Price Discovery: What price reflects the risk? It was $675,000 last week:
Here is Tom giving a tour of the detailed work he did at the Stewart house:
Part 1 shows the work progressing over time with before-and-after photos too:
There hasn’t been much concern around San Diego about the ibuyers because they have been cutting their teeth in the lower-priced and more homogenized housing markets, where valuations are easier.
Hat tip to the reader who sent this in though – Offerpad did purchase a Talmadge home in December. They took title as Offerpad, and they used their regular Gilbert, AZ address too:Link to Zillow listing
They paid $564,000, and tried all year to do better:
But the market didn’t come their way, and they ended up selling for less:
Even if they get a discounted commission (two different agents were involved, and the buyer’s agent got 2.5%), losing money on flips has to get old quickly!
A softer market should cause more of these guys to ‘self-sideline’.
Our YoY home sales are in decline, and it makes you think, ‘Here we go again”.
We know that sales are the precursor, and historically prices are the last to go. But with so many different variables this time around, could it actually be different this time?
Let’s consider the changes:
During the last two local declines (1992-1996 and 2007-2009), banks were the main culprits. They were visibly foreclosing and dumping homes, which affected the whole marketplace. Regular home sellers were burdened with the lower comps, and had to give them away if they wanted to move.
But now they’ve changed the accounting rules for banks, and they don’t have to dump everything they own. In fact, they can do whatever they want now.
Remember this McMansion in Carlsbad?
BofA first began the foreclosure process in 2011, but didn’t get around to actually foreclosing until July, 2017 – six years later! Then they off-loaded it to an investor in March, without having to put it on the open market. Bernanke told bankers in 2011 not doing anything that would harm the economy, and they took him up on it!
I think it’s safe to say that no matter how bad any future recessions might get, we don’t have to worry about a flood of foreclosures ever again.
Ok, so if the banks don’t/won’t foreclose and dump, then what about the institutional investors? They are smarter and more nimble – certainly they will be selling once they sense the top!
Not so fast – according to the WSJ, investor buying is on the upswing:
Financiers who loaded up on homes after the housing bust for pennies on the dollar are buying yet more—despite home prices in many markets being at all-time highs.
Their wager: High prices, higher mortgage rates and skimpy inventory are making homeownership harder. Well-to-do families who might have bought a single-family home in another era are willing to rent a house now, especially if it means access to a good school system.
The number of homes purchased by major investors in 2017 was at least 29,000, up 60% from the previous year, estimates Amherst Capital Management LLC, a real-estate investment firm that made nearly 5,000 of those purchases.
This year, investors have raised billions of dollars from bond buyers, pension funds and even wealthy Chinese individuals to purchase more homes. They have been particularly aggressive buyers in places like Atlanta, Phoenix, and other metro areas with good schools and faster-growing economies.
Cash to acquire and renovate homes has become so abundant lately that some rental investors can’t spend it fast enough. Without enough homes to buy, some investors are now building their own in popular residential markets like Miami and Nashville, Tenn.—upending a traditional pattern of Americans buying starter homes and moving up.
“The American dream no longer includes homeownership,” said Jordan Kavana, chief executive of Transcendent Investment Management LLC, a south Florida firm that has been a big acquirer of rental homes. “You will earn your equity in other ways, not your home.”Link to Full Article
The big-time Wall Street investors are betting on the affluent taking over the real estate market, and turning the country into a renter’s society. It may only affect 10% to 20% of the market for now, but that might be enough to keep it all propped up.
Local flippers and ibuyers are providing another floor. Any homeowner that will sell for 10% under value today will have a host of choices to pick from. If you play it right, and have a great realtor help you, it could turn it into a retail sale quite easily!
The biggest threat? While there are still people underwater, today’s market has to be the most equity-rich in history. If sellers had to dump in order to sell, they could – and still make a profit.
But for there to be an extended trend of declining prices, there would need to be a series of sellers in the same neighborhood that were all in the same boat. For now, we only see an occasional dump, and it doesn’t need to be more than 10% off to attract a crowd.
With the vast majority of recent buyers having to qualify for their mortgage, and use a regular down payment in order to buy their house, you have to like the prospects of them fighting to hold on to it, no matter what. Back in the last bust, too many people got in with little or no down payment, and got stuck with exotic financing that exploded on them. Those days are gone.
We’re most likely going to live in Stagnant City, with fewer sales in most areas. But it’s not the end of the world.
Get Good Help!
A feel for what Tom’s world is like:
Excerpted from this NPR article:Link to article
New research and data suggest that the practices of house flippers fed the bubble of the early 2000s. Much of the blame for the housing crash has fallen on subprime borrowers and people who bought and lived in homes they couldn’t afford.
But researchers are now coming to understand that a big part of the problem was people with better-than-average credit scores who owned multiple homes — not subprime buyers, but real estate investors, landlords and flippers.
What a flip!
This sold for $4,100,000 in 2014, was rebuilt, and then sold for $10,700,000 two years later:
Add house-flippers to Goldman Sachs’ ever-expanding roster of potential clients as the Wall Street firm hunts for new ways to make money.
Lending has taken an increasingly higher profile at Goldman, where once-prominent trading desks have had their wings clipped by automation and regulation. The bank started out last year with small loans up to $30,000 for regular people with good credit through an online business it calls Marcus.
This summer it opened its doors to investors by giving financial advisors a way to arrange loans of up to $25 million for clients backed by their investment portfolios.
Goldman is even trying to find a way to occupy its traders’ time, exploring possibilities in the realm of bitcoin and other digital currencies after picking up on client interest in the area.
In September, the bank’s president, Harvey Schwartz, said lending activities are projected to shake out $2 billion in additional revenue. Now Goldman is getting into lending for real estate pros through its acquisition of Genesis Capital.
The deal, for undisclosed terms, gives Goldman a business that makes loans of $100,000 to $10 million at rates of 7 percent to 12 percent. It won’t lend to occupants, so that leaves real estate professionals who are renovating and looking to sell fairly quickly. Genesis made $1 billion of loans last year.
Hat tip to Richard for sending this in:
Addressing a real estate conference in flood-ravaged Houston this month, longtime investor Ray Sasser detailed his strategy: buy up to 50 flooded homes at deep discounts, then fix and flip them for a hefty profit.
Sasser first followed that game plan after Tropical Storm Allison flooded the city in 2001. He bought homes for 30 to 40 percent of their pre-storm value, spent another 15 percent on repairs, and sold many a year later – at full value.
The quick recovery surprised him, he said.
“This can’t be true,” he recalled thinking at the time.
The bet that home prices in hard-hit Houston neighborhoods will fully recover after Hurricane Harvey could be riskier, Sasser and local economists said. But a rush of investors eager to snap up flooded homes reflects broader confidence in the resilience of Houston’s unique metropolitan economy.
While the region’s unchecked development has come under fire for exacerbating flooding, it also reflects its core strength: A rare combination of rich job opportunities and low cost of living, driving explosive population growth in America’s energy capital.
The surging demand has sustained home prices through four major floods since 2001 and a historic oil price crash starting in 2014. Though Harvey caused far more damage than previous storms, investors such as Sasser see plenty of opportunity in the region’s estimated 268,000 flooded homes.
Tara Waggoner, the Houston market manager for brokerage and online listings firm Redfin, said the firm’s local agents were getting about four times the number of calls they usually get from investors. They ranged from individuals looking to buy one flooded house to groups of ten or more pooling their money for a home-buying spree, she said.
“You have people with millions of dollars to work with,” she said in an interview days after the storm. “They want to go in, pay cash, get the discount and fix it up to sell.”
Read full article here:
We saw this happen in Bressi Ranch when Jenae and Company went on their 100% financing spree. Her victims weren’t deadbeats – instead, they had good credit scores and other assets, and they were just duped into the get-rich-quick scheme. When it didn’t pan out, they dumped everything.
Hat tip Richard!
The grim tale of America’s “subprime mortgage crisis” delivers one of those stinging moral slaps that Americans seem to favor in their histories. Poor people were reckless and stupid, banks got greedy. Layer in some Wall Street dark arts, and there you have it: a global financial crisis.
Dark arts notwithstanding, that’s not what really happened, though.
Mounting evidence suggests that the notion that the 2007 crash happened because people with shoddy credit borrowed to buy houses they couldn’t afford is just plain wrong. The latest comes in a new NBER working paper arguing that it was wealthy or middle-class house-flipping speculators who blew up the bubble to cataclysmic proportions, and then wrecked local housing markets when they defaulted en masse.
Analyzing a huge dataset of anonymous credit scores from Equifax, a credit reporting bureau, the economists—Stefania Albanesi of the University of Pittsburgh, the University of Geneva’s Giacomo De Giorgi, and Jaromir Nosal of Boston College—found that the biggest growth of mortgage debt during the housing boom came from those with credit scores in the middle and top of the credit score distribution—and that these borrowers accounted for a disproportionate share of defaults.
As for those with low credit scores—the “subprime” borrowers who supposedly caused the crisis—their borrowing stayed virtually constant throughout the boom. And while it’s true that these types of borrowers usually default at relatively higher rates, they didn’t after the 2007 housing collapse. The lowest quartile in the credit score distribution accounted for 70% of foreclosures during the boom years, falling to just 35% during the crisis.
So why were relatively wealthier folks borrowing so much?
Recall that back then the mantra was that housing prices would keep rising forever. Since owning a home is one of the best ways to build wealth in America, most of those with sterling credit already did. Low rates encouraged some of them to parlay their credit pedigree and growing existing home value into mortgages for additional homes. Some of these were long-term purchases (e.g. vacation homes, homes held for rental income). But as a Federal Reserve Bank of New York report from 2011 reveals (pdf, p.26), an increasing share bought with the aim to “flip” the home a few months or years later for a tidy profit.
Read full article here: