We saw the numbers in the last post – people are still buying houses.
A day or two ago, a commenter went off with a couple of rants, mostly same stuff we’ve heard for years, like:
In the long term, can a state which is hemorraging jobs, income and people; which is still building houses; and which has a huge shadow inventory of REO and squatter occupied – waiting to be REO houses, expect prices to rise or fall? Just wait till the flood gates open and the REO’s hit the market.
In response, I suggested that prices could go either way, which caused TJ and the bear to politely ask me to make the case. It’ll probably turn into a series of posts as the violent objections roll in, but if the market were to somehow survive, here are some reasons why: (at least in limited areas):
1. The banks have choked off foreclosures, and hoping for sellers to eventually short-sell.
This chart shows how the foreclosure machine has slowed to a crawl. There may be millions of borrowers not paying their mortgage, but they are getting away with it, at least for now.
The cancellations are a result of sucessful short sales and loan modifications – I doubt that there are many defaulted mortgages actually being paid current. The old-school folks who want to believe that there will be financial or accounting pressure on banks someday, causing them to unload – that is so 1990s. The banks are just servicing the bulk of paper for a myriad of investor groups around the world.
They sure are giving borrowers a lot of slack too:
If the servicers continue to not put much pressure on the delinquent borrowers, then this will drag on for years. I think the government will be very lenient on the servicers, creating a zombie atmosphere where you won’t know which of your neighbors are paying their mortgage, and which are living for free. It’ll only be the squatters that’ll put any pressure on the sheriff to evict.
2. Investors are everywhere.
Sure, they will ebb and flow with the prices and once they get burned once or twice that’ll be the end of them, but the numerous big groups buying multiple properties per month are improving their efficiency with each success. This extra demand is competing with the owner-occupant buyers, making both more frustrated. The owner-occupiers should win the battle, but because they are more willing to pay a higher price.
Here are examples:
If investors are going ga-ga in the marginal areas now, once there are more bank deals in the good areas they’ll be jumping all over them. In the higher-end areas, the comps are fewer and farther between, making the valuations more challenging, but the thought of hitting a home run should entice many an investor.
3. The clock is ticking for buyers.
Those with families want to find a house to raise the kids. Logically you can argue that it shouldn’t matter if you rent or own the family house, but if you’ve been bounced around once or twice by a deatbeat landlords, have sufficient income and down payment, and are comfortable with your job security, you’re going to step up the effort to buy. There are emotional benefits too, and they don’t figure on the calculator. People with means want to know that their housing is secure.
Where is the money coming from, you ask? Most of the buyers I work with have brought money from past real estate deals – either recent or sold at the peak and squirreled away. The baby boomer generation is fueling the market too. Those in their fifties and sixties have always been believers in real estate, they have had their success in business, and they are looking for the final home. Many have inherited from their families too.
Naysayers want to point at unemployment – if we have 20% unemployment, there are still 80% employed, and many of them are doing fine. All we need is about 2,000 sales per month in a county of 3 million people, and we’ll keep this thing afloat.
I might as well predict the first reaction. “Jim, you’re nothing but a realtor, you obviously don’t know anything about economics or statistical trends or averages.” True, but I’m on the street every day, and the demand to buy houses in North San Diego County Coastal is OVERWHELMING – and many people have been waiting for years to buy a home. If there were more quality homes for sale at current pricing, they would be selling. It may takes more price dips to bring in the skeptics, but many more buyers have been waiting silently, and they’ll probably jump in first – that is what’s been happening the last 15 months.
I’ll touch on more positives, and negatives, in future posts. Thanks for considering.
To point 1, which is dead on.. I think supply is also constrained by people who would like to sell but cant due to the drop. They can afford the current place, have no plans on strategic defaulting, and are just going to sit.
I dont have much data, but as I tracked 92646 (north OC) in 2008, at one point I had a 50% MLS cancellation rate. Just put it on the market, found no buyers, and pulled it. Nothing else happened.
I’d love to see this point dug into further – where are current sales volumes compared to historic norms?
Jim, do you mean investors (2) as in flippers or buy/hold? I was under the impression investing into RE got harder as you went up the price tier cause the numbers dont work out as well (esp. cash flow).
clearfund, please feel free to chime in!
I think the investors are 100% flippers.
Adam is an example – on the CV house he will make 12% return for three months work, or 48% annually.
I have heard of pension funds, insurance companies, and all-around rich people pooling money and diving in for those types of returns.
clearfund will check in with his thoughts, he is on the same trail.
Real estate salespeople do not make the market. Buyers and sellers make the market. You are reporting from the trenches what you see the market (buyers and sellers) doing right now. That’s a lot more accurate than all the dated statistics in those economic studies.
Not only are 85 percent of the folks employed, there is a lot of money out there with no place to go. Investing in real estate, whether for one’s own use or as investment property looks pretty good compared with Wall Street or that one percent savings account.
The reality is that San Diego real estate is a highly desirable commodity. There will always be more willing buyers than inventory, unless mortgage financing disappears. The behavior of the market as you report it just confirms this.
Nicely done Big Jim.
I believe you are whistling past the graveyard but only time will tell.
I can confirm that there are almost NO foreclosures here in downtown 92101 for the past few weeks. There are all of 6 listed this week, when a few months ago there were over 30 a week.
I also know two people out looking to buy for the exact reason – have been bounced around and out by landlords.
Then there are the positive economic factors in San Diego County (local not national trends). The Military and Military contractors are doing quite well, as the Obama administration has not cut back. Add to that the Border Patrol, the DEA, Federal agencies beefing up the drug/border situation (Homeland Security) and we have a huge recession proof economy. Also Qualcom is doing well during the recession, and we are also home to a number of Korean/Japanese companies in the US (LG, Sony, etc.).
Agree with Jim, that banks can hold on for 5 years, as long as interest rates are so low – essentially zero for banks to borrow. They can just write off a percentage of bad loans each year, and not take a huge one year hit.
People want what they want. If everybody only bought things based on what what facts and numbers said “makes sense,” the tobacco industry would have collapsed decades ago, companies like Ferrari and Porsche wouldn’t exist and every big pickup truck, van or SUV that isn’t being used to carry heavy equipment, business deliveries or families with six kids would be a 30 MPG sedan.
I refer readers to this really cool interactive map which shows inflows and outflows for every county in America. If you place your cursor over the endpoints it gives the actual number of migrants each way and the average income. San Diego County does not fare so well.
http://www.forbes.com/2010/06/04/migration-moving-wealthy-interactive-counties-map.html?preload=06073
Here’s a present JtR, just between you & me – for the excellent work you do with this Blog. 811 Highland Drive, SB 92075
Jardinero1
Thanks for the map – very cool. It looks just like we’ve seen on the ground.
The folks that are moving here are from more affluent areas (NY, Chicago, LA, SF, etc.) and the outbounders are going to cheaper areas.
In the end, it’ll be the haves, and the have-nots.
I’m not sure I would view investors (flipper/merchandisers) being everywhere as a positive for the market in a fundamental demand sense. Probably more of a lagging neutral indicator. A flipper depends on the existance of a retail end buyer, so that is what is more important for the market to hold up. If end buyer demand slows, should be a slowdown in flippers a few months later, even a boost in inventory since North County properties don’t usually cash flow.
Yep, homes don’t cash flow…and the ones that do are probably one that I wouldn’t want to own as an asset.
We stopped new funding for our ‘flipper partners’ in AZ/NV/CA about 6 months ago as things seemed out of whack to me. I get uncomfortable and don’t sleep well when all that investor money is out there and I see non-real estate people starting to invest as a ‘sure thing’…that’s my signal to hit the sidelines.
We’ve since pulled about 80% of the fund’s cash out of the market (20% looking for isolated opportunties). Now we don’t see much to buy on the residential side as EVERYTHING is getting cancelled.
Quality Commercial is cranking and cash flowing like a BP oil well now that prices are down, and yields are up. Continuing to ramp up investing in single tenant NNN distribution facilities leaased 15+ yrs to Fortune 100 tenants with investment grade credit (BBB or better by S&P).
Its all about credit, credit, credit for your risk adjusted returns.
The spread between their corporate bonds and the yield on the real estate is super sweet.
If its so OVERWHELMING in North SD Coastal, then why is west of 5 in Encinitas dead. Nothing is moving and its right by the beach.
clearfund,
Thanks for the insight!
***The other way to look at this is the natural “s” shaped curve of rent in San Diego County. Basically as the price of the house for rent increases, the actual rent on that house flattens out. Rent vs. home value is not linear by any means. The best rentals are the ones at the top of the market looking at rent as a percentage of purchase price.
Now for the necessary examples:
In parts of Oceanside, modest priced homes can be had for $200k, need some rehab, then become great rentals. They will rent for $1800 or so per month. Step up to Rancho Penasquitos and rent a $500k house and you do not pay 2.5 times for rent like the home value would suggest, you pay only $2300 or only 27% more. Step up to parts of Rancho Bernardo where the home is $750k (3.75 times the Oceanside house cost) and you pay only $2600 in rent (44% more for 3.75 times the house). Step up to Rolling Hills where that Chargers player got shot by the off duty cop last year/2 years ago and you are in $1.2 million homes (6 times the house), but rent is only $3500 or so. The trend continues.
What this all means: You will have a tax deduction for your interest and taxes, but even your after tax considerations, your cost for a commodity called “housing” will be substantially less for the rental in that part of the market. Also, as previously mentioned, you will be putting in a huge down-payment for that price of home in today’s mortgage world. I would agree with the other posters here that that part of our market is the next range to fall. Therefore you will see that down-payment caused “equity” to evaporate. So rent now and put your $200k to $300k into a modest priced rental house for now, enjoy the cash flow, and wait a wee bit longer to buy.***
—–>Full disclosure I stole the above from a San Diego investor message board (http://sdcia.websitetoolbox.com/?forum=59897) thread regarding San Diego price predictions. But I thought it was spot on.
In this video you echo my sentiments exactly about lower tier oceanside. And apparently it’s been like that for at least a year now because that’s exactly what I had to battle with when I bought in that general area a year ago.
I wanted to pick something up in the mid 200s but anything decent was snapped up by cash offer investors. I ended up spending an extra $20K just to get lucky and slip into a pre-approved short sale that was vacant and in decent shape.
This area has definitely established a floor, at least for now. I believe it is because the prices have fallen nearly 50% and are below rental parity on the good deals. And it’s less than 10 miles from the beach.
The argument of “yes, the economy is a mess, but because the system is so messed up, it won’t affect housing” is an argument that works perfectly up until the point when it stops working. Jim isn’t wrong here, but timing on that is anyone’s guess.
Jim, I really like your blog and I share it with friends.
Back to the map: it has a blow up feature. If you blow up the map and look at the net positive migration lines(Black lines), you will note that the net gains within CA are very low income, on average. For the east coasters it’s a wash, you are replacing affluent San Diegans with affluent East Coasters.
Clearfund–As a commercial property owner and investor I have came to realize that the words “credit tenant” have no value. Contrary to what I was always taught, I now know that leases are not worth the paper they are printed on, regardless of who the tenant is, or what is written in the lease. Case in point, two years ago, I turned down a couple of smaller tenants for a “credit” medical lab with 175 locations. That lab group is now being bought by Labcorp, and they are being forced into chapter 13 in order to get rid of about 70 leases–70 leases wiped out just like that! I much prefer a personal guarantee from an owner of a smaller established business that is relocating or expanding, or better yet, a large security deposit! When I analyze a property I look at how quickly the space will re-let once it is vacated. Large names add value to properties, but I definitely don’t give them the weight that I used to.
Speaking of positive…I think that guy on Lago Lindo is pretty happy about his buy. Drove by there a couple days ago…got that place all cleaned out, putting in nice new landscaping and everything. They’re moving pretty quickly too.
A great property…I want it.
then why is west of 5 in Encinitas dead. Nothing is moving and its right by the beach.
Not sure how long you’ve been a reader but we’ve been covering that over the last few weeks. This is the time of year when sellers are at peak enthusiasm, and are the most ridiculous on price – that is why “nothing is moving”.
And it’s not exactly nothing.
Check the house on Raintree in Leucadia that backs right to the mobile home park, listed for $899,000. It was marked pending yesterday, after 23 days on market.
The house up the same street had 4-5 offers on it when they reduced to $835,000.
How about the Parkwood house? The agent had to mark it pending after 2-3 days because of all the offers (double-digit), and how about 1089 Hymettus, listed for $799,000? It had over a dozen offers and it was a teardown on septic. Closed for $837,000 on May 21st. Teardown, on septic, no view.
If more sellers would get realistic on price, they would sell.
LocalBoy – had that happen as well with Clothestime, etc.
What was the ‘credit’ of the lab that filed? Was it BBB or better?
I tend to stick with the FedEx, ATT, McDonalds, etc that are all corporate leases with corporate guarantees for the lease/rental obligations…typically all Fortune 100
However, that is the real estate risk which is why the premium is there.
Right now I feel we can get extra high yields relative to the investment grade credit while the real estate is in its current financial state.
Example: BBB credit, new bldg, 15+yr lease 9.5% cap rate….would have been a 7.0% cap rate 2-3 yrs ago…we’re clipping a 14% cash on cash yield with that brand name tenant.
That’s the stuff we search/fight for.
Those are some solid returns Clearfund. Are you buying in here in SD? Seems like 6-7% caps are all I see around town. I do know in Texas the norm on retail or Office is around 9-10%. The Lab in my example is Westcliff Medical Labs–They may, or may not, abandon our location. I am unsure of what their rating was two years ago, but I remember it to be high. We have an LOI waiting from Quest Diagnostics if they do leave. By the way, I do remember Clothstime, even back when they were “Clothsline” operating out of the swapmeets in OC–they lived in my Father’s hood.
We have facilities in CA, OR, MT, LA, AZ, NV, CO, WI, etc…
Example: Signing a deal for a 4 bldg build to suit with BBB+ credit, fortune 100 (15yr lease with expansion potential in year 5) at a 9.25% cap on all costs (including fees, etc).
Typically don’t buy stuff on the market, but rather work more with the corportions directly in the sale-leaseback scenario or build to suit with new lease.
SD is tough as the caps are still stupidly low. Since we are highly cash flow focused (retirement fund investing) on the commercial side, we like the ‘mid america’ type of logistic hub locations.
Not looking for a resale anytime soon, just simply looking to deliver a risk adjusted 8%+ annual dividend, sheltered by depreciation, consistently and forever!!!
ps: the 14% coc yield is at the property level and is lower to investors at the partnership level after splits, etc.
ps: distribution/warehouse is nice as the TI’s are essentially hose it out, paint grey inside and be done….CHEAP!!!!
That wasn’t so bad now, was it Jim? 😉
No, but it’s early! 🙂
Your first point trumps all others. As long as inventory is low, everything else doesn’t matter. Japan proved you could go 20 years in this condition. But don’t confuse desire for demand if inventory every gets back to normal. Demand is cash in hand.
The MBS investors who lost their investment probably have written off their monthly income. So there’s less pressure on the servicers. Once everyone is in pretend and extend mode the word will get around that paying your mortgage is so 2005. Then there will be a problem.
When a system is as broken as this one you are going to see some very creative solutions.
In 2004, a realtor told me the exact same thing.
In 2004, a realtor told me the exact same thing.
—————————————————
You must be a mind reader -lol
Macro is the most important factor in my view.
I agree that coastal houses are still vastly overvalued by most measures, but I think inflation is the only way out of the economic mess.
There are few inflation hedges better than a house with a 30-year-fixed mortgage.
This post changed my opinion about this blog.
OVERWHELMING!!!11!!one!!!
lol
Be smug while the gov intervention lasts. Once the banks are out, you kids are toast.
But to be fair:
“If more sellers would get realistic on price, they would sell.”
QFT
Happy 4rth Jim! I think it has been a good year for you and your business through half time of 2010!
…here is a new neighbor who did good in my hood this week, moving in for the 4rth!
http://www.sdlookup.com/MLS-100011090-1176_Tres_Ninos_Corte_Vista_CA_92084
Jim, thanks for the info. To me, I just keep seeing the same product sitting. Your examples are encouraging. Thank you.
Housing prices can go either way because of the government support for them (as well as other assets). The government is printing money. The government is giving aid to banks that allows them to restrict housing supply. The government is doing everything it can to prevent inflation.
If the government steps up its efforts as the economy continues to worsen then housing could be a great buy. If you get a 30 year loan to buy a house at 4.5% and in 18 months we get hyperinflation of 15% a year or more, then you’ve got a great deal.
But if the government is tapped out, and if they realize that printing money has always devastated any government that has done it, then prices should fall. We’ll have to see how it goes though.
Great insight Eric. I think the Padres may come in 1st if they play well, on the other hand, if pitching suffers, they will come in 2-4th, guaranteed.
Still the only rational insight on local SD real estate comes from this blog.
Thanks Jim!