Is This Real Estate Stuff For Real?

Eddie Braverman's picture
Rank: The Pro | 21,111

I see a lot of stuff reported on the Internet that I take with a whole shaker of salt, but I've seen the following in too many places over the past week to just dismiss it. I'm looking for some of you involved in real estate to shed some light on this and let me know if it's for real. Because if it is, it could signal a comeback in real estate prices for certain markets.

What I'm referring to is the supposed housing shortage being experienced in much of California, as well as several other areas around the country. I've seen this reported from a number of reputable sources recently. Apparently the number of available starter homes in much of California has dried up, due in large part to institutional investors scooping them up before individual buyers can even view them. And it's not just in California.

The median price in Phoenix is up over 30 percent year over year. You read correctly, the year over year median price is up by 30 percent. Did incomes go up by this much? Of course not. For years you have nearly half of all properties being bought in this market going to investors. Rent prices have surged while banks leisurely leak out inventory while shelling out the best deals to other financial institutions with deep wallets. In other words all the bailouts were to create another bubble and crowd out the typical buyer and also, squeeze the wallets of many renters who probably are not able to buy.

I'm of two minds on this. Yes, it sucks if no one but investors have access to these "pocket listings" and true home buyers are being iced out of the market. On the other hand, a rising tide lifts all ships, so if housing prices are making a comeback on the backs of investors, is that necessarily a bad thing?

Maybe it comes down to the religion of home ownership in America. That's the original American dream, and it's deeply ingrained. But I would think that the crash would have illustrated that not everyone gets to own a home. Is that so bitter a pill to swallow?

I guess what I'm really wondering is whether it's a bad thing to have a real estate market dominated by investors. It occurs to me that the greater number of properties owned by investors, the cheaper the rents will be (supply outstripping demand). As long as we don't go back to sub-prime lending things can't really get out of hand, right? Or am I missing something?

Really looking for some input from real estate folks here, because it's an area where I've made a lot of money in the past and I wouldn't mind getting back into it if the time is right.

Comments (26)

Oct 17, 2012

This sounds like yet another win for the baby boomers

Oct 17, 2012

My question is whether the 'shadow inventory' or whatever you want to call it has been 100% absorbed and resolved. Are we anywhere close?

A friend of mine who is a bank examiner at the FDIC in AZ expects bank closings to continue for the next five years. This sounded high to me, and I would assume he wasn't talking about levels similar to a couple years ago, but it still left an impression.

Oct 17, 2012
prospie:

My question is whether the 'shadow inventory' or whatever you want to call it has been 100% absorbed and resolved. Are we anywhere close?

A friend of mine who is a bank examiner at the FDIC in AZ expects bank closings to continue for the next five years. This sounded high to me, and I would assume he wasn't talking about levels similar to a couple years ago, but it still left an impression.

http://www.calculatedriskblog.com/2012/10/corelogi... I think is a good summary. The inventory is not completely absorbed, but it has been improving.

Then you have economists like Shiller who say that the weight of the shadow inventory isn't affecting prices as much as maybe it should be... or that it shouldn't be... it's hard to say because current market is speculative, which makes it hard to predict. No doubt, as the OP said, loose money in the macroeconomy has undoubtedly helped push the rising tide of residential prices. Phoenix AZ is probably a bubble, though.

Oct 17, 2012
prospie:

My question is whether the 'shadow inventory' or whatever you want to call it has been 100% absorbed and resolved. Are we anywhere close?

A friend of mine who is a bank examiner at the FDIC in AZ expects bank closings to continue for the next five years. This sounded high to me, and I would assume he wasn't talking about levels similar to a couple years ago, but it still left an impression.

I'd have to say your buddy is tripping (regulators are the worst/pessimists). Working out here on the west coast in FIG, the amount of healthy banks we have relative to the rest of the nation is mind blowing. Earnings for all institutions have pretty much come back and they are trading at much higher tangible book levels than many of their counterparts across the nation. Luckily, out here we have a bit more transparency with many of the banks listed on an exchange or bulletin board.

Although CA is rated as one of the top 5 states with bank failures, most of them were flushed out from '08-'10. Since then, there haven't been many failures. My point here is that there will always be failures, even in good times, as reflected on the FDIC website, but the turmoil out here in the west is past us. I would say at the very most, a total of 8 more banks may fail over the course of the next 5 year, but that's attributed to the fact of just doing business. If they got through the thick of things up until today and they are still holding on, then they will pretty much make it unless there is another dip in the economy. That's not to say that they won't be selling out as the M&A wave is about to hit with force. Btw, as a reference point for states I am referring to when I mention West Coast, they are CA, WA, AZ, and NV.

OP as it relates to real estate and shadow inventory, there is a lot of that on the books of banks out here in CA. OREO is still incredibly high and many of the community banks are leaving it on the books and unwinding it slowly as they don't want to lose much or to a certain degree, anything, on these assets. So this is obviously effecting real estate out here as there isn't much inventory on the market. You have investors picking up any portfolios they can come by or properties at trustee sales while you have the middle income family still looking for houses that just aren't available, causing a stabilization and to a certain degree an increase in values over the board depending on your geography i.e. SF and LA proper housing continue to appreciate in value.

Oct 17, 2012
Edmundo Braverman:

Maybe it comes down to the religion of home ownership in America. That's the original American dream, and it's deeply ingrained. But I would think that the crash would have illustrated that not everyone gets to own a home. Is that so bitter a pill to swallow?

Solid post except for this section, which is complete fallacy.

The American Dream, as stated by James Adams: "Life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement."

It's the idea that regardless of your race, religion, class, etc. if you work hard enough you can achieve anything.

    • 1
Oct 17, 2012
Babyj18777:
Edmundo Braverman:

Maybe it comes down to the religion of home ownership in America. That's the original American dream, and it's deeply ingrained. But I would think that the crash would have illustrated that not everyone gets to own a home. Is that so bitter a pill to swallow?

Solid post except for this section, which is complete fallacy.

The American Dream, as stated by James Adams: "Life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement."

It's the idea that regardless of your race, religion, class, etc. if you work hard enough you can achieve anything.

OK, yes, but for practical purposes the American Dream has meant home ownership since WWII.

Oct 17, 2012
Edmundo Braverman:
Babyj18777:
Edmundo Braverman:

Maybe it comes down to the religion of home ownership in America. That's the original American dream, and it's deeply ingrained. But I would think that the crash would have illustrated that not everyone gets to own a home. Is that so bitter a pill to swallow?

Solid post except for this section, which is complete fallacy.

The American Dream, as stated by James Adams: "Life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement."

It's the idea that regardless of your race, religion, class, etc. if you work hard enough you can achieve anything.

OK, yes, but for practical purposes the American Dream has meant home ownership since WWII.

haha yeah it's funny how babyj finds one contrary view of the "American Dream" and then calls your widely believed notion of home ownership being part of it a complete fallacy.

Oct 17, 2012

That's whats changing though, Eddie. People who were at least 14 during the crash will remember the doom and gloom for along time. Couple this with the fact that people are getting married much later in life (a win for us, right?!?!) and you have a group of 25-35 year olds who will remain renters for a long time to come.

Check out rent growth nationally versus median home price growth.

Oct 17, 2012
tprb52:

That's whats changing though, Eddie. People who were at least 14 during the crash will remember the doom and gloom for along time. Couple this with the fact that people are getting married much later in life (a win for us, right?!?!) and you have a group of 25-35 year olds who will remain renters for a long time to come.

Check out rent growth nationally versus median home price growth.

He's got a point. Coincidentally, I was 14 at the start of the crash. I personally do not see myself owning any non-investment real estate until at least 30. A desire for career flexibility coupled with that fact that marriage scares the shit out of makes renting seem much more viable.

    • 1
Oct 17, 2012

LOL... "Complete Fallacy?" Jeez..

"That dude is so haole, he don't even have any breath left."

    • 1
Oct 17, 2012

Must relever households in America to keep the system going...

Household net worth as % of GDP

Total Credit Market Debt

Oct 17, 2012
onebuck:

Must relever households in America to keep the system going...
Total Credit Market Debt

This. Credit card and student loan debt will keep substantial growth out of the home ownership market for a while I think. As in AT LEAST a generation. I think Eddie's post is the post-recessin 'blip' that was definitely coming, but I don't forsee blue seas ahead.

My drinkin' problem left today, she packed up all her bags and walked away.

Oct 17, 2012

I own a rental property in Phoenix that I bought in May 09. I bought it for 85k the previous owner paid 235k in 07 before foreclosing. I watch zillow pretty closely and I saw that another similar house in the neighborhood sold for 150k recently. Just about a year ago the entire neighborhood was for sale, now there are only 1 or 2 properties in the area. I currently have the house leased for 1350k per month and I have 12 years left on the mortgage which is a payment of about 700/month including taxes and insurance. I used to work in Phx and the people who had money to invest after the initial crash have made an immense fortune since then. I also own a home in NC that has been pretty much stagnant. Residential mortgages are hard to value though, and you can get great deals if you are willing to wait and you are also willing to insult the seller. When I bought the house in NC I came in 20k under the asking price which had already been reduced. He was pissed, but he eventually took the offer.

Oct 17, 2012

fuck i am too drujk to post meaningful answers, but i do own a property in the Bay Area since 09 and it's nowhere up 35%. i'll be happy as shit if it's up 35% and will likely splurge on some russian models. i am out, peace.

Oct 17, 2012
ST Monkey:

fuck i am too drujk to post meaningful answers, but i do own a property in the Bay Area since 09 and it's nowhere up 35%. i'll be happy as shit if it's up 35% and will likely splurge on some russian models. i am out, peace.

I would give a SB but you posted this after noon, before noon is the goal during day drinking.

My drinkin' problem left today, she packed up all her bags and walked away.

Oct 17, 2012

I know for a fact there are some big boys investing in the Southern California Inland Empire market in Single Family Homes. They are purchasing at auction for 40% of replacement value, fixing, and renting out for a hold period. Long term California Housing is in for a rude awakening. I think a 5-7 year hold is safe and you can make a ton of money on the upswing, but long term people can't afford this shit.

You mention that there aren't any "starter homes" in California, my question is what is a starter home? A $450,000 piece of shit, run down 3bed 1 bath home in the armpit of Los Angeles County? Because that is what you will get for $450,000 nowadays in these areas. Median household income in Los Angeles is only $44,000. Read that: $$44,000 FOR A HOUSEHOLD. Median home price in Los Angeles County: $650,000.

There aren't any starter homes because no one in their right minds can afford these houses. Our generation is already leaving college with a mortgage size debt problem and making $40K out of college living in Los Angeles with a high effective tax rate. They aren't going to be buying a home any time soon. Baby boomers will be downsizing and then dying off leaving a much smaller and debt ridden generation to take over their homes which I think long term will force the Southern California market to severely correct itself. AKA: LA County typically runs on a boom/bust cycle, eventually the boom won't happen.

Buy multifamily housing in well off parts of Los Angeles is my bet, as I think that will be the only product type to succeed long term.

Oct 17, 2012
Nobama88:

I know for a fact there are some big boys investing in the Southern California Inland Empire market in Single Family Homes. They are purchasing at auction for 40% of replacement value, fixing, and renting out for a hold period. Long term California Housing is in for a rude awakening. I think a 5-7 year hold is safe and you can make a ton of money on the upswing, but long term people can't afford this shit.

You mention that there aren't any "starter homes" in California, my question is what is a starter home? A $450,000 piece of shit, run down 3bed 1 bath home in the armpit of Los Angeles County? Because that is what you will get for $450,000 nowadays in these areas. Median household income in Los Angeles is only $44,000. Read that: $$44,000 FOR A HOUSEHOLD. Median home price in Los Angeles County: $650,000.

There aren't any starter homes because no one in their right minds can afford these houses. Our generation is already leaving college with a mortgage size debt problem and making $40K out of college living in Los Angeles with a high effective tax rate. They aren't going to be buying a home any time soon. Baby boomers will be downsizing and then dying off leaving a much smaller and debt ridden generation to take over their homes which I think long term will force the Southern California market to severely correct itself. AKA: LA County typically runs on a boom/bust cycle, eventually the boom won't happen.

Buy multifamily housing in well off parts of Los Angeles is my bet, as I think that will be the only product type to succeed long term.

Think this is a pretty solid assessment of the Southern California housing dynamic and would agree with your prediction.

Also, in general I think people are starting to wake-up and realize the owning a home is largely a scam propagated by banks and the real estate industry. Why on earth anyone thinks it's a good idea to dump the majority of their net worth and after-tax income into a piece of junk property so they can spend their weekends mowing the lawn and fixing plumbing leaks is beyond me. People will tell me "but mortgage rates are so low! And you get all these tax deductions!" Yeah but you also have maintenance costs, property taxes, and the deductions phase out as you move up the bracket curve. And banks take your money at 0% and loan it back to you at 6%. That's not a good deal.

Rent for life. I don't care if my landlord is Blackstone Real Estate group or the usual assortment of Persian immigrants. As long as someone answers the phone when I need my A/C fixed, I'm good. Boomers can have their overpriced homes.

Oct 17, 2012

Thought this was pretty interesting, because I just talked to a buddy of mine this morning who has been killing it in homebuilder stocks:

Oct 17, 2012

Investor's have been scooping up every REO/distressed note under the sun - in large part those looking to enter into reo to rental market. The largest PE shops have raised over $8bn recently to go after single family residential and some even paying premiums relative to appraised values (though discount to principal outstanding) for these assets - sitting outside the doorsteps of banks, Freddie, local courthouses, etc. with cash in hand.

Here in Miami it's even more pronounced and from a different source - international investors are simply parking cash primarily in condominiums, but also detached sfr, due to favorable exchange rates and politically instability in their home countries - they've essentially cleared out all inventory and are creating a mini boomlet which I question the sustainability of. There's already multiple cash funded condominium projects going up reminiscent of the early days of the last condo boom.

I don't know if the single family rental market can be institutionalized but the biggest players are definitely trying. Residential distressed inventory is diminishing and will be completely absorbed in the next few years, and these investors will be in at a very low basis relative to values. I think there'll be a significant disparity between job/wage growth + available credit and growth in home values which may give rental programs some legs until there's some sort of stabilization.

All in all I think institutional investors stepping in is a positive for the market as it'll help expedite the release of this remaining shadow inventory - though I can't say the same thing about foreign investors that are rashly investing with little expectations for return and artificially inflating prices, and who at any second may retreat upon shift of the dollar or other unexpected macro event.

Oct 17, 2012

Wall street = finance = debt

Securitisation of NPLs

Ever hear about liquidating trusts? Several hedge fund/PE firms have used similar structures to finance their NPL (non-performing loan) portfolio acquisitions. Basically, the crappy loans and assets bought at a discount from banks, etc... are held in a separate vehicle that issues investment grade bonds to investors. Any interest received on the loans, rents from the properties or proceeds of repaying the loans/sale of properties is used to pay the bondholder first. The rest goes to the equity guys. Oaktree, Rialto and Blackstone have all used similar structures this year...

Government Influence

I posted earlier about the US Government potentially providing "seller financing" for auctions of REOs and distressed housing mortgages. According to a Morgan Stanley analyst, there could be 7.5 million homes foreclosed on by 2016 and added to the existing rental market of circa 20 million homes.

One thing i think you can bet on is that the government and federal reserve will continue to support and intervene in the residential credit markets as well as on behalf of large banks. This may or may not filter down to the level of families being able to own their home, but it will allow for refinancings and for speculative capital or some asset price inflation, i.e. bank recapitalisation in slow motion.

Investing

In terms of investing, unless you are able to get in at a decent price relative to cash flow (unleveraged), you're really just playing the difference between the spread from asset cash flows and the debt financing. I'd focus on markets where people actually want to move to and where people will want to live/work. i.e. somewhere with good rental fundementals, rather than looking at where has has the steepest declines or rebounds.

If you're going to place any bets on real estate make sure the leverage is non-recourse and you can afford to lose your principal.

Disclaimer: This isn't investment advice and i don't focus on single family or residential investments. Caveat Emptor.

Oct 17, 2012
Comment
Oct 18, 2012
Comment

Pages