Aug202013
With depleted MLS inventory, all-cash buyers rule the market
In early 2012 lenders changed their foreclosure policies and opted for can-kicking loan modifications, most of which will fail. This dried up the MLS inventory and caused prices to bottom. Coincidentally, the low house prices and superior returns on rental homes attracted large private-equity firms to this market bringing their cash to the foreclosure sites as well as the MLS to acquire what they could.
In a normal real estate market, all-cash buyers represent about 20% of sales. Ordinarily, these are empty-nesters who accumulated a lifetime of home equity, sold their properties, and downsized to a less expensive property to live in during their retirement without a payment. Plus, many people simply don’t believe in debt, and with family help, many people live in their homes without ever having a mortgage. All-cash investors have always been part of the market as well, but not in the number seen since the housing bust.
When the inventory was cut in half, the all-cash buyers did not go away. And with the influx of the private equity funds, their share of the housing market more than doubled. Cash buyers are always at the head of the line when it comes to buying property because they don’t have to arrange financing. A seller would always prefer an all-cash buyer because the deal is far less likely to fall apart.
Report: Half of All Homes Are Being Purchased With Cash
By Nick Timiraos — August 15, 2013, 10:29 AM
More than half of all homes sold last year and so far in 2013 have been financed without a mortgage, according to an analysis by economists at Goldman Sachs Group.
The analysis estimates that around 20% of all homes sold before the housing crash were “all-cash” sales (or around 30% of sales by dollar volume). But over the past seven years, the all-cash share of sales has more than doubled, increasing by more than 30 percentage points, according to economists Hui Shan, Marty Young and Charlie Himmelberg. …
This has serious implications for the housing market.
First, all-cash buyers are not limited by financing. The affordability limit imposed on everyone else does not apply to them. All-cash buyers can easily inflate another housing bubble by pushing through the limits imposed on the rest of the market, particularly in an inventory constrained market where they make up more than 50% of all sales.
Typically, a housing bubble would be created with debt, and it’s the banks that get burned when it comes crashing down. However, if we inflate a housing bubble with equity, many all-cash buyers could find themselves bagholders with nobody to sell to. Remember, these all-cash buyers need a take-out buyer to profit on more than the meager rental returns. If they inflate prices above what financed buyers can bid, these investors will only have other investors to sell to. Once the word gets out, no investors will step up to be bagholders, and the entire house of cards will collapse back down to price levels where financed buyers can participate.
We are quickly approaching the price levels where financed buyers can’t compete, particularly in the most desired neighborhoods. The next year or two will tell us whether investors inflate another bubble or not.
The surprisingly large cash-share of purchases helps to explain why home sales have jumped over the past two years despite more muted increases in broad measures of new mortgage activity, such as the MBA’s mortgage application index.
Yes, it does. It further reinforces the argument that this housing relief rally is not built on solid fundamentals.
There’s no exact way to know who is responsible for all of these cash purchases, though they are likely to include some combination of investors, foreign buyers, and wealthy homeowners that don’t want to go through the hassle of getting a mortgage before closing on a sale. Mortgage lending standards have sharply tightened up since the housing bubble, with banks scrutinizing borrowers’ tax returns and bank statements to verify their incomes and the source of their down payment.
The Goldman analysis also estimates that around 44 cents of every $1 of homes sold currently is being financed, compared to 67 cents before the crisis.
Purchase-mortgage origination volumes have fallen from around $1.5 trillion in 2005, when the housing market peaked, to around $500 billion in each of the last two years.
The chart of originations looks at the total count, but the dollar volumes tell and even more remarkable story. We are only originating 1/3 of the dollar volume of the peak, despite the fact that prices are nearly pushed up to those levels.
The only way that happens is through an artificial restriction of inventory.
While declines in the volume of homes being sold accounts for some of the decline, the Goldman economists estimate that around 40% of the decline is due to the drop-off in the amount of financing per home.
The Goldman analysis estimates that purchase-loan volumes will rise to around $750 billion next year and to $1.1 trillion by 2016.
So they are expecting a 50% increase in mortgage originations in each of the next two years. Does anyone else think that is likely? Wages are stagnant, job growth is tepid, lending standards are prudent, Dodd-Frank restrictions are due to be implemented, interest rates are rising, but somehow we are supposed to see 50% increases in origination volume? I don’t think so.
The percentage of all cash-buyers will decline over the next few years as the big REO-to-rental hedge funds stop buying. We know Carrington Mortgage has already stopped, and many others will take their cue. The result of the diminished all-cash buyer activity and weak housing fundamentals will be lower sales volumes. The restricted inventory will keep prices where they are, and they may continue to rise. The market manipulations will continue until the banks get out from under their bad loans.
The Ponzi lifestyle claims another victim
The owners of today’s featured short sale already sold the house — to the bank. They were busy keeping up with the Joneses, and in a series of refinances, second mortgages and HELOCs, the managed to spend the house they’ve owned for 23 years. 
- This house was purchased for $400,000 in 1990, at the peak of the last housing bubble. I don’t have their original mortgage balance, but it was probably $320,000 since 20% down was the norm then.
- On 6/12/2001 they refinanced with a $275,000 first mortgage, so they were prudently paying down the mortgage for the first 11 years they had the property.
- On 7/25/2001 they obtained a $137,300 stand-alone second.
- On 12/4/2002 they refinanced with a $428,000 first mortgage.
- On 2/13/2003 they obtained a $75,000 HELOC.
- On 6/3/2004 they refinanced with a $600,000 first mortgage and opened a $150,000 HELOC.
- On 12/14/2007 they refinanced with a $756,000 Option ARM.
- On 5/29/2008 they obtained a $107,890 HELOC.
- On 7/25/2008 they borrowed $101,500 from a private-party lender. I guess they needed to keep the ATM machine running.
- They were served with a NOD in June.
- It’s difficult to say how much they owe exactly, but they have it listed as a short sale with a $899,900 price tag, and since their original purchase prices was only $400,000, we can surmise they blew through about half a million dollars.
This is a family that should be selling their home for a huge profit and executing a move-up sale. Instead, with their credit trashed and not a penny to their name, they will quietly move into a rental. Perhaps they will contribute to housing demand again someday, but for now they, and the millions of Ponzis like them, will only be bidding up rental rates.
[raw_html_snippet id=”newsletter”]
[idx-listing mlsnumber=”OC13104470″ showpricehistory=”true”]
30942 VIA ERRECARTE San Juan Capistrano, CA 92675
$899,900 …….. Asking Price
$400,000 ………. Purchase Price
2/6/1990 ………. Purchase Date
$499,900 ………. Gross Gain (Loss)
($71,992) ………… Commissions and Costs at 8%
============================================
$427,908 ………. Net Gain (Loss)
============================================
125.0% ………. Gross Percent Change
107.0% ………. Net Percent Change
3.4% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$899,900 …….. Asking Price
$179,980 ………… 20% Down Conventional
4.52% …………. Mortgage Interest Rate
30 ……………… Number of Years
$719,920 …….. Mortgage
$178,981 ………. Income Requirement
$3,656 ………… Monthly Mortgage Payment
$780 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$187 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$4,624 ………. Monthly Cash Outlays
($958) ………. Tax Savings
($945) ………. Principal Amortization
$302 ………….. Opportunity Cost of Down Payment
$245 ………….. Maintenance and Replacement Reserves
============================================
$3,268 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$10,499 ………… Furnishing and Move-In Costs at 1% + $1,500
$10,499 ………… Closing Costs at 1% + $1,500
$7,199 ………… Interest Points at 1%
$179,980 ………… Down Payment
============================================
$208,177 ………. Total Cash Costs
$50,000 ………. Emergency Cash Reserves
============================================
$258,177 ………. Total Savings Needed
[raw_html_snippet id=”property”]
Actually, cash buyers do not inflate the market. Quite the contrary.
Rather, they expect, and get, massive price concessions because they can offer the seller an early, painless closing with no worries that the deal will fall through at the last moment because of financing, which so often happens now. Or, at least, THIS cash buyer does. Cash buyers not only realize that they have an advantage, but there is something about actually writing a massive check and parting with a substantial portion of your savings that makes people very, very conservative, while people who have little “skin in the game” and can borrow huge amounts of money with 3% down are a lot more willing to commit money they don’t have because to them, it’s just a number.
Often, a desperate seller will accept a lowball cash offer over higher offers that are contingent on financing, just to get the deal done, especially if the property has been slow to sell.
It is the ability to borrow beyond your means with little down that inflates house prices, as we saw with the debt rampage of the 00s. A market where people must part with a huge wad of cash and have to live within the money they actually have, will be a conservative one.
Being a future all cash buyer myself, I refuse to pay a single dime for a property over real value (Of course, figuring out ‘real value’ is a whole discussion in itself).
My motivation to buy is very simple. After a lifetime of hard work I want to reward myself with a nicer, larger home than the one I have now.
Having said that, I wonder what the ownership motivations for others to purchase all cash really are? To hedge possible future hyper inflation? To impress your girl friend? To accommodate a growing car collection? To get a good defensible location before the coming Armageddon? Who knows.
If somehow, better statistics were available on *why* the purchase in addition to the *how* (in these cases, cash) the purchase, it sure would be interesting and I think provide some keen insight into the direction of these markets.
Because you would rather own that owe? Some people don’t like to owe anybody anything? And they pay cash. And they could care less what anybody else thinks is smart, especially those with large mortgages.
I have no idea what the “value” was of the home we bought last year. I knew what it was worth to me.
Value with respect to real estate is generally based on what a property could resell for. As we’ve all seen, this can be easily manipulated, but over time, it still comes back to borrower income and comparable rents.
I am a cash buyer, but I focus on ocean close properties with large yards. Unfortunately, I find many cash buyers are after the same, so often bidding wars break out. I feel sorry for anyone needing financing. They are being shut out of great properties. Why is this happening? Inflation, caused by central bank money printing. This article failed to mention the inflation.
Am I worried if prices fall? No. I am in this for decades. Over decades, beach close properties will be worth multiples of their current value. Some of the Corona Del Mar and Manhattan Beach stuff I picked up in the 90s is up 400%. I expect this will happen again, thanks to your socialist governments electing central bank officials who love to print money. This appears to be the only way socialists can make the system function, so adapt.
I mostly agree.
The last real estate boom was anomaly. We have much more pain that will be felt. All this will be happening in a rising rate environment.
However, they will print the dollar off a cliff trying to stave off the inevitable. Own something, I guess!
I know you consider coastal California real estate to be the best possible investment, but my Las Vegas properties are up much more on a percentage basis than your coastal properties since early 2012. The same amount of money distributed among more properties there would net the owner about 20% more than that money invested in Coastal California.
Malibu property for sale. $.80 c/dollar. Contact [email protected] for info.
Malibu property for sale. Discount property. Contact [email protected] for info.
Eastvale proposes to permit Real Estate Investors
My last post dealt at some length with Federal policy. But in many of my writings, presentations, and comments, I point out that the folks who are most likely to get all up in your business are municipalities.
Case in point: the city of Eastvale, CA, with some 57,000 residents, is contemplating telling real estate investors to FOAD. Of course, in the course of telling real estate investors to FOAD, the City of Eastvale is also telling homeowners to ESAD, with predictable results for the brokerage community.
What do I mean?
Well, the City Council is contemplating a new ordinance No. 2013-13 “Establishing a single-family residential rental registration, inspection and crime-free rental housing program.” Right up front, the City Council tells us whys and the wherefores:
The City of Eastvale (“City”) is experiencing an increase in the occurrence of substandard maintenance, unsafe conditions, illegal activity and public nuisances in single-family rental property, especially those properties rented by absentee landlords. As of August 1, 2013, there have been approximately twenty (20) single family properties in the City where the Riverside County Sheriff’s department has served warrants for indoor marijuana grow houses. These homes are not owner occupied; rather, they are rented by the owners to tenants either directly, or through property management companies. These conditions have precipitated the City Council to direct City staff in taking immediate and proactive action in an effort to curb these conditions and hold owners of single family residential property more accountable in the renting of their property within the City.
So, the City plans to force landlords to register each rental property. If the registration is made by someone who has more than one single-family rental, then a separate business registration certificate is needed for each such property registered.
Mike this is currently where I’m currently renting. The number of rented homes in this city is staggering. Investors have been buying heavily through the down-turn and turning right around and putting them up for rent. The bulk of the homes in Eastvale were built since 2000 thus need very little maintenance and upkeep outside of gardening.
I estimate that my street is 50% rentals, many with 8-10 people living in the home. There are very few homes in the city under 2,500 square feet, and many tracks of homes are 4,000 or more Square feet. Plenty of room for growing “herbs”.
I thought Eastvale, but I didn’t realize how new. Built in 10 years!.
Incorporated October 1, 2010
1940 755
1950 780 3.3%
1960 785 0.6%
1970 1,587 102.2%
1980 1,599 0.8%
1990 1,587 −0.8%
2000 6,011 278.8%
2010 53,668 792.8%
Mike,
This business license requirement for single-family rentals has been in existence in many SoCal cities for years. For instance in Whittier, the city charges a tax (minimum of $50) based on annual revenues plus an admin fee of $7 and a state disability fee of $1. Another governmental money grab.
You are right. I have forgotten that face. I think Pasadena (when I lived there) had the same requirement.
The rise of the all cash buyer dominating the best investments while mortgage buyers get the scraps is a result of Obama administration policy. This administration and the FED decided to put in mortgage underwriting regulations meant to cap house price increases. This concept was based on the idea that the sole reason we had a financial earthquake was because of house price appreciation due to easy credit. Another agenda of the left was the feeling that society would be better off with house prices held in check. Instead, this misguided policy of strict mortgage underwriting standards have resulted in a 2 tier housing market where the best properties are shut off from people that need mortgages. The scraps that wealthy do not want ( less desirable areas, busy locations ) … are left to the mortgage buyers. The idea that mortgage buyers have been turned into second class buyers by the current administration makes me want to throw up. If America had worked like this in the early 90s, I would be broke and invested in a poor property.
jimmy, there is nothing “socialistic” about strict underwriting standards. These standards are not meant to “cap” housing prices, but to prevent
What is “socialistic” is bailing out errant banks and homeowners whose insanely risky lending and careless borrowing created the crisis to begin with. And what is most socialistic is the entire alphabet soup of government programs created to make mortgages available to home borrowers to begin with. The bald fact is that, were it not for the government- chartered “for profit” GSEs which were created to buy mortgages from the banks, as well as the FHA, there would be no such a thing as a 30 year or even 20 year mortgage, and most people would have to have at least 50% down in order to buy, as they did in the Great Depression and in most periods before that.
And had we not trumpeted to the financial cartel our willingness to rescue them from the consequences of their own greed and insanity, as we did with the S&L bailout of the 80s and most of all with the Long Term Capital bailout of the 90s, they would never have made the loans they made from the 90s forward, for any amount of money for anything that had four walls and a roof, to anybody who could sign an app, for 5, 6, or even 7X their income.
And what “caps” on amounts are you talking about? Would you be speaking of the caps on FHA loans, and on the size loans Fannie and Freddie will buy? Those have always existed, and a very sizable cohort of Free Market advocates, myself included, think that FHA and the GSEs really shouldn’t exist at all, given that they are either a government entity like the FHA, or have the implicit backing of the government like the Fannie and Freddie, both of which have had to be bailed out to the tune of hundreds of billions of dollars thanks to their purchases of bad loans that would never have been written if the lenders writing them had had to assume a significant part of the risk in them and had not been able to offload it.
Wish there was an editing function on this site. Sorry about the incomplete sentence in the 1st paragraph- I was going fast.
Fannie, Freddie Masking Billions In Losses, Watchdog Finds
http://www.zerohedge.com/news/2013-08-19/fannie-freddie-masking-billions-losses-watchdog-finds
As is well-known by now, one of the main reasons why the Fed’s hands are tied when it comes to the future of QE, is the dramatic drop in the US budget deficit which cuts down on the amount of monetizable gross issuance (read Treasurys) and for which a big reason is that the GSEs have shifted from net uses of government cash to net sources. So in what may be the best news for Bernanke, and/or his successor, we learn that according to a report written by the Federal Housing Finance Agency (FHFA) inspector general and reviewed by Reuters, “Fannie Mae and Freddie Mac are masking billions of dollars losses because of the level of delinquent home loans they carry.”
The very first sentence of this article will be a constant refrain from the MSM over the next six to nine months. The month-over-month figures will be bad, but they will constantly reassure everyone by touting the year-over-year numbers.
Report: Prices Slip from June to July
Median home prices dipped month-over-month in July, but still experienced a sharp rise from last year, according RE/MAX’s latest housing survey covering 52 metropolitan areas. At the same time, the inventory situation eased, while sales remained strong.
Homes in July sold for a median price of $189,950, down 2.1 percent from June, but up by 11.5 percent from July 2012. The annual increase marks 18 consecutive months of yearly gains, and 49 out of the 52 metro saw improvements over the last year.
While inventory was down compared to last year and the prior month, the decreases were more conservative, which means home price gains should slow, according to RE/MAX.
July inventory was 1.3 percent below the level in June and 20.7 percent lower compared to a year ago.
However, inventory expanded month-over-month in 18 of the metros tracked.
Currently, it would take four months to clear inventory available for sale, but in San Francisco, Denver, and Los Angeles, supply was under two months.
Sales in July were positive all around, with closed transactions climbing 17 percent from last year and inching up by 1.5 percent from the prior month. The annual increase represents the 25th straight month sales were higher.
Overall, 48 of the 52 metro areas saw higher sales over the last year. Thirty-nine of those metros saw double-digit increases, including Albuquerque (+43.8 percent); Raleigh-Durham, North Carolina (+38.7 percent); Chicago (+38.3 percent); Boise, Idaho (+36.8 percent); Providence, Rhode Island (+35.5 percent); and Indianapolis (+30.5 percent).
“…down 2.1 percent from June”
Ouch! Isn’t that a -25.2% annualized fall in home prices? The +11.5% YOY won’t last long with monthly numbers like that. Especially considering that prices were rising 1-2% last fall. That is a 3-4% drop in YOY relative numbers every month. What is the MSM going to say three months out when the YOY numbers run negative?
Reality is, the double digit YoY sales volume/price ‘beat’ stats this year are due to easy comps.
Not gonna happen next year
The problem is you say that every year when prices are up.
Beyond the good comments you both contribute, you two are great for entertainment value.
I’m interested to watch what happens with the volume and velocity of flip houses with the interest rate increases. If a foreclosure was bought in early June with a 60 day flip, that August listing had a completely different interest rate and mortgage payment environment. The whole point of a flip is to get an owner-occupied into the house, a significant majority of which will carry a mortgage. The interest rate spike may have taken all of the profit margin from any flips in process.
When is the last time there was a 1% 10Year Yield increase in such a short period of time?
I recently had someone email me about doing a flip. I gave him the same warning you wrote in this comment.
Can kicking again.
Watchdog says Fannie, Freddie too slow to record loan losses
Fannie Mae and Freddie Mac are taking “an inordinately long period” to implement guidance that calls for the housing-finance giants to classify very delinquent loans as losses, according to a recent inspector general report.
Fannie FNMA and Freddie FMCC had planned to fully implement 2012 guidance by 2015, accounting for mortgages that are 180 days past due as losses, a move that could force the firms to charge off billions of additional dollars for bad mortgages. But 2015 is too long to wait, wrote Steve Linick, inspector general of the Federal Housing Finance Agency, which regulates Fannie and Freddie.
“Appropriately classifying assets according to risk characteristics is a key safety and soundness practice,” according to Linick’s report.
In response to Linick’s report, FHFA said Fannie and Freddie will confidentially report the impact from recognizing very delinquent loans as losses for this quarter. Eventually, the firms’ public financial filings will include the information.
Fannie and Freddie already recognize that delinquent loans may fail, and account for these troubled mortgages in their loan-loss reserves. Forcing Fannie and Freddie to recognize these troubled loans as losses could decrease loan-loss reserves but increase charge-offs.
Should I feign surprise that the government might be cooking the books to make things look better than they are?
Indeed, lots of cash sloshing around.
But..where did it all come from?
It was borrowed.
rofl
Many of the hedge funds supplemented their equity component by floating bonds, so much of the REO-to-rental “cash” was actually borrowed money.
What you can observe depends on the theory that you use. I think Einstein said that.
One thing that always irked me is the salary – house price correlations. See, I know many many many people who are rich, but that have no job at all. Even in my “poor” family a farming uncle died and just left 0.5 M to two grandsons. Only taxed at 4 percent.
So, for obvious reasons, I’ve long wondered about the effects of significant amounts of old money sloshing about. I hear people suggest that it is all debt that drives this cash buying. However, I know that (if the status quo is maintained) that my house in southern California will be paid off in 5-6 years. I read a study not too long ago that suggested that 70k is the salary that allows people to achieve near maximal happiness from money. That was true for me even in southern CA. When I see articles like this I really wonder if all the buying is debt.
Bidding Wars Continue to Tumble as Housing Market Rebalances
Competition in the US residential real estate market dropped for the fourth consecutive month in July, underscoring the market’s overall trend towards balance. Nationally, the percentage of offers written by Redfin agents that faced multiple bids fell to 63.3 percent in July, down from 68.6 percent in June, and 75.7 percent at the peak in March. Across the 23 major markets that Redfin serves:
Bidding wars in San Diego and Orange County cooled the most in July with above 10 percentage point drops. San Diego saw bidding wars fall to 71.1 percent from 81.9 percent in June. In Orange County, bidding battles fell to 78.2 percent from 88.6 percent in June.
Competition also eased markedly in San Francisco and Boston, with a drop of 9.2 and 8.9 percentage points, respectively.
Baltimore was the only market to see competition ramp up; bidding wars grew 8.8 percentage points from 41.2 percent in June to 50 percent in July.
Reduced competition also helped winning offers fall closer to list prices for the second consecutive month; nationally, the average difference between winning offers and list prices fell to 0.6 percent in July from 0.9 percent in June and 1.4 percent in May.
I wonder what the optimal percentage of bidding wars would be for a healthy housing market. A drop of 10% in Orange County sounds like a lot until you realize that nearly 90% of offers faced competing bids in June. Now it’s down to nearly 80% in July.
One thing that was great about buying in late 2010 post-tax credit was the lack of competing bids. I actually had bids accepted on two separate properties, one of which I backed out on. The house we ended up buying I waited 2 full weeks from the time we toured the property to the time I submitted an offer. This allowed time for due diligence — talking to the neighbors, researching the owner’s mortgage history, formulating bidding strategy, and making sure we still liked the place after the initial excitement wore off.
Contrast that to today, I had a family member close on a property in July for which she had to rush to submit an offer within hours of listing, sight unseen. It was a condo and she had toured other similar floorplans giving an idea of what she was bidding on, but still, what a stressful way to make such a large purchase.
I wonder if it was something that was even tracked in the pre-tech days?
Oh yeah. And we had bid on 3 or 4 other properties and those bids were not accepted. I think one of the responses said something about being insulted. And one of the responses on a short sale was a counter-offer to sell us some “art” and “jewlery” and assorted crap for over $100,000 as a prerequisite to taking our offer to the bank.
I think I waited 6 or more months, until the price had come down, it had fallen out of escrow twice, had been postponed from foreclosure auction 5 times, and was less than three weeks from the auction that the bank was no longer going to postpone.
Sounds like you got a good deal. If I remember right you said it was a real fixer. That can exact its own price on your money and time.
I looked at plenty of fixers that could have been had for a great deal, but the real cost to me is the time, something I don’t want to sacrifice with my kids being so young. My goal was to buy something in a good location that needed minimal fixing, for a reasonable price.
To rent in the neighborhood that I bought cost the same as my PITI payment, and on an after-tax basis it’s a nice savings. We probably could have stretched the home buying process over many months like you and squeezed out a better deal, but again, my time is valuable and spending weekends touring homes gets old and can get frustrating.
“I wonder what the optimal percentage of bidding wars would be for a healthy housing market. A drop of 10% in Orange County sounds like a lot until you realize that nearly 90% of offers faced competing bids in June. Now it’s down to nearly 80% in July.”
One thing to consider about these anecdotal studies is that most listing agents lie when asked if there are competing bids. The real number may be 30% to 50% less. Further, even when there are multiple bids, often these bids are not competing. If a $500,000 house gets a $400,000 low-ball offer and one good offer at $480,000, there were multiple bids, but they were hardly competing.
I don’t have a clue about optimal percentages for bidding wars overall. I know that personally, the optimal percentage is zero. The last thing in the world that I am going to do is try to outbid someone else on a house. It is worth to me what it is worth, and if someone thinks it is worth more, it isn’t going to change my mind. “Ti-i-i-ime is on my side. Yes, it is.”
Hopefully this is a trend but I’m seeing houses in the expensive neighborhood breaking the $400,000 barrier. Breaking as in under $400k. These houses are terrible but in this neighborhood even the terrible SFH were asking $500-600k since I been hunting.
Still looking for a home but in no rush now that one of our kid got accepted to the local Magnet school, the other kid is only 2 year old so we got time.
The LA Times is starting to catch on to the market shift. I guess they’re embracing the philosophy that “In the land of the blind, the one-eyed man is king.”
I remember talking with a coworker in April about price trends. Being a long-term Southern California owner, he fancies himself an expert on the housing market. Since he has benefited from the drop in rates over the last 30 years, no to mention Prop 13, he can’t see any downside to buying right now. Anyway, he was telling me how prices had jumped 3% last month, and that I should buy now before the prices keep rising. My response was: “Yeah, that’s probably sustainable.” Given the low level of inventory and bidding wars, we didn’t end up buying. Glad we didn’t. We would have been stuck with paying too much for whatever crappy property the cash buyers didn’t want.
Southern California home market cools; prices remain flat
http://www.latimes.com/business/la-fi-home-prices-20130815,0,129821.story
By Andrew Khouri
August 14, 2013, 5:57 p.m.
The red-hot Southern California housing market finally got a dose of cold water.
The region’s median home price in July remained flat from a month earlier, at $385,000, real estate firm DataQuick said Wednesday. The figures followed a record-setting June, when the median price rose 4.6% over the previous month and 28% year-over-year, the highest percentage since DataQuick started tracking the statistic in 1989.
The cooling off came with a surge in the number of sales to an eight-year high, indicating a growing supply of homes that could steady the market after this year’s frenzy. Rising mortgage rates may also have propelled more buyers to close deals, fearful that rates could climb higher, the San Diego research firm said.
“We are slowly moving toward a normalized market,” said Stuart Gabriel, director of UCLA’s Ziman Center for Real Estate.
The market nonetheless remained strong, with the median price up 25.8% from July 2012.
Prices have risen at a breakneck pace this year with an improving economy, a short supply of homes and heavy investor demand. The gains have frustrated many would-be buyers who found themselves on the losing end of bidding wars and raised questions about whether the market is getting overheated.
Many economists say the increases should moderate as the inventory crunch loosens. Rising prices, many have predicted, will spur new-home construction and lure more sellers into the market.
Rising mortgage rates should also eventually help cool the market. But rate increases could also spur more sales and price increases in the short term, as buyers look to get into the market before rates go up further. Mortgage rates have risen about 1 percentage point since the beginning of May.
Inventory has increased in all six Southern California counties last month from June, according to Realtor.com. Los Angeles County, for instance, saw 7.8% more home listings in July than a month earlier. Orange County inventory rose 8.4% last month.
The increasing supply and rising rates could now be putting a damper on prices, although economists usually like to see three months of data to prove a trend.
“As the mismatch between supply and demand eases, it will be more difficult for home prices to rise as steeply as we’ve seen over the past year,” DataQuick President John Walsh said in a statement.
This year’s sharp price rebounds have brought both pain and gain.
For those who bought during last decade’s housing bubble, just before the housing crash, rising prices brought relief in the form of increased home equity. Thousands of homeowners have escaped negative equity positions — so-called underwater mortgages, on which they owe more than their home is worth.
But many buyers have struggled in the fast-paced recovery, often losing out to cash buyers in bidding wars over the paltry selection of homes. Many have been priced out of the market entirely as prices have soared.
Only 36% of Californians could afford a single-family house at the state’s median price in the second quarter, according to the California Assn. of Realtors. That’s down from 44% during the first three months of this year and 56% during the first quarter of 2012.
Blair Newman, a real estate agent who specializes in Lakewood, said the market remains hot. Two weeks ago, Newman said one of his clients signed a contract to sell her three-bedroom home for about $15,000 over the asking price after receiving six offers within a week.
“It’s been pretty consistent,” he said.
Investors remained a heavy presence in the Southland in July, although their presence is receding. Absentee buyers — mostly investors — purchased 27.4% of homes last month, down from 28.6% in June and the lowest level this year.
Esmael Adibi, director of Chapman University’s A. Gary Anderson Center for Economic Research, said because the market fell so hard during the bust, there is still room for future price appreciation. Still, he said interest rates are likely to rise, inventory expand and the year-over-year median price figures will soon be compared with a period of more robust growth.
“Blair Newman, a real estate agent who specializes in Lakewood, said the market remains hot. Two weeks ago, Newman said one of his clients signed a contract to sell her three-bedroom home for about $15,000 over the asking price after receiving six offers within a week.”
Well-priced properties still sell. Under-priced properties sell even better. I just wonder how the home was priced relative to the rest of the market. Pricing runs the whole gamut. There are homes priced to sell, and homes that are priced to get the listing.
Looking at the 3 bdrm pending sales in Lakewood the last few weeks, with Prudential California Realty as the listing agent (where Blair Newman apparently works — gotta love Google), the property is most likely 5716 Blackthorne since it went pending on 8/1 (the other pending dates are 7/8, 7/9, 8/17). Here is the description:
http://www.redfin.com/CA/Lakewood/5716-Blackthorne-Ave-90712/home/7552689
Gorgeous 3 bedroom 2 bathroom Lakewood home with spacious family room, open kitchen and pride of ownership home. This one won’t last! Breathtaking kitchen with new counter tops, updated tile backsplash and flooring. Recessed lighting and open breakfast bar to the relaxing family room. This home is perfect for entertaining with separate living room and family room with direct access to the outside covered patio where you will enjoy Southern California’s delightful weather. It’s resort style living right at home. Other fine features include: Newer roof, new dual paned windows installed 3 years ago, chilling central A/C and central heating, ceiling fans through out, separate master suite, recessed lighting through out, space saving drawers installed in the kitchen, decorative window blinds, inside washer/dryer hook ups with gas. Just in time for School! Local school is Blue Ribbon School, Stephen Foster as well as Mayfair Jr. and Sr. High. The Intensive Learning Center is also another top performing option. Mayfair Park is a close walk away where you can enjoy great city programs and activities, swimming at Mayfair Pool and play equipment for the kids. Take advantage of this well maintained home that has been well cared for inside and out!
The property is listed at 448,888. Notice the ending 8’s. That is code for: we are going to try to sell this to the Chinese buyers. “8” means rich in Chinese. Prudential California typically has 10-20% of their listings end in all 8’s, so we know this house was marketed to Chinese investors.
Also, this house appears to be more or less recently renovated and is in a nice area of Lakewood. How is it priced? At $301/sf. It is lower than the average $317/sf of other pending sales in the area. Since pending sales typically run 10% less than average listing prices, this property appears to be somewhat underpriced even if it sold for 444,888 +15,000 = 460k/1490=308/sf.
Is it possible the realtor cherry picked this property to make the entire Socal market seem better than it actually is? And at 460k, practically every household in Socal could buy this property (with 20% down, you need 78k household income, or two $19/hr jobs, at 36%DTI). A Chinese investor would probably buy two of these as investments.
Great comment and great research.
The bulls narrative continues to crumble simply because in this type of landscape
leverage = ruinage™
What do make of the fact that this bull market has been built on the least amount of leverage of any in living memory?
“What do make of the fact that this bull market has been built on the least amount of leverage of any in living memory?”
It seems to me that this latest recovery in housing is due not to the absence of leverage but the complete removal of all leverage limits. The low inventory is not a result of demand but a result of reselling loans to insolvent “owners” at unlimited LTV levels via Harp 2.0, and the private and government limits on foreclosures. What about the mark to market rules? Have those been reinstated?
And the high demand is a result of low yields driving investment into real estate from bonds by the FED keeping the target and discount rates at the zero bound. If ten year UST yields were at 6%, Blackrock and Colony Capital wouldn’t be out buying tens of thousands of rental units hoping to generate 6% cap rates after operating expenses. And the banks wouldn’t be flush with profits from depositors since they are paying out .1% interest and need to make Jumbo loans.
I see leverage everywhere. Why can’t you? I assume you are referring to the amount of down payment and cash buying right? What is the source of those funds? Bank deposits that are earning no interest. Foreign investment sales of UST. European countries looking for safe haven assets. Emerging nations getting beat up by the quantitative easing are buying US real estate.
The source of all this lack of private leverage is the FED expanding its balance sheet by 85+B/mo. People aren’t borrowing money because the FED is borrowing it for them. It’s like a college student having zero debt because his parents took out a 200k loan. His balance sheet looks great, but his inheritance ain’t lookin to gud. Eh? Ignoring public leverage that hasn’t been seen in ANY memory, living or dead, while touting the bull market in housing based on low private leverage, is misleading.
That aside, since when does a boom require anything other than a misallocation of capital? The leverage will increase the size of the bubble, but it doesn’t have to be there to initiate it. So, the lack of leverage should, in the present case, limit the size of the bull run in housing. Good point. The mini-boomlet is over since buyers can no longer lever-up into Option ARMs, or access the housing ATM for downpayments on investment properties.
It’s like a college student having zero debt because his parents took out a 200k loan. His balance sheet looks great, but his inheritance ain’t lookin to gud. Eh?
Well put!
The Fed is putting $85 billion dollars into the economy every month and huh? No leverage? Of that $85 billion, $45 billion is created as DEBT, and the other $40 billion is buying DEBT. No leverage? What the …?
MR says: “What do make of the fact that this bull market has been built on the least amount of leverage of any in living memory?”
———————————————————————–
Nonsense!!!
Housing debt is not the same as total debt and the Fed is not a borrower but a lender. The basic theory around here seems to be that interest rates will kill housing, but it never gets mentioned that 50% of buyers aren’t concerned in the least with interest rates. Another significant percentage of buyers are putting large down payments and the interest rate affordability issue is not affecting them very dramatically. So…
(Rephrasing the question I asked earlier)
How do interest rates kill housing when such a large segment of buyers are not interest rate dependent for their purchases?
Dude, whether you pay cash or finance, interest rates kill housing simply because the 10yr UST bond is essentially priced into the financial model.
Also, many all-cash buyers don’t necessarily drain their savings, they borrow the cash, especially when they have access to uber-low rates.
Cheers!
Wrong. They are interest rate dependent. Why? The reason they are being herded into real estate is because they cant get shit for return in the bank. Similar phenomenon exists for historically unprecedented SFR rentals by “hedge” funds. they are being driven further out on the risk curve, seeking reward.
The effect on real estate prices is compounded and is much more complex than simply looking at affordability indexes.
This is truth and thus, cyclical arguments are complete horse shit
Why don’t Big Macs cost $100? I would say that just as large a percentage of people buy Big Macs with cash as they do houses, perhaps more. Of course with the EBT cards right now, I wouldn’t be surprised if the cost of a Big Mac was $50, since many people aren’t paying with their own money.
Anytime financing costs rise for major purchases like cars or houses, the effective price rises for a majority of the customers. Since many customers now can’t afford to buy the product, or don’t have access to mountains of cash, they either offer less, or drop out of the housing market. As a result, volumes drop. When volumes drop due to rising finance costs or low inventory, cash buyers make up a larger portion of the market than they normally would. This is why the cash buyers are at 50% right now. When inventory rises, the cash buyers will comprise a smaller segment of the market, and their influence will diminish.
Normally, cash buyers operate on the fringe of the market, they aren’t THE market. At 20% of the market, they don’t have sufficient market power to drive prices higher or lower.
Cash buyers are buying because they sensed that the market was rising and they could turn a quick profit. The market was rising because of a lack of homes for sale and low rates drove up buying power. Now that prices have risen sharply AND rates have risen sharply, inventory is rushing to the market. The opportunities for cash buyers are mostly gone. This is why many investors aren’t buying.
So, it isn’t just interest rates that will kill housing, it is also prices and inventory. Prices have risen for both cash buyers and mortgaged buyers. As inventory rises and competition from mortgaged buyers diminishes, cash buyers can be more selective of the properties the bid on. This alone should result in lower prices.
MR – Where to start?
When the Fed creates money, they create it on a computer and then they use it to buy Bonds from the treasury; bonds that the treasury creates on a computer. The Bonds are DEBT. Our money is created from DEBT. All the money created from the fractional reserve banking system is DEBT. And where do you think all that “money” goes? It is used to buy assets and the sellers use the funds to buy houses, FOR CASH! It may not be leveraged to that person buying the house, but the money they used created multiples of LEVERAGE in the system. How could home prices not have risen with all the so called money being thrown out there. Some of that leveraged DEBT lands on the housing market. To think that the housing prices have not increased without incredible amounts of leverage is …, well I will leave the descriptor to your taste.
And they are interest rate DEPENDENT. The money/debt would not be in the system without low interest rates.
Think for a second. Where did all these cash buyers get the cash? They had to sell something. They had to sell something for a price that they could not have gotten without $85 billion per month being thrown out of a helicopter, whether it was equities, collectibles, etc.
I do not have any numbers, but I would venture to guess that at least 50% if not 90% of those who bought with cash went out and got a mortgage after the sale.
And the investors who paid with cash? Is there anyone here who thinks that investors just let that equity sit there after they buy?
“Housing is BAAACK and prices are headed up, up, UP!”
At least according to industry cheerleader Bill McBride.
Here’s another evenhanded report from America’s favorite economic blogger:
From Zillow: Housing Conversation Turns to the Future as Market Turns in Another Strong Month in July
The national housing market recovery proved it is on firm ground in July, as home values rose 6 percent year-over-year to a Zillow Home Value Index of $161,600, the first time home values have appreciated at an annual pace of 6 percent or higher since August 2006.
July marked the 14th straight month of annual home value appreciation, according to the July Zillow Real Estate Market Reports. Home values were up 0.4 percent in July compared with June. …
“After three straight months of annual home value appreciation above 5 percent, the U.S. housing market recovery has proven it is on very sound footing. We have entered a new phase in the recovery when we can begin to turn away from ugly recent history and turn toward what the housing market of the future will look like and how it will act. …” said Zillow Chief Economist Dr. Stan Humphries
Hey, if you can’t trust Stan Freaking Humphries, who can you trust, eh?
Hooray for Humphries! Hooray for Bill McBride!
But what about those artificially low interest rates, Bill?
McBride: No comment
And what about all those Wall Street speculators slinging cash at anything with a roof; is that having an impact on prices?
McBride: No comment
And what about all those bogus mortgage mod programs that let people refi who haven’t made a mortgage payment in 3 years, Bill? Is that having an effect on prices?
McBride: No comment
And what about the Fed’s monthly purchases of $40 bil in MBS? Is that impacting sales?
McBride: no comment
Yup, prices are going up, up, UP! Better get on the green shoots bandwagon or you’re gonna miss out!
Truly pathetic. I can’t wait to read McBride’s take on existing home sales tomorrow when he omits any mention of the fact that rates rose after the period reported and sales are presently tanking bigtime.
He actually commented on the upcoming sales report so you don’t need to wait:
“However I wouldn’t read too much into an above consensus report. I suspect some people pushed to close in July before their mortgage rate “lock” expired, and my very early guess is existing home sales will decline in August.“
raskolnikov’s point about Bill’s cheerleading is right. His posts on housing have not been objective since he called the bottom.
Another MBS wild swing day. Until the Taper announcement this will be normal.
http://www.mortgagenewsdaily.com/mbs/
http://www.dsnews.com/articles/first-mortgage-default-rate-inches-up-in-july-2013-08-20
National default rates inched up in July, with first mortgages showing a slight increase, according to the S&P/Experian Consumer Credit Default Indices.
The national composite for consumer defaults—which cover first and second mortgages, bank cards, and auto loans—ticked up to 1.35 percent in July from 1.34 percent in June.
For the first time this year, the default rate for first mortgages increased. In July, the default rate was 1.25 percent, up slightly from 1.23 percent in June. The first mortgage default rate though is still down compared to July 2012, when it was 1.41 percent.
The second mortgage default rate fell flat at 0.54 percent, but was down from 0.75 percent a year ago.
The default rate for bank cards was the only category to show a decrease, falling to 3.22 percent from 3.41 percent in June.
Even with the increases, David M. Blitzer, managing director and chairman of the index committee at S&P, pointed to the bigger picture.
Talked w an HB real estate agent, discussing my concern regarding the validity of the “recovery” in prices and how future rising interest rates may affect prices to the downside.
He commented the market is still in bull phase, but experiencing a minor seasonal blip due to stock market softening, and that the stock market returns every October.
What did you expect? The truth?
I expected psycho babble; and I got it!
realtors will always provide bullshit if given the opportunity. The correlation with the stock market is laughable, but since he was unconcerned with the truth, any lie will do if it sounds plausible.