When most people think about a bull market in any asset class, it begins with an increase in demand for the product. In housing, this demand has historically been from owner occupants taking jobs and competing for the available housing stock with their new income. All sustainable housing market rallies in the past have been built on strong job growth and increasing wages. Not so with our current housing recovery. This has many questioning whether or not this recovery is real. The engineers of this house price rally at the federal reserve hope to drive up prices to create momentum which will stimulate the economy and cause the job growth and increasing wages needed to keep the momentum going. Only time will tell if their gambit pays off.
I recently reported that Orange County home resale volume very weak by historic norms. Sales picked up in 2012 compared to 2011, but sales in 2013 are flat compared to last year, mostly due to a chronic lack of available MLS inventory.
The increase in demand we are seeing in Orange County is entirely investor driven. DataQuick reported that absentee buyers set a new record of 31.4% of all sales. The monthly average since 2000, when the absentee data begin, is 17.9 percent. The NAr reports a similar trend on a national level.
As I’ve repeated many times, owner occupant demand is showing no signs of life. If not for investor demand, the housing market would still be languishing with prices and sales volumes lingering at the bottom. However, both prices and volume are up, and those who want that outcome have investors to thank for it.
LAKE FOREST, Calif.—Jeff Pintar had buyer’s remorse as he purchased 12 foreclosed homes in five Southern California counties on a single day. His regret: that he didn’t buy more homes a year earlier.
“Things have turned around faster than anyone anticipated,” said Mr. Pintar, who first began buying properties here four years ago and now owns or manages 1,700 homes, which he rents out for between $1,000 and $3,800 a month. Here in Orange County, nearly every home listed for less than $400,000 “is being pursued by institutional investor capital,” he said.
Given how lousy the capitalization rates are here in Orange County, that’s somewhat surprising. Paying $400,000 for a house that rents for $2,000 a month returns less than 4.5% to the investor after costs. The buyers executing this plan are speculating on increasing prices to make their returns. That’s a demand cohort that could leave in a flash if prices fail to appreciate.
U.S. housing recoveries almost always have been ignited by rising demand from families and individuals looking for a place to live. This recovery is different. Investors—including some big Wall Street players—are leading the way, say industry executives and analysts. Their role is noteworthy given that flippers and speculators were blamed for helping to inflate the housing bubble of the past decade.
Flipper and speculators have different goals and objectives than cashflow investors. To the degree these funds are buying for current cashflow is the degree to which they will hold the properties in all market conditions. Speculators are flaky, and they will sell for emotional reasons usually at the worst possible time.
Today’s investors are mostly buying with the intention of holding on to the homes and renting them out. As they pile into the housing market, they have set off a chain reaction that has stabilized prices and changed market psychology, industry executives and analysts say. Fear of buying homes when prices are dropping has been replaced by the fear of missing out on cheap homes.
“Whether they knew it or not, investors helped set a floor. They warmed up the market, and it brought buyers back,” said Lanny Baker, chief executive of real-estate brokerage ZipRealty.
In some of my earliest writings on the IHB back in 2007 I said this would happen. Cashflow investors always set a floor in a declining market.
Investors have always played a role in the housing market, but their presence was often small. Currently, cash buyers—largely investors—make up about 32% of sales nationally, according to the National Association of Realtors. In Southern California, a favorite target for investors, absentee buyers accounted for 31.4% of purchases last month, up from an average of less than 17% between 2000 and 2010, according to DataQuick MDA, a real-estate research firm. …
Some of these investors are people of wealth who are leaving bonds in search of other investments. Houses are a better investment than bonds right now because the value of houses will not get whacked as hard as bonds if interest rates go up.
The house-rental market long has been dominated by mom-and-pop outfits, including retirees, real-estate brokers, doctors and other professionals, and they still account for most investor purchases.
Over the past year, large private-equity firms such as Blackstone Group BX and Colony Capital have spent billions of dollars buying up single-family homes. Blackstone says it has purchased 20,000 homes since early last year. It is buying more than $100 million worth of homes a week and has spent $3.5 billion so far.
While private equity hedge funds have invested a great deal of money, it pales in comparison to the banks. Banks are the largest players in the REO-to-rental space.
Investors are concentrating on markets that have cheap housing and where job growth—and rental demand—is revving up. A year ago, Phoenix became the hottest target, and with prices there up by 20% since early last year, investors have raced to find similar discounts in other metro areas. …
Some investors have a notorious history in the housing market. During California’s housing bust in the late 1980s and early 1990s, the federal government sold hundreds of homes in California’s San Bernardino and Riverside counties, about an hour east of Los Angeles. Some homes weren’t maintained, turning entire neighborhoods into shabby rental communities.Colony’s Mr. Chang said sophisticated real estate professionals are unlikely to repeat such practices. “If you’re building the business for the long term, which we are, the incentive is to make sure the assets are looking good,” he said. “If you let them go, tenants will leave.”
He is exactly right. Anyone planning to own the asset long term will fix it up and keep it well maintained.
While investor interest in housing has helped stem big declines in household wealth, their ubiquitous presence is a growing problem for individuals who are finding themselves on the losing ends of bidding wars.
“We can’t find anything because investors are gobbling up everything that is affordable,” said Gloria Wain, 66, of Costa Mesa, Calif., during a morning meeting with her real-estate agent. After losing out to 18 offers—mostly cash offers from investors, according to her agent—she decided to raise cash herself in an effort to compete. She plans to borrow money from her son.
The bidding wars we are currently seeing — wars being lost by owner occupants — wouldn’t be occuring if the banks would foreclose on the remaining delinquent mortgage squatters. Unfortunately, they have other plans. (see: Must-sell shadow inventory has morphed into can’t-sell cloud inventory)
40% off in Newport Beach
Despite the apparent frenzy in today’s housing market, when the banks need to dispose of REO, particularly at the high end, the discounts are truly remarkable. Today’s featured property is being offered for nearly 40% off its 2006 purchase price. Perhaps it will be bid up by investors, but in all likelihood, the bank will eat a big loss on this one.
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Proprietary OC Housing News home purchase analysis
$844,900 …….. Asking Price
$1,375,000 ………. Purchase Price
7/6/2006 ………. Purchase Date
($530,100) ………. Gross Gain (Loss)
($67,592) ………… Commissions and Costs at 8%
($597,692) ………. Net Gain (Loss)
-38.6% ………. Gross Percent Change
-43.5% ………. Net Percent Change
-7.2% ………… Annual Appreciation
Cost of Home Ownership
$844,900 …….. Asking Price
$168,980 ………… 20% Down Conventional
3.59% …………. Mortgage Interest Rate
30 ……………… Number of Years
$675,920 …….. Mortgage
$155,331 ………. Income Requirement
$3,069 ………… Monthly Mortgage Payment
$732 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$211 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$4,013 ………. Monthly Cash Outlays
($487) ………. Tax Savings
($1,047) ………. Equity Hidden in Payment
$196 ………….. Lost Income to Down Payment
$231 ………….. Maintenance and Replacement Reserves
$2,906 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$9,949 ………… Furnishing and Move In at 1% + $1,500
$9,949 ………… Closing Costs at 1% + $1,500
$6,759 ………… Interest Points at 1%
$168,980 ………… Down Payment
$195,637 ………. Total Cash Costs
$44,500 ………. Emergency Cash Reserves
$240,137 ………. Total Savings Needed