35 years old have seen this strategy work brilliantly for their entire adult lives: if you want to get rich, buy the dip.  In the unlikely event that markets turn ugly, the fed will print and bail us out.

[Gregmal]

Yea but that age group I don’t think is as dominant(or moneyed up) as the 35-55 crowd. Especially in the money management/ finance world.
 

You’ve got the younger definitely reckless group and the slightly older, scared of their shadow, I wanna be the next Michael Bury group and it creates an interesting dynamic. Both IMO are wrong.
 

Generally I think just evaluating things from a historical context and then applying some logic/deductive reason in terms of how people act/react works best. Or just focus on company or sector fundamentals but I guess a lot of folks wanna be macro traders…

 

There is virtually zero relevant data that supports a housing crash if you define crash the way any rational person would. If folks wanna define crash as prices in some areas maybe pull back to levels from a year or two ago and a slowdown in activity then I mean, they’re free to, but what I’ve found is those folks generally don’t have their money where there mouth is in a meaningful way and are really just looking to capitalize on short term noise. Often their own noise.

Edited August 20, 2022 by Gregmal

[changegonnacome]

6 minutes ago, crs223 said:

 In the unlikely event that markets turn ugly, the fed will print and bail us out.

 

Yep the Fed has had your back.......question is do they have your back right now with inflation where it is/going.....cutting rates and printing isn't the no brainer policy choice it was for the last 40 years.....I'm not saying they wont do it per se but highlighting with inflation prints above ~4% it isn't the no brainer solution Greenspan/Bernanke/Yellen had arms reach away at all time behind a glass door marked 'break in case of emergencies'.

 

21 minutes ago, Gregmal said:

this huge percentage of folks who are influenced by or suffering from PTSD due to it.

 

Agree and I think any nominal fall in system wide house prices are going to 'trigger' this group again such that they fail to act....and these folks, in the main, have the cash to act and they wont I think based on this PTSD phenomenon.

 

14 minutes ago, crs223 said:

I would guess that anyone under 35 years old have seen this strategy work brilliantly for their entire adult lives: if you want to get rich, buy the dip.

 

Yes will be interesting to see how this cohorts reacts to potential nominal house price falls......isnt this 'generation rent' though?....dont buy a car...uber.....no holiday home... just airbnb.....no credit cards...BNPL........the narrative is they have an aversion to debt.....I've never looked at the data so could be BS.....I wonder do they demand mortgages in lower number than previous generations?

[changegonnacome]

4 minutes ago, Gregmal said:

There is virtually zero relevant data that supports a housing crash

 

Crash to me is 50% peak to trough......I agree the data doesn't support this......I think the data potentially supports round tripping to January 2020 prices (but inflation adjusted upward revised Jan 2020 prices)...........how big your fall  depends on how high you flew.......and again property is riddled with micro-markets so I'm not saying any particular area

Edited August 20, 2022 by changegonnacome

[Gregmal]

Yea to me crash is probably 30%+ but then also a sustained flatline. Not a dip and then rebound or 15-20% pullback. Some like to trumpet the leverage in housing but that again doesn’t show an understanding of how residential housing works. I bought a new golf club the other day. Was my mental set a) wow I just spent money on what will be a 50-100% loss? Or b) I’m excited to have something? Most homebuyers, think much more like this than the fund analysts in his Excel bubble. Someone signs a lease and if rents plummet the follow week most probably don’t even know or care they just have their place a pay an amount they were fine with. Buying a home is even more like this. If your numbers derisk you enough to qualify for a certain loan amount, the price you pay is fine. In today’s environment, most folks are ecstatic just to be able to buy one. You think they care one iota what the Zillow estimate is a month later? Nope. They just pay their mortgage and live their lives as happy homeowners. 

[ERICOPOLY]

On 8/20/2022 at 10:46 AM, changegonnacome said:

and these folks, in the main, have the cash to act and they wont I think based on this PTSD phenomenon.

 

However the alternative has mistreated them lately -- what were rents two years ago vs today?  This period of rapidly rising rents should have weakened their love of renting.  They should be feeling insecure as renters.

Edited August 22, 2022 by ERICOPOLY

[ERICOPOLY]

What stocks are the most exposed to a housing drop of 15%+?