Thursday, March 19, 2009

Novice Investors, Rents, and the Modern Boarding House

From the Sacramento Bee:

Free-falling home prices and thousands of bank repos have pulled investors back into the Sacramento housing market at levels not seen since the headiest days of the housing boom, new statistics show. Preliminary estimates from researcher MDA DataQuick indicate that 28.4 percent of February buyers in Sacramento County were investors aiming to buy, repair and rent out their new acquisitions.
...
[Ian] Maker [of ReMax] said, "There's a lot of people with money, but it's not the old people we used to see. It's not the pros. It's new money coming in."
...
[A] veteran [investor] said a lot of investors jumped in too early, a year or more ago, and are stressed now by debt, falling values and downward pressure on rents. He said many owe more than they collect in rent, which may result in a new series of foreclosures.
From News 10:
About a year ago, the apartment rental market was booming because people living in foreclosed homes moved from owning to renting. But now, things are starting to slow....There's a glut of apartments in the Sacramento area with "For Rent" signs outside. News10 spoke with some landlords who say that units usually only stay vacant for up to 30 days, but lately, it's been two to three months.
From KPBS:

Faced with shrinking incomes and home values, more people are opening up their houses to strangers. We're talking about the modern boarding house, where homeowners rent out bedrooms in order to keep making the mortgage payment.
...
A lot of people in Christin Barron’s position might just give up. She and her husband Efrain paid $400,000 for their four-bedroom, three-bath home a couple of years ago. Now it’s worth maybe $300,000. It’s in an Elk Grove neighborhood where foreclosure signs are about as common as mailboxes..."I made a list of things I could do to bring in more income and one of them was renting out the room." She put an ad on Craigslist for two of the four bedrooms. At first, no hits. Then she lowered the rent from $525 dollars to $400. A woman in her 60’s is taking one. The other’s still up for grabs.

SacBee on DataQuick's February stats

16 comments:

Jacob said...

[A] veteran [investor] said a lot of investors jumped in too early, a year or more ago, and are stressed now by debt, falling values and downward pressure on rents. He said many owe more than they collect in rent, which may result in a new series of foreclosures

You can post this same thing again next year as it will apply to anyone buying this year. Repeat for several years...

As to the person renting out 2 rooms in her house to make rent. Wouldn't she have been better of buying a house with 2 less rooms (since she obviously doesn't need them) that she could afford...

But don't worry there is an $8k tax credit to buy a home, that, along with the nth moratorium on foreclosures will fix everything...

And job losses are still climing.

And still too many people thinking they can flip homes for big $$.

ralphk said...

Let the cycle continue. As investors buy them to fix up and rent...more rentals = greater supply and lower rents. Lower rents drive down house prices. Many rentals will ultimately be foreclosed thereby lowering house prices...and on and on it goes. Perhaps if this continues long enough, houses might be free!

Diggin Deeper said...

"Let the cycle continue."

California real estate is no longer an investment. While much of rest of the country doesn't consider their home a tradeable commodity, out here it was the rule. Not any longer. A home is what it is, a durable good that gives one long term security as the debt gets paid off. Once people make that transition, it will take greed out of the picture, and restore confidence in buying real estate for altogether different reasons.

patient renter said...

a lot of investors jumped in too early, a year or more ago, and are stressed now by debt, falling values and downward pressure on rents.

Boy did we call that. And Jacob is right - it will apply again next year.

Dave said...

Why in gods name would you believe someone would pay $525 for a single room in your house? You can get an apartment for not much more then that or better yet get a roommate, split the apartment rent and you are much cheaper then that person wanted for a room. The delusions never stop.

smf said...

I have been proven right once again!!

Let's recall that the housing bubble involved homes, condos, town homes, and apartment buildings, for all those people that would be 'priced out'.

The elephant in the room is this situation:

If you have 100 homes for rent, but only 70 people looking for a rental, how many of the landlords are screwed?

At the end of this bubble, we will see some subdivision abandoned, I tell you what...

Husmanen said...

As one of my basic metrics, I monitor rents in EDH and Folsom. There has been a lot of downward pressure, ie no increases, asking rents lower etc.

With this information I calculate a potential bid price range for homes I am interested based on rent parity (PITI = 30yr, fixed, 20% down).

As you may guess, a 10% decrease in rental prices has a dramatic decrease in the home value price range when using rental parity. Assuming, a $400k home rental has a parity of $2,367 per month a 10% decrease would put the rent at $2,310 per month. This bumps the rental parity house value down from $400k to $360k.

What is nice about rents… THERE IS NO SPECULATION. You get what the market can bear.

So as SMF pointed out in a market when the supply increases and demand stays the same the price will decrease. There is a caveat, as prices decrease demand increases and some form of stabilization occurs. Just the supply might be very large and outstrip demand for a long time and keeping pressure on rental prices.

smf said...

But some forget that it is not just that the rent has to cover your mortgage, but the maintenance expense of the house as well.

This has almost been forgotten. Price is one thing, maintenance is another one.

A 3000 sq.ft. house may be the same price as the 5000 sq.ft. house, but the larger home will have higher maintenance bills that will have to be offset with a lower price.

And a housing excess does not get eliminated very easily, especially with a population that is barely growing and worse with an aging population.

mopar777 said...

Thanks for bringing me back to my senses Jacob! I was thinking about sweetening the offer I have on a rental in Folsom this morning after the realtor said the bank is still mum on my offer and two others after six weeks.
I think this is a tactic the bank is using to get the three of us bidders on the property to ante up some more money.

Husmanen said...

SMF, you are correct about the total costs being more than PITI. Luckily, for my personal budget calculations I have a large family in the area where I have a range of prices from McMansions to smaller track homes.

In this area the big killer is changing from SMUD to PGE for electricity prices, that nearly doubles my electricity cost budget.

Jacob said...

I think this is a tactic the bank is using to get the three of us bidders on the property to ante up some more money.

Who knows what the banks are doing. They turn down offers of short sales and REOs only to end up selling months later well below the offer they got, not to mention all the additional carrying costs.

In one of Jim the Realtor's videos there was a house, probably over a million owed, the bank turns down $797k I believe and a few weeks later an identical house a couple lots down lists for under $500k.

As much as I want to buy, I am not going to do so for a while, I don't care how good of a deal there is. Until I see job losses start going to 0 monthly (or gaining jobs) there is no reason to buy. And until I see foreclosures peak and start declining (not counting any government interventions) there is no reason to buy.

Let the knife catchers kill each other as the fight to get in line to lose money.

sacramentia said...

In this area the big killer is changing from SMUD to PGE for electricity prices, that nearly doubles my electricity cost budget.

This really depends on how much you use. PGE is cheaper for low usage and more for large usage than SMUD. When I did the math in 06 before buying my home, the crossover point was about 175/mo in electric.

smf said...

Still the point remains that for any purchase, maintenance costs have to be accounted for somewhere.

Hence, if a rental unit is purchased that gives a +$200 per month, in the long run it is most likely ZERO as the novices are not taking into account how that $2400 per year positive income can be turned into a negative with a minor repair.

Garth Farkley said...

The greenhorn "investors" of 2009 snapping up REOs for "cash flow" remind me of the flippers snapping up houses to re-sell for a quick buck in '05-'06. It's a can't miss opportunity. Everybody's doing it! Roll up for the REO bus!

Garth Farkley said...

My comment continues in Lander's new thread:

DataQuick: Sacramento Median Price Back to 2000 Levels

http://sacramentolanding.blogspot.com/2009/03/dataquick-sacramento-median-price-back.html

Cow_tipping said...

"Investors" have to put up 20% right. The bank will repo at the first smell of a missed payment, cut it 25% and toss it back on the market. It will drop 25% per missed payment, and try every 2-3 months it will be sold over and over and over, to "investors". Till someone pays 35K for that 500K crap box and lives in it.
I'd count on another 30-40% decline year over year.
I have a better idea than the stimulus for propping up house prices. I'd try carpet bombing.
Tell people to get out a few days in advance in a foreclosure riddled subdivision. Then place radio controlled bombs every where, and on a nice windless day, kaboom. Entire cities - gone. Merced - who needs it. Stockton - gone. The gas station off I5 needs to be left there, but all else, done.
Repeat, yuba city, woodland hills etc etc etc.
Of course that will fix the problem, we want the problem to get bigger so we can snap it up at the 30K true price.
Cool.
Cow_tipping.