Mar302012
Investors absorb distressed properties at feverish pace
In the second post I wrote for the IHB back on March 3, 2007, I discussed a basic truth of housing markets:
Cashflow Investors have a different agenda; they want to turn a monthly profit from ownership. For them, the cost of ownership must be less than prevailing rent for them to make a return on their equity investment. Cashflow Investors form a durable bottom. If prices drop low enough for this group to get into the market, the influx of investment capital can be extraordinary.
In a declining market, a market where by definition there is more must-sell inventory than there are buyers to absorb it, it takes an influx of new buyers to restore balance. Since it is foolish to buy with the expectation of appreciation in a declining market, the buyers who were frantically bidding up the values of properties in the rally are notably absent from the market. With the exception of the occasional knife-catcher, these potential buyers simply do not buy. This absence of buyers perpetuates the decline once it starts. Add to that the inevitable foreclosures in a price decline, and you have an unending downward spiral. It takes Rent Savers and Cashflow Investors to enter the market to provide support, break the cycle and create a bottom.
It’s taken 5 years, but this process is happening right now, and the low end of the housing market is finding its footing.
The federal reserve’s counter-cyclical interest rate policy is designed to force capital out of safe harbors like interest-bearing bank accounts into riskier asset classes. With CD rates under 2%, the 8%+ cap rates of residential rental housing is very attractive. Cash investors are flocking to these assets despite falling prices because that asset class has superior returns. The activities of these buyers is what ultimately puts a bottom in the housing market.
Investors Swarm Housing, Raising Concerns
Published: Thursday, 29 Mar 2012 | 11:11 AM ET
By: Diana Olick
CNBC Real Estate Reporter
The number of homes sold to investors more than doubled last year, as rising rents and low-priced distressed properties fueled demand. Investors, half of them using no mortgage, bought 1.23 million homes in 2011, a 65 percent jump from 2010, according to the National Association of Realtors. Half of the homes purchased were distressed properties, that is, foreclosures or short sales (when the bank allows the home to be sold for less than the value of the mortgage).
“Rising rental income easily beat cash sitting in banks as an added inducement,” says NAR’s chief economist Lawrence Yun. “In addition, 41 percent of investment buyers purchased more than one property.”
I’m shocked. Something Lawrence Yun said is not complete bullshit. Cash buyers are buying distressed properties as cashflow investments. The number of distressed properties purchased for cash will increase sharply again this year as private equity funds start buying more properties.
Half of investment buyers said they purchased primarily to generate rental income, according to the Realtors’ report. 34 percent wanted to diversify their investments, as 2011 saw a volatile stock market due to the debt crisis at home and overseas.
While nearly half of investment buyers said they were likely to purchase another property within two years, housing and mortgage analyst Mark Hanson calls them a “thin cohort” and worries that they add ever more volatility to the current housing recovery.
“They are fickle and volatile. They will go away on the slightest of conditions changes.
Yes, the cashflow investors will go away once prices rise enough that cashflow no long makes sense. By then, the speculators buying for appreciation will take their place. Value buyers always give way to momentum buyers. That’s the way markets work.
They also won’t chase prices higher or buy new homes from builders. Lastly, without the heavy flow of distressed supply, there is no U.S. housing market recovery. Distressed sales ARE the market,” says Hanson.
I’m not sure what Mark’s point is regarding the flow of properties. These properties must be pushed through the foreclosure process, and when it’s done, it’s done. These foreclosures are a necessary part of the market healing process, and investors are needed to absorb them.
Foreclosure supply is still running high, with 65,000 completed foreclosures in February of this year, according to a just-released report from CoreLogic. 862,000 foreclosures were completed in the twelve months ending in February. While there are still 1.4 million homes in the foreclosures process, all of these numbers are coming down, albeit very slowly, and sales of bank-owned properties (REO) are speeding up.
Even the Realtors are concerned, like Hanson, that new programs by the government and banks to sell foreclosed properties in bulk discounts to large-scale investors, will cut off a robust individual sales market for smaller investors.
“Small-time investors are helping the market heal, since REO inventory is not lingering for an extended period,” says Yun, clearly looking out for his Realtor constituents. “Any government program to sell REO inventory in bulk to large institutional companies should be limited to small geographic areas.”
I used to worry about crony capitalists buying up all the inventory, but that isn’t going to happen. There is far too much of it. Lenders own $30 billion in California single-family homes.
Ponzis create distressed properties
Many distressed properties are from peak buyers who overborrowed and now find themselves underwater. However, a second group of distressed properties was created by those who overborrowed at the peak — the Ponzis.
About 40% of the population are spenders who will borrow money to live beyond their means. Some are more responsible than others, but anyone with a propensity to spend is not going to resist taking free money when it’s offered. And lenders were giving free money to loan owners.
With so many people prone to take the free money, it shouldn’t be surprising so many overborrowed and lived the good life. Each of these Ponzi borrowers must be recycled.
- Today’s featured property was purchased on 1/10/2003 for $369,000. The owners used a $295,200 first mortgage, a $73,800 second mortgage and a $0 down payment.
- On 2/19/2004 they refinanced with a $370,000 first mortgage and a $48,000 stand-alone second. That’s $48,000 in Ponzi borrowing after just one year of ownership.
- On 4/10/2006 they refinanced with a $528,500 Option ARM with a 1.5% teaser rate.
- They quit paying sometime before May of 2010 and got to squat for at least 16 months.
If none of these Ponzis had borrowed and spent their houses, we wouldn’t have so many distressed properties, and there would be much more equity to support a move-up market.
Investors (speculators) caught in a mania?
One thing is assured …. the herd always gets led to slaughter.
Freddie Mac Reports 30-Year Fixed-Rate Teetered Back Below 4%
The 30-year fixed-rate mortgage positioned itself back below 4 percent this week as economic indicators point to a weaker housing market and economy, according to Freddie Mac’s Primary Mortgage Market Survey.
“The S&P/Case Shiller 20-City Composite home price index slid in January to its lowest reading since December 2002,” said Frank Nothaft, VP and chief economist for Freddie Mac. “In addition, new home sales declined 0.5 percent in February, below the market consensus of an increase, and pending existing home sales also declined for the month.”
Last week, the 30-year fixed-rate averaged 4.08 percent, above 4 percent for the first time since October 2011. This week ending March 29, the 30-year averaged 3.99 percent (0.7 point), barely below the 4 percent mark. The 30-year is still below last year’s average at this time, when it was 4.86 percent.
The 15-year fixed rate mortgage slipped to 3.23 percent (0.8 point). Last week, it averaged 3.30 percent and 4.09 percent a year ago at this time.
The 5-year ARM lowered to 2.90 percent (0.8 point) this week, compared to last week’s average of 2.96 percent, and still lower than last year’s 3.70 percent.
The 1-year ARM also dipped down, averaging at 2.78 percent (0.6 point ). Last week, it averaged 2.84 percent, and last at this time it was 3.26 percent.
Bankrate also reported a drop in rates, with the 30-year fixed-rate down to 4.23 percent compared to 4.29 percent last week. Bankrate conducts a national weekly mortgage survey using data provided by the top 10 banks and thrifts in the top 10 markets.
The average 15-year fixed mortgage rate dropped to 3.44 percent and averaged 3.48 percent last week. The 5-year ARM also moved lower, averaging at 3.14 percent. Last week, it averaged 3.24 percent.
According to a release from Bankrate, renewed concerns about the effect of higher gasoline prices on the U.S. economy as well as slower growth in China contributed to the lower rates this week.
The consumer finance company also noted that the last time mortgage rates were above 6 percent was Nov. 2008, which means that a $200,000 loan with a 30-year fixed rate at 6.33 percent would have a monthly payment of $1,241.86, compared to a $981.54 month payment with the average rate of 4.23 percent.
Las Vegas Home Sales up Sharply
The number of homes sold in the Las Vegas area rose last month to the highest level for a February in six years, with new-home transactions at a four-year high and resale activity the strongest since 2005. The median price paid for a home in the region edged up slightly from January, while the median’s year-over-year decline was the smallest in a year, a real estate information service reported.
In February, 4,240 new and resale houses and condos closed escrow in the Las Vegas-Paradise metro area (Clark County). That was up 5.0 percent from January and up 8.9 percent from February 2011, according to San Diego-based DataQuick. The firm tracks real estate trends nationally via public property records.
An increase in sales between January and February is normal. On average, sales have risen 5.6 percent between those two months since 1994, when DataQuick’s complete Las Vegas region statistics begin. The sales tally for this February got a boost from the leap year, which added one extra business day to the month.
In February, 3,744 homes resold (excludes newly built homes), up 5.1 percent year-over-year. It was the 14th consecutive month in which resales have posted an annual gain, and marked the highest number of February resales since 3,875 sold in February 2005.
February’s 496 sales of newly-built homes represented a 51.2 percent year-over-year increase. It was the highest new-home total for a February since 2008, when 911 new homes closed escrow. The average number of new homes sold in the month of February since 1994 is 1,351. New-home sales have risen year-over-year for eight consecutive months.
Total February sales were 11.5 percent higher than the average number of homes sold in that month since 1994, while resale activity was 52.7 percent above average for a February.
Continuing a months-long trend, February sales were strongest in the lower price ranges. The number of transactions below $100,000 rose 18.9 percent compared with a year earlier and represented 42.8 percent of all deals, compared with 39.2 percent of all sales in February 2011. The number of February 2012 sales below $200,000 rose 11.2 percent year-over-year. February sales above $300,000 rose 1.1 percent compared with a year ago, while sales above $500,000 rose 4.4 percent.
A 2002 price roll back in CM, nice. Californians are not used to having a lost decade for housing. I can not tell you how many people (usually boomers) I have heard crowing about CA RE prices doubling every ten years like clockwork. Man, it’s going to be a long, long time before we have any doubling of prices from this point. This reminds me of CSCO stock back in the 90s when it went to the moon. All the future gains were eaten up by a short term statospheric rise.
What will chronic high unemployment (especially for younger buyers) and pending higher interest rates do for future CA home prices. I would guess we’ll be treading water for a LOOOOONG time.
During the bubble, buyers created 25 years worth of appreciation in 5 years. Perhaps by 2025 we may get back to the peak, perhaps not.
Perhaps not indeed 🙂
Reminds me of a semi-oldie (2010) but goodie from Fiserv …
**Housing markets that experienced the greatest inflation in house prices — including certain metro areas in sand state California, will not see a return of peak-level home prices before 2025
http://www.housingwire.com/2010/04/09/peak-house-prices-will-return-to-sand-states-after-2025-fiserv
It will peak before, in my honest opinion. Only, if we have QE3, QE4, or Super Twist, where these Federal Reserve operations have expanded the money supply so much we will have major dollar devaluation. I’m not hoping for that outcome, I hope we stop at QE2. But look at what with prices when we were taken on off the gold standard in 1970’s. It was something like 75% inflation in 6 years.
I hope we increase interest rates soon.
IR,
Funny I posted the same thing today. Do you think some of these investors are people that frustrated that they are getting less than 1% interest in their CD accounts and are looking for better returns?
Several of the investors in my fund have told me that was their primary motivation.
A private investor needs to look into the cash flow, expenses and profit/loss upon sale of the rental property. The fund investor and especially creator look at the cash flow and expenses. The profit/loss sale of the property is only a rose-colored projection that will materialize after they have cashed out to form a new company or retired.
This is a sad, shabby, fugly 70s vintage dump.
Will it still be under “rental parity” when you add in about $75K worth of fixup?
Sad to think that you have to make at least $100K to live like this.
Hardly surprising, considering the 1955 build date.
Did you note the
$0 Mello-Roos, and
$0 HOA?
This is a starter home, in the old-fashioned sense. That $75K you sneeringly refer to could be spread over many years.
Study: Fukushima radiation plume contacted North America at California “with greatest exposure in central and southern California”
Southern California had 2,500 Bq/kg of iodine-131 in seaweed — Over 500% higher than other tests in U.S., Canada
Corona Del Mar (Highest in Southern California)
* 2.5 Bq/gdwt (gram dry weight)= 2,500 Bq/kg of dry seaweed
http://enenews.com/california-2500-bqkg-iodine-131-seaweed-500-higher-other-tests-canada
Yikes! I was at Newport Beach last weekend, and I actually touched some seaweed on the beach. I guess next time, I will bring my Geiger counter.