It’s Go Time In California
The Press Enterprise reports from California. “Drawn by the prospect of high profit margins on rents and re-sales of homes, hedge funds, Wall Street investors and flippers are muscling out home-grown shoppers in Inland Southern California. The dynamic has gotten so pronounced, Realtors admit they’re getting edgy about the run-up in price. Al von Entress, an agent in Murrieta, said buyer interest has been so strong in southwest Riverside County he’s been collecting multiple offers on properties — some well above list prices — within a matter of hours. Weeks ago, he listed a two-bedroom, two-bath house in Menifee Lakes at $215,000, where comparable homes had been selling for $170,000. The client, Charity Willard, was prepared to rent out the home if it didn’t sell before she moved out of state for a job transfer.”
“‘At the time, I thought it would be on the market for two or three months,’ Willard said. ‘Before we had the first showing, I had two offers, sight-unseen.’”
“The 1,300-square-foot home nabbed 18 offers within five days, three of which were all-cash. The buyers paid $35,000 over asking price, von Entress said. Willard said she is thrilled about the $250,000 sale and somewhat rattled by better-than-expected gains. Going in, the Air Force auditor said her only goal was to pay off the mortgage. ‘I feel like this is a mini-bubble, where things are spiking up at the moment,’ she said. ‘People want homes so bad they’re throwing everything they have at it to get in while they can.’”
“‘Cash buyers have the advantage,’ particularly on homes in the low-price range, von Entress agreed, and some are wielding it to make investments that bring up assessed values in their own neighborhoods. That’s exactly how the sale played out in Menifee Lakes, von Entress said. Willard’s buyers were local investors with property in the area. ‘They viewed the sale as a way to drive up comps,’ he said.”
The Ventura County Star. “A luxury home Realtor with Coldwell Banker at Hollywood Beach in Oxnard, Ariel Palmieri said her clients agree the market has bottomed out and prices are on the way up as inventory deteriorates. ‘Many buyers are saying it’s now or never,’ she said. ‘If I don’t buy this home on the sand for $2.5 million now, I won’t ever be able to.’”
“The buyers Palmieri sees shopping for beach properties in Ventura County are coming from Los Angeles, Pasadena, the San Fernando Valley, Santa Clarita and other areas south of Los Angeles. ‘It’s go time for these people,’ she said.”
The Bakersfield Californian. “Chase Hosley is a mid-level grocery store manager who said his father taught him that renting is ‘just throwing the money away.’ Now 21 years old and renting an apartment in Bakersfield, Hosley began looking a few months ago for a home to buy in Oleander or southwest Bakersfield. But the first property he ‘fell in love with’ was bought by someone else almost immediately. The next four or five homes that came up — all listed at between $100,000 and $150,000 — had already drawn cash offers by the time he called to ask about them. ‘Everything I looked at, it was like that,’ said Hosley.”
“His luck may have taken a better turn: He recently entered escrow on a three-bedroom, 1,200-square-foot Myrtle Street home after bidding $136,500, or $1,500 above the asking price.”
“A single-family home listed for sale at $85,000 to $90,000 can often be ‘flipped’ and resold for about $130,000, Bakersfield Realtor Jonathan Weinmann said. Investors willing to leave their money in the market for a longer period often shoot for a property priced at about $120,000, then rent it out at $1,100 or $1,200 a month, Weinmann said. One result of this tighter supply, Weinmann said, is that the ideal properties to buy and hold onto are mostly gone. ‘It’s not to say (investor demand) has gone away, by any means,’ he said. ‘But (the competition) is … ferocious at certain price ranges.’”
“Bakersfield home flipper Miguel Soltero, backed by what he calls a ‘closely knit’ group of friends, family and business acquaintances — owned about 60 Bakersfield properties as of March. That made them, as a group, one of Kern’s top 10 homeowners. Soltero said the group’s guiding strategy is not to rent out these properties but fix them up and sell them at a profit. It’s less capital-intensive than buying and holding, he said, and more profitable, too.”
“‘We have enough rentals to know that, at the end of the day, it hasn’t been that lucrative for us,’ said Soltero. ‘We make more money buying, rehab’ing and selling.’”
The Signal. “Effective June 3, when a home purchase is insured by the Federal Housing Administration – FHA – buyers will no longer be able to drop their mortgage insurance once the balance drops to 78 percent of the value of the home. Credit requirements are much more stringent with conventional loans, but, so many home buyers still need the FHA loans, said Connor MacIvor with RE/MAX. ‘Currently, over 70 percent of our buyers are FHA,’ MacIvor said.”
“Dwight Hawkins, with Realty Executives said the upfront loan fee home buyers pay for an FHA-back loan is jumping as well from 0.1 to 1.35 percent. After adding up all the fees to buy, and own, a home – loan fees, mortgage insurance, impound account, closing costs, principle, interest, taxes, insurance and, in most cases, a homeowners association fee – the home buyer has a lot of costs added on when buying a home, said Dwight Hawkins, with Realty Executives. ‘I believe the administration has said that they want more people to buy homes and are looking to ease up on qualifications again,’ Hawkins said. ‘Go figure!’”
The Union Tribune. “Want to buy a new home in San Diego County? You may have to wait in line. Demand for housing has become so intense that major builders are requiring prospective clients to sign up on lists for a chance to buy a home. ‘The problem is being created by the absence of inventory in the resale market,’ said San Diego economist Alan Nevin. ‘That’s creating a panic mentality.’”
“Some homebuilders, taking note of increased demand, have been boosting prices after each phase. Nevin fears these supply-demand dynamics could fuel a dangerous rise in home prices, which have accelerated due to a sizable share of investment and cash buyers creating more competition in the overall market. Single-family home prices have risen 14 percent from a year ago while condo values have gone up by 21 percent, said Nevin, citing a recent per-square-footage analysis from the Greater San Diego Association of Realtors.”
“Industry experts said today’s price gains are an indicator of a recovering real estate market, not another housing bubble. ‘We’re raising prices again, which we think is important for buyer confidence,’ said Matt Sauls, a spokesman for Pardee Homes”
“‘That’s an outrageous increase even though (homeowners) love to see their home values go up. But it will become another debacle like what we had,’ said Nevin, referring to the lead-up to the housing crisis.”
The Sacramento News & Review. “The cash-for-homes trend exploded in 2008 and streaked to a 10-year high in December 2012, when cash buyers accounted for nearly 40 percent of Sacramento County’s home sales, according to the Sacramento Association of Realtors. Since then, these buyers, most of whom are investors looking to rent or flip purchases, have continued to rule the market, accounting for 39.5 percent and 36.4 percent of all home sales in February and March, respectively.”
“Ross Hendrickx lives in a home in Del Paso Heights that’s currently worth less than he paid for it. He’s not in danger of losing it, but he is waiting for the market to rebound to where he’s no longer underwater and might be able to sell it for close to what he put down. As a Roseville-based title officer who deals with short-sale and foreclosure properties, Hendrickx sees a lot of clients who are worse off. They’re just barely treading water and hoping the banks will agree to short sales. But because the market is climbing and values are up, it’s more likely these banks will just foreclose, he says. ‘They gamble, and they get foreclosed on anyway,’ Hendrickx said.”
“Tom Pool, spokesman for the California Department of Real Estate thinks there’s enough pent-up demand that when the shadow inventory is released, there still won’t be enough to accommodate interested homebuyers. The bubble may flutter, but it won’t bust. But no one knows for sure. While rising home prices can’t come fast or furious enough for the foreclosure-endangered, there is a risk that prices, if spiking too rapidly, could arrest the market before it has time to heal. Prices are already growing too rich for investors, real-estate agent Harold J. Frink reminded. ‘If this clip keeps up, it could price first-timers out of the market,’ he added.”
“A lifelong renter, Chris Raynes missed out on the first housing-bubble blockbuster that dropped six years ago. His mother, who now lives with him after losing her home to the banks, did not. But Raynes has a front-row seat for what may end up being the soul-sucking sequel. And like most sequels, it’s all about maximum commerce and shock-and-awe thrills. He started bidding last spring when he felt home prices couldn’t drop any lower. The Bay Area native would prefer to stay here in the floodplain capital, but knows he can’t be picky. Not in this ruthless climate.”
“‘I’m 43 years old, and I’m finally trying to get my feet wet,’ he told SN&R. ‘I’m fortunate I wasn’t ready [to buy a home when the bubble popped]. But now I’m ready, and so is everyone else.’”
Soltero said the group’s guiding strategy is not to rent out these properties but fix them up and sell them at a profit.
“‘We have enough rentals to know that, at the end of the day, managing rentals hasn’t been that lucrative for us,’ said Soltero.
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RutRoh Shaggy!
‘Willard said. ‘Before we had the first showing, I had two offers, sight-unseen…The buyers paid $35,000 over asking price, von Entress said…some are wielding it to make investments that bring up assessed values in their own neighborhoods. That’s exactly how the sale played out in Menifee Lakes, von Entress said. Willard’s buyers were local investors with property in the area. ‘They viewed the sale as a way to drive up comps,’ he said.’
Motivation is important. If I want to buy a house to rent out long term, what do I care about driving up comps? I would actually want lower prices so I would get a higher return.
If I was interested in selling for a profit, I would want comps to rise. But paying for comps to rise is probably one of the stupidest things I’ve ever read.
Remember the recent comment about “investors” in Florida paying over asking when they were the only bidder? I guess we’ll find out if pump and dump works with SFH.
A lot of this “bidding war” stuff is nothing more than bald-faced lies by Realtors interested in getting the highest commission they can.
I was talking with someone about this recently. In a mania, it becomes hard to distinguish fraud from the legitimate market activity, because both look so similar. If you are simply looking for signs of a bubble, the distinction doesn’t matter much. It’ll end in tears.
We’ve yet to verify a single case of “bidding wars” anywhere in the country.
This is all part of the ruse perpetrated by the Realt-Whores and Mortgage Pimps. And the public needs to understand that its a charade.
A lot of it is actually happening. We are facing the reality of a rebubble. We just are. I know that many are unhappy with this rebubble. It is, however, a truth. Denying it will not help anyone.
A lot of the hype is just that- hype. The lower end of the market is suffering from a massive inventory shortage which is leading to a different mix of houses being sold. That is reflected in the median price increase. If I were a car dealer selling Mercedes and Hyundai, and I used to sell 100 cars per month with a median of $37k, then I ran out of Hyundais and was selling only 35 Mercedes per month but my median sales price was $68k, are my financials all of a sudden super rosy? People need to wake up.
‘A lot of it is actually happening. ‘
The truth it is not ‘happening and you know it isn’t.
The truth it is not ‘happening and you know it isn’t.
You’re full of it. I saw it happen last year on a piece of property I tried to buy. I did not change my bid and walked away, but I saw the other offers and I know what subsequently happened to the property.
I suppose Ben’s post: “‘Willard said. ‘Before we had the first showing, I had two offers, sight-unseen…The buyers paid $35,000 over asking price, von Entress said…” is a lie, too. Maybe Willard doesn’t even exist!
I know people who are in the market to buy, and they are being told about the multiple bids they are up against. I know, how do we really know if that is the truth or if it is marketing hype to create fear and panic? In any case, I would stay away from the market. There is tons of shadow inventory.
I know, how do we really know if that is the truth or if it is marketing hype to create fear and panic?
That’s precisely what it is. And it’s driven by the corrupt realtor/mortgage sales crime syndicate and a few paid hacks.
It is happening in a few select markets and they get all the press. It’s not happening in a generic, mid market city like Locaville.
I assumed it was market demand for a couple dozen trendy cities. Or, if you like, a trendy state like CA. Plus Phoenix because no one ever accused Phoenix of being trendy.
Interesting point about market manipulation, Ben. So you buy 100 houses, sell 5 of them at a 20% inflated price to your cronies. Suddenly the total price is up 19%. Interesting racket but too labor/capital intesive to carry out across the country.
I called a few weeks ago about a car for sale I was interested in, but not interested in enough to drive 20 miles out to see it. The dealer said “I had someone looking at that today, you may want to come in as soon as you can”
Two days later he called me back “Just wanted to see if you wanted to take a look at that car - It’ll probably be gone if you don’t come in by COB tonight. I’m getting a LOT of calls on it”
Yesterday he called me back again “If you are still interested please let me know. The car is still here”
See a common theme working here? The only difference is there is no buyers agent in my ear saying “multiple offers” or “act fast” or “you’ll be priced out forever”. Why people can’t see these sales tactics and get played off of their fear is beyond me. We’ve all heard of the Shadow Inventory, now we have the Shadow Buyers.
It’s called creating a sense of urgency. Classic selling tactic.
Spiced in with a “Hard to find” offer. Because its so HARD to find a late model Mustang these days. Only 656 of them within a 100 mile radius!
“A lot of this “bidding war” stuff is nothing more than bald-faced lies by Realtors interested in getting the highest commission they can.”
A realtor friend of mine told me during the ‘08-’12 years that she was as busy as ever, just with lower end homes. But she sold so many that the sheer volume made up for the lower commissions. But in this odd environment, maybe they think it’s in their interest to get it as high as they can, as the inventory is so low.
There are actually studies done that show realtors actually sell their own homes for more on average than their clients…getting the last dollar for someone else really isn’t that important (since they only get 1.5-3% of that last dollar–the house gets a piece, as does the other broker, if there is one). What matters is getting the first several hundred thousand dollars.
Of course, if they are selling their own home, where they keep 100% of each marginal dollar, they will try harder, and generally sell for a higher price.
Nonsense.
“‘We have enough rentals to know that, at the end of the day, managing rentals hasn’t been that lucrative for us,’ said Soltero.
They’re learning the same lesson that legions of mom -n- pop landlords have already learned.
It’s odd to hear this, though. Ben’s fund has been returning very good profits on the rentals he bought for his investors (me included). I can only imagine that those who bought in 2011-2013, but aren’t getting a good return, must be gigantic bone heads. Maybe they should have asked Ben what to do.
And your losses grow by the day.
HA:
What losses? The fund (managed by Ben Jones) provides very high rental returns, and the market value of the houses is skyrocketing.
Why do not think it possible that an informed person may have purchased used houses at the bottom of a huge crash, thereby providing substantial rental returns? Why do you deny that prices per square foot (as confirmed by the Case-Shiller index) are rising? You could probably follow the houses in your own nabe and see that prices are rising.
You will not benefit from taking your side of the argument on as a personal characteristic. One must observe the world and form their hypotheses based on that observation.
The bottom is ahead of us kiddo.
And no…. prices are falling when measured in price per square foot.
Over by me (Thousand Oaks, CA) price per square foot has been rising pretty steadily in the last year.
Inventory is nonexistent, and not just for low-end (less than $400,000 SFR’s) but for anything less than $600-700k.
The issue is that with 2-3% interest rates everyone who was in “trouble” re-fi’d, or went interest-only because the lenders didn’t want the properties back (although that may change with these price rises). And the FHA with it’s 3.5% down programs have stimulated demand. And there hasn’t been any significant building of houses in probably 20 years.
Add it all up and it equals rising prices. It stinks for me because I can’t/won’t purchase a $500,000, 1,300 square foot SFR just on principle…. but I seem to be in the minority where I live.
That would explain why demand collapsed a whopping 30% in Thousand Oaks.
And still falling.
http://www.zillow.com/local-info/CA-Thousand-Oaks-home-value/r_34278/#metric=mt%3D30%26dt%3D1%26tp%3D5%26rt%3D8%26r%3D34278%26el%3D0
Now you know whats coming down the barrel at you.
You are correct - demand is down because there is literally nothing to purchase. Average prices (and on a per square foot basis) are going up steadily…… Econ 101 supply and demand at work…..
What’s “coming down the barrel at me” is prices stuck at bubble levels and virtually no inventory, at least for the next 5-7 years…..
You’re funny Analyst. You reference a site you give no credence to. On the very same page it shows this table:
Zillow Home Value Index Y-o-Y
Thousand Oaks $558,700 14.7%
Westlake Village $771,500 14.8%
Oak Park $623,900 15.1%
Newbury Park $535,000 14.5%
Moorpark $472,800 13.8%
Agoura Hills $665,100 21.9%
It doesn’t look like people who bought last year have lost 65%. How do you explain the YOY advance? Are these numbers crappy, but the other numbers on the same page are right?
Housing demand is collapsing for the very reason you stated and the losses are in front of you at current inflated asking prices. It is what it is. I’m indifferent to it.
It looks to me there are over 4500 REO’s in Thousand Oaks alone. That’s plenty of inventory and I’m sure it’s increasing by the day.
http://picpaste.com/pics/8be46b54eb1573335f85956285706609.1367973782.png
Remember… there are over 4 MILLION excess empty houses in CA alone.
“It stinks for me because I can’t/won’t purchase a $500,000, 1,300 square foot SFR just on principle…. but I seem to be in the minority where I live.”
+1 I admire your principle.
Me? Well…I couldn’t afford anything that costs $500k, and I honestly doubt that most of these California buyers can either.
Hold on, what? What is this fund?
Ben got a few investors together and bought some used houses. I am one of his investors. The returns are awesome, with virtually no risk. I tried to tell you guys about the fund before, but I got shouted off the blog when I had the nerve to say that it sucks to be on welfare (because someone else was saying they were grateful to be on welfare). I got mad at everyone and decided to pound sand. A few people read my comments, but apparently not everyone got the message.
Now I’m back, so I’m mentioning the fund again. The fund is first-hand proof that small beans like you and me actually CAN make money off the economic chaos created by the masters of the universe.
Is that stunned silence?
Those are your growing losses speaking for you.
HA:
The Case-Shiller index compares the same house to itself over time. So yeah, it corrects for square footage, age, nabe, etc.
Your house depreciates regardless of what anyone says.
Ben/Uncle Fed, are you willing to tell us what the total returns are on that investment, with backup details?
I guess it would be annualized profit / total amount invested, right? In other words, just to throw some random numbers out, we’re at May 31st, you’ve collected $30,000 in rent, minus $10,000 in PITI, minus $5,000 in repairs, so $15,000 profit divided by 5 months times 12 months, so $36,000/yr profit, divided by $300,000 invested, = 12% return
Are you willing to tell us those numbers? I’ll be they’re pretty good, and they don’t even count appreciation on the homes.
Houses don’t “appreciate”. Houses depreciate like they always have and always will.
Worse yet, cap rates are negative at current grossly inflated asking prices of resale housing so you best get dumping those depreciating shacks ASAP.
My lawyer told me not to talk about it about on the blog, but since it’s pretty much past tense I can share a little detail. Because I fix up houses for lenders to sell, and see so much of this part of the foreclosure market first hand, I could see a micro market no one knew about that could have decent rental yields. A few years ago I tried to raise some money, but didn’t convince very many people. We only own a few houses, each purchased for less than a new car. I say past tense because now unfortunately investors have discovered this market and rents increasingly don’t pencil out as healthy as before.
If these idiots keep coming in, I’ll sell these properties and get ready for the next bust. And yes HA, they do depreciate; I can attest to that, as I fix them up regularly. I have made probably 20-30 offers for every house I closed on. That’s a lot of leg work. But we got them so low, the rents are pretty good. For instance, the first house I did for Uncle Fed a few years ago cost us $12,000 at an auction. It had sold in 2006 for over $100k.
And we low-ball every seller, never paid anywhere near asking. Fix them up ourselves, I manage them. It’s basically just hard work to do this. Anyone can have their money back with 6 months notice. Hopefully posting this won’t get me in trouble with the SEC.
If I weren’t earning a good living on a W-2 and the opportunity were there, I’d do the same. Well done Jonesy.
It is terribly unfortunate that single family housing has turned from shelter into an investment vehicle.
“The dynamic has gotten so pronounced, Realtors admit they’re getting edgy about the run-up in price.”
There have been so many shoe-shine-boy moments for the echo bubble, I have completely lost count.
no one cares on the way up. Just get out before everyone else.
Or can the FED keep it going forever?
“Or can the FED keep it going forever?”
They keep dropping hints that they won’t, but given their track record of deliberately misleading the public, who knows?
Everything You Think You Know About the Fed’s Exit Plan May Be Wrong
Published: Monday, 6 May 2013 | 1:18 PM ET
By: John Carney
Senior Editor, CNBC.com
Everyone knows that the Federal Reserve’s overnight interest rate targets will not rise before quantitative easing ends.
The exit strategy will be: QE first, rates later.
Edward Fitzpatrick, who heads up the U.S. rates unit at JPMorgan recently gave voice to this conventional wisdom when asked by Bloomberg about rising rates: “There are still hurdles, not the least of which is that they have to end the quantitative easing program before they would contemplate tightening,” he said. “The Fed will have time to craft their message well.”
When everyone in the market knows something, that’s reason to be worried. Does the Fed really “have to” end QE before rates rise?
While this assumption seems well-grounded in both logic and in statements from several people inside the Fed (including Chairman Ben Bernanke himself), it’s at least worth considering the possibility that that particular view of the future may not be as certain as Wall Street wise men think. We do not have a lot of history with the zero bound and QE, and so we should be wary of anyone who “knows” exactly what the exit strategy will entail.
What many of us commonly refer to as QE is known around the Fed as large scale asset purchases, which are actually just one part of what the Fed calls “credit easing.” Under current policy, the Fed buys $40 billion of agency paper and $45 billion of Treasurys.
The effectiveness of these asset purchases is still controversial. Because they have been accompanied by other forms of easing—such as commitments to keep rates low until economic goals are met—it is difficult to isolate the effects of the purchases themselves.
What’s more, even if we think we know what the asset purchases accomplish, we might not know how it does the job. Is it the lowering of supply of safe financial assets that pushes yields down? Or are the purchases really just another form of communications strategy, in which the effect on asset supply is less important than the effect on market expectations?
…
The Fed said last year that they would start losing money this year, right? If this happens, then they will not be able to continue buying MBS. If they stop buying MBS, then long-term rates (i.e., mortgages) should rise in response to the stupid-low short-term rates. See credit card rates for an analogy.
In any case, the Federal Reserve may be able to keep the bubble economy going for a very long time. However, this does not mean that they will keep asset prices perpetually high. It only means that asset prices will continue fluctuating in a bubble-like pattern, with inflation reflected between the peaks of each successive bubble.
The other possibility is for our entire economy to collapse because we are allowing slavery now (through offshoring), and slavery is not compatible with capitalism. The Federal Reserve can’t save us from that.
Is the Fed Blowing Bubbles?
If we exit QE3 too quickly, the economy will crash. Too slowly, and we’ll see a finance bubble.
By Nouriel Roubini|Posted Sunday, May 5, 2013, at 7:15 AM
Treasury Secretary Jack Lew (right) speaks while Federal Reserve Chairman Ben Bernanke listens during an open session of the Financial Stability Oversight Council at the Treasury Department, April 25, 2013 in Washington, DC.
Photo by Mark Wilson/Getty Images
The ongoing weakness of the American economy has led to stubbornly high unemployment and sub-par growth. The effects of fiscal austerity—a sharp rise in taxes and a sharp fall in government spending since the beginning of the year—are undermining economic performance even more.
Indeed, recent data have effectively silenced hints by some Federal Reserve officials that the Fed should begin exiting from its current third (and indefinite) round of quantitative easing. Given slow growth, high unemployment (which has fallen only because discouraged workers are leaving the labor force), and inflation well below the Fed’s target, this is no time to start constraining liquidity.
The problem is that the Fed’s liquidity injections are not creating credit for the real economy, but rather boosting leverage and risk-taking in financial markets. The issuance of risky junk bonds under loose covenants and with excessively low interest rates is increasing; the stock market is reaching new highs, despite the growth slowdown; and money is flowing to high-yielding emerging markets.
Even the periphery of the eurozone is benefiting from the wall of liquidity unleashed by the Fed, the Bank of Japan, and other major central banks. With interest rates on government bonds in the U.S., Japan, the United Kingdom, Germany, and Switzerland at ridiculously low levels, investors are on a global quest for yield.
It may be too soon to say that many risky assets have reached bubble levels, and that leverage and risk-taking in financial markets is becoming excessive. But the reality is that credit and asset/equity bubbles are likely to form in the next two years, owing to loose U.S. monetary policy. The Fed has signaled that QE3 will continue until the labor market has improved sufficiently (likely in early 2014), with the interest rate at 0 percent until unemployment has fallen at least to 6.5 percent (most likely no earlier than the beginning of 2015).
Even when the Fed starts to raise interest rates (some time in 2015), it will proceed slowly. In the previous tightening cycle, which began in 2004, it took the Fed two years to normalize the policy rate. This time, the unemployment rate and household and government debt are much higher. Rapid normalization—like that undertaken in the space of a year in 1994—would crash asset markets and risk leading to a hard economic landing.
…
If we exit QE3 too quickly, the economy will crash. Too slowly, and we’ll see a finance bubble.
Assuming there’s actually a Goldilocks window in between? I’d say the worst of both worlds is more likely at this point.
The Fed cant raise interest rates.
When the local real estate experts start offering insights like these, watch out below!
“The cash-for-homes trend exploded in 2008 and streaked to a 10-year high in December 2012, when cash buyers accounted for nearly 40 percent of Sacramento County’s home sales, according to the Sacramento Association of Realtors. Since then, these buyers, most of whom are investors looking to rent or flip purchases, have continued to rule the market, accounting for 39.5 percent and 36.4 percent of all home sales in February and March, respectively.”
These record levels of all-cash investments are another shoe-shine boy indicator.
How does the MSM consistently miss these obvious warning signs in their reporting?
It would be fine if the all-cash investors were “looking to rent” the houses. It does not make sense to describe the same group of people as “looking to rent or flip” the houses. This is double-speak. Remember in 2009, when it was a “good time to buy or sell a house”? At what point does a shade of gray become the color of BS?
I have a friend who swam with the sharks, against my own better advice, and bought himself a SoCal investment condo. (There was somewhat of a Suzanne Researched This commercial dynamic involved with the decision.)
How would you advise such a fellow about getting out before the rush to the exits by hedge funds and all-cash Chinese and Canadian investors buries him? Or would it be prudent to play mum* and never, ever say, “I told you so”?
* This is my tendency; for instance, I never point out to my sister that she is still underwater on the December 2006 home purchase I emphatically suggested she not make.
Just checked on Zillow. According to the Zestimate™, my sister and her husband are still $22K underwater on their 2006 home purchase before closing costs, and my impression is that Zillow tends to come in high (but perhaps not so much when prices are on a parabolic bubble runup). Last I heard, a few months back, they were planning to sell this year; but apparently the home is not yet on the market, even though we are right in the middle of the red-hot spring sales season.
Here is the irony: Her husband, who has to be on of the world’s most extreme penny pinchers, insisted they make that year-end 2006 purchase, on the theory that ‘real estate always goes up’ or ‘real estate is the best possible investment’ (I forgot which). He must kick himself daily for being more than 2,200,000 cents poorer today than when they bought, and I am not even including the considerable value of his sweat equity in my figure.
You should send them a piggy bank for Christmas.
Their marriage is fragile already; I don’t want to push them over the edge.
Just send them the piggy bank to speed up the inevitable.
Zillow comes in high??? Example house 3 doors down Zillow price $765 closed price $944, another home Zillow price $946 closed price $1,135m, one more Zillow $889 closed sale $1,035m.
Zillow is not a appraisal or takes into consideration of prime view lots and upgrades, it is basically pricing a used car with no visual inspection or condition of such vehicle?
Zestimates are inflated 85% per recent article in NYT.
More recent than March 25th of this year? The NYT article on that date sounds like they believe Zestimates are accurate:
“The app has an option to show “Zestimate” prices, which is Zillow’s guesstimate for the market value of many homes across the United States, a figure that might influence your house-buying deliberations.”
http://www.nytimes.com/2013/03/21/technology/personaltech/a-review-of-real-estate-apps-for-home-hunters.html?_r=0
How is there any question about it when the cost to build is a fraction of the /sq ft asking prices of resale housing?
Housing Demand Collapsing in Bay Area California
This is what happens when prices are grossly inflated. Sales collapse.
http://www.zillow.com/local-info/CA-Alameda-County-home-value/r_1510/#metric=mt%3D30%26dt%3D1%26tp%3D4%26rt%3D6%26r%3D1510%26el%3D0
I have three simple points to make, then I’ve gotta go:
1) This is a New Era gold rush for California.
2) As in the first California gold rush, those who got in early (e.g. mid-1990s) made out like bandits, some of those who came later will make some money, and the latecomers will be left holding the bag on massive losses.
3) Unlike the original California gold rush, the collapse phase of this real estate mania will play out over a far longer period of time, due to the inherently glacial pace of real estate market adjustment compounded by the attempted hair-of-the-dog hangover cure in play.
May the odds be ever in your favor!
Here’s another thing that’s unlike the original California gold rush:
‘The story of our economy now and in the near future is of some continued gain and definitely some pain,” said Heather Stephens, director of the Office of Economic Research at CSULB. Stephens started with the March jobs report, which showed just 88,000 jobs created in the U.S. A large number of folks are no longer looking for work. Stephens said 31,000 people in Los Angeles County have left the labor force.’
“The especially worrisome part is that people are actually dropping out of the labor force, especially young people with very little work experience,” she said.’
‘Stephens also said negative domestic migration, or more people leaving the area than moving in, means the loss of higher-skilled and highly educated people who can help turn around the local economy. The slow housing recovery has been bolstered largely by investors, she said.’
http://business-news.thestreet.com/press-telegram/story/csulb-regional-economic-forum-more-gain-some-pain-ahead/1
Nice post Ben….Its a disconnect in some ways…We seem to have all these micro economies around the country…Some markets doing quite well, others scrapping-by and still others in deep-Do-Do…
There is “one” common denominator though for all these places…Record low interest rates….And, what ever “froth” thats been built up due to these rates, it will vanish at light speed when rates rise…
I think that with more cash going into today’s purchases, the next crash will be faster. I think the investors of the hedge funds will simply put in a sell order once they see their rental profits declining or negative. If this happens, the managers of the hedge funds will have to sell at market rates. I don’t think they will have much opportunity to hold their shadow inventory off the market (unlike the banksters, the real “made men” of today’s economy). IMO, it is the shadow inventory that has enabled the snails pace of the most-recent crash.
“…unlike the banksters, the real “made men” of today’s economy…”
Which ones?
May 7, 2013, 1:26 p.m. EDT
Can investors oust Dimon as J.P. Morgan chairman?
Commentary: The bank’s performance tempers governance concerns
…
Perhaps they’ve prudently pre-purchased a brace of congresspeople to facilitate their bailout.
I wouldn’t be surprised.
“I think the investors of the hedge funds will simply put in a sell order once they see their rental profits declining or negative.”
I don’t think you understand how this works.
“Hedge Funds” primarily invest in liquid securities, where investors have quarterly liquidity options, and the hedge fund sells securities when necessary to provide liquidity for those who want out (as long as they don’t put up the “gate”).
“Private Equity Funds” primarily invest in illiquid stuff, like private businesses and real property (homes, buildings, timber, etc.). Investors in PE Funds often have their capital locked up for 5-8 years, and don’t have the ability to “put in a sell order”.
I don’t know if their investors are locked up for 5-8 years. I didn’t find any indication of that on their website. I guarantee that the investors are allowed to get their money out of the fund, whether you use the term “sell order” or not.
Sorry, but that’s not right.
How do I know? We manage such funds, and our investors have no right to get their money out. Our terms are not unusual.
Rental Watch:
That’s weird. Are you sure your investors have no right to get their money out? So how does that make them investors? They gave you their money forever? Sounds like they just gave you their money then.
Ben’s fund had a minimum investment period too. It isn’t 5-8 years. That would NOT be normal for residential real estate. Does your fund buy residential real estate, or does it make private investments into distressed companies?
The investors own a piece of the Fund, and that Fund owns real estate. They have rights to cash distributions, and we are required to make distributions when there is cash to distribute, but they can’t force us to sell assets to generate such distributions when they want, that is our decision. We have invested our own capital alongside them (usually much more than any individual investor), and so our interests are highly aligned.
If you allow one investor to “cash out”, you can have substantial valuation challenges, appraisal costs, and at certain points in the cycle, illiquid/distressed markets, which is just the time when some people want out, and make certain assets very hard to value (how do you value land at that time? partially leased commercial assets? a property where a major tenant is in the middle of a bankruptcy?). We have taken an approach where only the market can determine the value of an asset, and we as investors and managers determine the best time to sell the asset.
I don’t have the right to tell Ben when to sell a house. If I wanted my money back, he would find another investor to replace me. Since the returns are highly competitive with low risk, he would not have a hard time accomplishing this. If he were Blackstone, he would have a hard time. Blackstone pays high and rents low. I imagine that’s why Blackstone is getting bank loans these days. If they had competitive returns, wouldn’t they just use private investment?
However, is it one investor per house? In other words, you are invested in one house at a time? That is the difference, most funds that are out there are pools of investments. In a typical “opportunity” fund, you might have some single-family rental homes, some grocery anchored retail, some apartments, etc.
Blackstone’s biggest issue is that they need to get $ Billions to work for it all to make sense, and to do so, they can’t be as selective as a small team willing to make 30 offers and win one bid. Many of their investors are institutions, who are happy to get lots of money to work at a 8-10% current yield…using leverage, they can get there…and that assumes no market increase in prices.
Larger private RE funds don’t swap out investors…typically if you are in a private RE fund and you want out, you need to find a buyer of a “secondary interest”, someone who will acquire your interest in the Fund. Sometimes a manager will help arrange this. However, you will typically sell the interest at a discount to what you would get if the assets were sold at market value.
And during the gold rush, the people that made the real money were not the prospectors, but the guys selling pickaxes and hotel meals and Levi’s. Hence the seminar hawkers.
“site unseen”
Do you want a hot investing tip?
May 7, 2013, 1:46 p.m. EDT
Housing on Fire: Tips for Buyers and Sellers
The housing market is heating up again. MarketWatch Radio levels the playing field with tips on how buyers can avoid bidding wars and how sellers can boost their sale price. Alisa Parenti reports.
I’m afraid I’d burn myself. Besides, it’s much better to use an oven mitt for handling hot objects like a tip.
Invest a small fortune in real estate today and lose a large fortune in real estate tomorrow?
The idea of buying a 2nd house in one’s own neighborhood just to drive up comps seems so insane.
Is it too late now to dump your long-term bond holdings and rotate into stocks and housing in order to capture certain investment gains?
BOND REPORT: Treasurys Drop For Third Day After Auction
By Ben Eisen, MarketWatch
Published May 07, 2013
Dow Jones Newswires
Treasurys closed lower after a $32 billion auction of 3-year notes, capping the third straight day of losses for the safe-haven debt.
The 3-year note (3_YEAR) yield, which moves inversely to prices was half a basis point higher at 0.24% following the auction, still stronger than the high yield of 0.35% during the note auction.
The 10-year note (10_YEAR) was nearly 2 basis points weaker on the day at 1.79%, while the 30-year bond (30_YEAR) was over 2 basis points weaker at 3%, and the 5-year note (5_YEAR) was less than 1 basis point weaker at 0.75%.
The Treasury market held on to those losses after the release of a report showed U.S. consumers increased their debt by only $8 billion in March, the least since July and well below the $16 billion expected by economists.
…
Get into stocks now? There is a massive crash coming.
My Story.
I have been reading this blog since 2007 or so.
In 2009 It kept me from buying a house, here in Bakersfield CA.
In 2010, however the planets aligned, and I was able to buy.
It is a “Toe-Tag” house,1900 Sq Ft. purchased for under 140K.
It supposedly appraised for over 250K in 2007.
Since my mortgage payments are under $1000.00 a month, I am OK with the deal. This actually cheaper than the rent I was paying for an older, smaller house, with fewer bedrooms.
(Rental was 3bd, new house is 4bd.)
New house has dual pane windows and A/C Vs Swamp Cooler, so heating / cooling costs are down from the old place too.
Loan is VA, and since I am a disabled Veteran, the closing costs were covered by the VA. I don’t think it was a “perfect” deal, but it is close enough. Since, I would be paying money to live someplace anyway, for me, right now, this is a good deal.
I know various folks on here would have advised me to keep renting, but cheaper Utilities, and a mortgage payment smaller than my rent makes economic sense to me.
All any of us can do, is the best we can, at the time.
Did I overpay? Probably so.
Do I regret it? No.
I have a very nice house, with room for my Grand Children to play and have their own room. That is important to me. It is cool in the summer, and warm in the Winter. It works for me.
Again, Thanks to Ben Jones and the others who post here. You helped me weather this whole thing, cheerfully.