Wednesday, July 30, 2008

Estimate: Up to 50% of Foreclosure Sales Go to Investors

From the Stockton Record:

Stockton area real estate brokers say that at least 80 percent of home sales this year are foreclosure homes and that as much as half of those sales involve investors. According to figures from Coldwell Banker Grupe-TrendGraphix monthly sales reports, based on Multiple Listing Service data, there have been more than 3,600 closed sales on single-family homes in San Joaquin County. If eight out of 10 of these are foreclosure properties, that means about 2,900 foreclosure sales, with perhaps up to 1,450 of those bought by investors and headed for the rental market.
From the Sacramento Business Journal:
Financial Title Co., headquartered in Citrus Heights, abruptly closed its 57 branches in California late Wednesday, as well as shuttering operations in Arizona and Texas, the California Department of Insurance said. The company has 10 offices in the Sacramento market.
From the Sacramento Bee:
Mortgage brokers said Monday the FHA program, in which the federal government's guarantees make loans more affordable, accounts for the vast majority of their business. That's become increasingly true as credit markets tighten and conventional mortgage guidelines become more restrictive. Some experts said the FHA's guarantees are playing a major role in the fledgling recovery in Sacramento's real estate market.
...
With conventional lenders demanding down payments of 5 percent or 10 percent, the 3 percent down payment required by FHA has become a bargain. That could make the FHA "the new lender that's going to deal with risky loans," said Steven Krohn, an economist and analyst with the Real Estate Group Inc., a consulting firm in Sacramento. "They've moved in to kind of remove the financing risk from the banks and the investors."
From Calculated Risk:
In a number of previous housing busts, real prices declined for 5 to 7 years before finally hitting bottom. That is my expectation for the duration of the price declines in the bubble areas. The bottom for real prices will probably be in the 2010 to 2012 period. The less bubbly areas will probably bottom sooner. If this bust follows the historical pattern, we will continue to see real price declines for several more years, and the rate of decline will probably slow....

27 comments:

smf said...

Stockton area real estate brokers say that at least 80 percent of home sales this year are foreclosure homes and that as much as half of those sales involve investors.

And how do we think 50% sales to investors is going to end up?

(Hate to be proven right again)

James said...

"If this bust follows the historical pattern, we will continue to see real price declines for several more years, and the rate of decline will probably slow"

Problem is, this bubble has not behaved quite like past ones. The rate of change has been much steeper in this decline, unlike the 1990's. How can you compare the two when circumstances and behavior are not alike. I don't think the decline will all of the sudden slow and form a nice little bell curve. We will continue the hard fall, bounce, stumble, then return to normalcy long enough for us to forget this bubble then start the next round.

Jacob said...

Too bad we dont have stats on how many of those "investor" properties are planned rentals vs. planned flips. I would bet that people expecting to flip are at least 75% of that bunch.

At least people are getting more realistic about when the bottom will occur, putting it out past 2010. I havent heard that we are at the bottom in several months.

Tho it it still a great time to buy, or so I hear... lol

James said...

"I havent heard that we are at the bottom in several months."

Actually just this week several large and well respected fund managers have been calling a bottom based upon leading indicators.

smf said...

"I would bet that people expecting to flip are at least 75% of that bunch."

I second that thought. Still too many out there perpetuating this bubble.

To repeat, in our lifetimes are we going to see (inflation adjusted) the high prices seen during the bubble.

smf said...

Little more proof of psychology:

From the HBB.

“Papworth also puts her money where her mouth is. She is going to…purchase another rental home for $100,000. She’s confident that in six years…she will have a home worth $350,000 that could then be sold to help pay for her grandchildren’s college.”

“‘You can’t go wrong on homes in California,’ Papworth said. ‘Prices will always come back.’”

sacramentia said...

It is all about cash flow at this point. If you get a large enough cash-cash return it does not matter what the underlying asset price does.

The percentage sales to investors does not matter - it is really just setting up a massive transfer of wealth as more will be renting longer. Look at most established cities and the percentage of renters is very high, the prices are stubborn to drop, yet prices are still high compared to incomes.

smf said...

"It is all about cash flow at this point. If you get a large enough cash-cash return it does not matter what the underlying asset price does."

Yes, it does.

First of all, we will see that most of these buyers care more about the longed-for appreciation rather than cashflow.

As the example I noted above, you care little about whether it actually cashflows much when you are expecting a $250K payday in a few years.

At the same time, it is hard for any property to cashflow when you can't get renters to rent it from you.

You must remember that at the same time that homes were being built, a lot of other people invested in property for rental purposes for those wo were 'priced out' of the market.

When I talk about a housing excess, I am not only referring to for-sale housing, but all types.

In our almost 20 years of being in the construction industry, we built from 2X to 3X more rental housing than in previous years.

Jacob said...
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Jacob said...
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Jacob said...

So papworth expects 23% appreciation in a down market when the normal appreciation is closer to 3%... lol

Cashflow is for investors, speculators need that appretiation.

And what % do you make from renting a home? You can get 4-6% from a CD or checking or savings account with no risk to your money.

These homes that are sold, 50% will end up back on the market or back to the bank, and foreclosures are still on the rise (and that rise is exponential not linear).

Diggin Deeper said...

"At the same time, it is hard for any property to cashflow when you can't get renters to rent it from you."

I don't see where this has been a problem up to this point. You still have standing inventory that sits empty without owner or renter. I've yet to see an investor purchased home that sits for any length of time without occupants. Now that may occur as we get to some slop point where the only homes left are the ones that truly exceed the population necessary to fill them, but we're not there yet, imho.

The bigger problem is equity deterioration. Agree, speculators will be more likely to walk when their equity positions flip upsidedown. Long term investors with the right ratios, as sacramentia pointed out, treat this as a buying opportunity in a down market with a lot of the risk already baked into today's prices. If the ratios are right who cares about equity when you buy a home today on leverage, let someone else pay it off you, and someday down the road it's a cash cow...that still retains value upon sale...This concept has worked for since our country's inception...and survived many RE busts in the past.

Diggin Deeper said...
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Diggin Deeper said...

Jobless claims now pushed over 440,000. Anything over 400K is a forward looking indicator of recession. That will put more pressure on owner occupied buying and favor renting until we wade out of this problem.

Watch the big push for infrastructure rebuilding by whoever sits in the white house next year, ala New New Deal. Same thing happened in Japan when they went throught their bust. What the hell, what's another $200B when you're forcing the public to swallow $800B-$1T in new debt.

Panduka said...

"At the same time, it is hard for any property to cashflow when you can't get renters to rent it from you."

What are you talking about ...

If you look at good neighborhoods in Irvine, Silicon Valley, San Diego, Orange County, there is hardly any rental homes and they are asking for so much ...

Example - there are only 12 rental homes in Poway, with 3-bed rooms or more

Am I missing some thing ...

Patient Renter said...

I would bet that people expecting to flip are at least 75% of that bunch.

I agree. It's not as if we need many more rentals in our area.

It is all about cash flow at this point. If you get a large enough cash-cash return it does not matter what the underlying asset price does.

But can you get that cash return? The market for rentals is not infinite, and with so many "investors", at some point not all of them are going to be in good shape. Even if you do own a rental that is cash flowing, it's an uphill battle with the home's value depreciating for the foreseen future.

Actually just this week several large and well respected fund managers have been calling a bottom based upon leading indicators.

Yea, but the art of bottom calling is different now than it was a year ago. While the bottom is still being called, there are many prominent folks who are finally openly admitting that the bottom won't be in for quite a while still, whereas this time last year they were part of the bottom calling crowd.

sacramentia said...

"But can you get that cash return? The market for rentals is not infinite, and with so many "investors", at some point not all of them are going to be in good shape."

Good point. What are the key things that you look for in a rental property?

Sold in '05 said...

Supply and Demand.

As more rentals come to market, supply increases. Population here is no longer growing rapidly (if at all) and many distressed owners chose to leave the area after they lose their homes, so the demand for rentals has no real reason to increase above todays levels while the supply expands markedly. This will naturally require landlords to compete for tenants and the only real way to do that is with price.

Rentals are a market and unlike the purchase market, it is MUCH easier and faster to jump out of an overpriced rental and into a more competitively priced one. It would be reasonable to predict that rents will fall as the new wave of investor houses hits the market. If an investor is counting on today's rents holding up or as I would bet most are planning... being able to raise the rent over several years, this is a business plan that may very well not hold up.

Only time will tell but I would be willing to bet a few frosty adult beverages that these starry eyed new landlords end up being the next batch of people to slam full speed into the ever growing freeway pileup that is our national real estate market.

CD

Jacob said...

Plus I would think that being a landlord is more difficult and more of a pita than some of these specuvestors think. It sounds so easy:

1) Get a home with 100% financing. Or better yet get cash at closing. Or if you have to put a little but down.

2) Get a renter

3) Profit

Tack on maintenance costs, months where you have no renter, taxes, decreasing home value...

Like I have said before, there are real investors out there that know what they are doing, that can look at a home and see the really long term potential. Then there are the speculators that expect to bleed some money now for a big payday in a couple years.

Now if 50% of the sales are to investors what happens with that returns to its normal level? What if it went down to 10%, sales crash, and prices follow. And that will happen at some point. We will never get to a true bottom until the speculators leave, and I dont think they can prop up the market too much longer.

Diggin Deeper said...

"We will never get to a true bottom until the speculators leave, and I dont think they can prop up the market too much longer."

Sure we will...if we allow enough time for the market to do it's job of removing the excess...

Only RE Armageddon will take the speculator out of the picture completely... right along with every other potential buyer and many, many of their jobs. Now what buying group would that favor?

Let the market, made up of potential homeowners, investors, and speculators, dictate where the bottom will be. Do you really care if speculators make mistakes? That in a year these homes re-enter the inventory? Their activity allows time to pass while the market finds it's footing. To take them out completely invites a whole series of problems most would want to avoid.

smf said...

"To take them out completely invites a whole series of problems most would want to avoid."

There is no need to take them out, as reality will do the job, eventually.

My points are not about whether speculation is bad or not. But only to point out that one of the original reasons for the bubble (rampant speculation) still exists in this market.

As to Jacob's post, I agree with him 100%.

DD -

The pain will be felt, regardless of what is done. This went up so high that the fall will hurt. But the sooner you hit the bottom, the faster we can all start to pick up the pieces.

I don't have a desire to prolong this suffering more than it has to be.

James said...

This is all i know about the rental market.....
Not a single person I know who has bailed on their home has gone out and purchased a new one, they rented. They did not leave the area, they stayed and rented.
Property managers are busier than ever.
I am trying to refinance every apartment complex in Sacramento as vacanies are low, rents have actually gone up, and this makes for an easy credit deceision.

"Then there are the speculators that expect to bleed some money now for a big payday in a couple years."

As for speculators, most are buying houses below market from the banks. Doing 15-30 days of rehab, then putting them back on the market at or slightly below market prices. A nice clean fixed up house at 1-2% below market still makes for a quick sale. A 5-8% ROA or 30% ROI in 3 months is not that bad. I am not to sure many of these speculators are holding for 1-2 with the hopes of making a huge profit.

"1) Get a home with 100% financing. Or better yet get cash at closing. Or if you have to put a little but down."

There are no investors getting into this market with 100% financing. No bank is financing at less than 75% LTV. These large down payments allow these properties to cash flow much more easily. Having that much skin in the game will also keep these people from walking away so easily. It also narrows the field to well capitalized liquid investors.

Diggin Deeper said...

'The pain will be felt, regardless of what is done."

No doubt but we've got a govt that's putting up hundreds of $B's to make sure that markets don't collapse, altogether. This is serious business...and if speculators "take one for the team" so be it. My only point is that all players in the current market give it needed time to settle rather than bring it to an abrupt halt.

Jacob said...

I can agree with that, let the speculators take those losses instead of the tax payers, fine by me.

What I was saying is if you take the speculators out of the equation, the low sales we have now are even worse, prices will still fall.

And eventually the speculators will have their fill.

Unless the market does something screwey like have a V bottom and shoot right back up the we are in for a long flat bottom, and when the speculators have had their fill of negative or 0 appreciation for months on months on months they will leave the market and we will have our final leg down and reach the true bottom.

Another point, if I own a home, lose it, someone buys it to rent and I rent another home then nothing has been done about the excess. Just a transfer of ownership, but the excess is still there.

We have virtually negative population growth, and young adults that might normally enter the market cant afford to do so. So I am not sure where all that excess is going to go. Homeless shelters?

smf said...

DD -

As long as we stop the bailouts I'm OK. But what are the chances of that?

James -

This market was inundated by amateurs who have little idea of what to do. These will be flushed from the system. The professionals know what to do and are happy with a $10K profit per home.

James said...

How many empty housing units do you all think we have in Sac, as a percentage?

Take a look at your street, how many vacant homes do you have?

Diggin Deeper said...

There will always be vacant properties in limbo, unoccupied, and awaiting disposition. In this market there are a lot those homes.

I guess we'll really see the effects fo the oversupply problem when the last home closes, to house the last of the population we're lacking in this area. That doesn't appear to be happening yet...not to say that it won't, I just haven't seen much evidence of it as yet.