RE: Rental Mania Tipping Point?

[don]

Investor demand for housing is largely responsible for the feeding frenzy in real estate over the last couple of years. Yet this unrelenting demand is unsustainable and it looks like cracks are forming in the investor trade. First, the median price paid by those using “cash” financing has reached an all-time peak. Not a revisit of an old peak but a brand new one. Of course this is happening while the typical US household has seen stagnant wage growth. Most understand this yet manias lure people in at the most inopportune times. A few other pieces of evidence are highlighting a tipping point in the market. Inventory is starting to increase and new home sales remain incredibly anemic. The refinancing boom is now being shuttered because of rising rates (as if a 30-year mortgage going for 4.6% is somehow apocalyptic). The investor trade is crowded and we’ve seen data showing how large the investor share of the market is in 2013. A new peak for those cash buyers

For definition purposes, those categorized as “cash” buyers are those that do not use conventional financing. There has never been a market so dominated by non-conventional financing as the one we are seeing today. And those using this new way of financing home purchases are willing to pay record prices for homes:



This is a clear indication of the fever we’ve been seeing over the last couple of years. It also helps to explain the massive double-digit increases in prices in many metro areas around the country. Non-traditional financing is creating a new kind of housing market. Most families are not in a position to purchase a home via this mechanism. Even the typical 20 percent down buyer is being pushed out by this kind of buying. It was interesting to see the psychology of some analysts early in the game regarding cash buyers. For some reason, they believed in this myth that cash buyers were this tiny sliver of the market relegated to one wealthy actor or foreigner buying a home with all cash nestled in a silver briefcase. Well we now have data showing that roughly half of all purchases in 2013 came from this non-traditional road (more like a superhighway).

Another trend that is reversing is that inventory is increasing steadily:



We now have over 5 months of inventory. A “normal” market is closer to 6 months of inventory but we haven’t seen a normal real estate market in well over a decade. Real estate has now become something akin to a speculative commodity.

It is a boom and bust vehicle. People now try to time it like a stock and speak in terms of “missing the bottom” or “missing the top” as if this was normal for a housing market. Easy financing has created this situation and of course, most people realize that the benefits are largely leaking out to financial institutions, not regular Americans.

You would think with all this investor demand and prices increasing at a pace last seen during housing bubble 1.0 that new homes would be selling like pancakes. Let us look at this:



New home sales actually have dipped with the recent rise in interest rates. What you have is a speculative mania in the rental trade and now more commonly, in the flipper trade. It is an odd sort of logic here and even large funds catering to the rent play are having a hard time turning a profit (in fact are operating with losses). Real estate in the form of property management is a time intensive process that does not seem to jive with the culture that is Wall Street. Rents must be pulled by real world incomes and given our economy where part-time jobs are becoming more common, to think that you will have permanent tenants and a perfect stream of cash flow is just crazy.

In places like Las Vegas, you have investors selling to investors in a game of musical chairs now. You are also seeing aggressive flips in California where people buy a place, slap on some paint and a few simple tune-ups and then expect a $100,000 or $200,000 profit. The disconnect is becoming more prominent. Even in unmistakably solid areas like Irvine we are seeing a major jump with inventory:



We’ve already shown that nationwide inventory is picking up but the above is a desirable market. At a certain point, the mania becomes obvious to some. Without a doubt all these signs point to a softening in the housing market. Given the boom and bust nature of our market, after this recent boom are we suddenly to expect that cooler heads will prevail and we will have a slow retreat? These markets are momentum trades and with investors being the largest players in the real estate game over the last couple of years, it should come as no surprise if they react like investors would in your regular stock market. Given all the technology now available, selling and buying houses is a fairly easy process. Heck, we have investors buying them by the dozen as if they were heading down to Krispy Kreme.

The rental trade is looking very frothy.

http://www.doctorhousingbubble.com/i...an-home-price/

[don]

Re: In Related News

As Renters Move In, Some Homeowners Fret

By SHAILA DEWAN

MEMPHIS — Beneath the spreading shade tree in Laura Holcomb’s front yard, there are some 70 varieties of hosta, stands of elephant ear and a Japanese maple. For the 17 years she has owned the brick house on Rose Trail Drive in the Hillshire subdivision, Ms. Holcomb has devoted herself to her home and garden.

Across the street, Carl Osborne and his family have been tenants for two years, moving in after the previous owner lost the house in a foreclosure. They are happy to have a decent place to call home but, like many renters, they have not done much to improve the appearance or join the community.

They are not alone: the family behind Ms. Holcomb, the one two doors down, and several in the cul-de-sac across the way are among the renters who have been supplanting homeowners in this blue-collar, suburban neighborhood as investors buy single-family homes and convert them to rentals.

“Used to, we knew our neighbors,” Ms. Holcomb said. Then she gestured toward the few remaining owner-occupied houses nearby. “Except for the two that have been here, I don’t know any of my neighbors.”

Across the country, a growing number of single-family rentals provide an option for many who lost their homes in the housing crash through foreclosure and for those who cannot obtain a mortgage under today’s tougher credit conditions. But the decline in homeownership is also changing many neighborhoods in profound ways, including reduced home values, lower voter turnout and political influence, less social stability and higher crime.


“When there are fewer homeowners, there is less ‘self-help,’ like park and neighborhood cleanup, neighborhood watch,” said William M. Rohe, a professor at the University of North Carolina at Chapel Hill who has just completed a review of current research on homeownership’s effects.

Even conscientious landlords and tenants invest less in their property than owner-occupants, he said. “Who’s going to paint the outside of a rental house? You’d almost have to be crazy.”

Despite signs of a recovery in the housing market, the country’s homeownership rate is still on the decline. In Memphis, it has fallen from roughly 65 percent of families in 2005 to about 55 percent now, according to the Census Bureau.

In hundreds of neighborhoods that once attracted first-time home buyers, investors have stepped in, buying up tens of thousands of homes for the rental market.

Jimmy Fumich, a homeowner and air-conditioner repairman, said he had been in court that day as a witness in an animal cruelty case against a neighbor, a renter, who had left a dog chained to a stop sign in the heat. She was already in trouble, he said, for breaking into an empty house on the block.

Mr. Fumich, who is Ms. Holcomb’s brother, mentioned a couple of meth houses and one that had been used as a brothel. All were rentals. Police department records show that major crime in the area, which does not include drug offenses, has actually gone down since spiking in 2010.

Still, Lea Ann Braswell, the captain of the neighborhood watch, recounted a recent episode in which a teenage girl, whose throat police said was cut by a young man carrying a sword, sought refuge on Ms. Braswell’s doorstep.

“We used to have hardly anything happen,” she said.

Asked how many renters were active with the neighborhood watch, Mr. Fumich said, “Zero.”
What is watchful to some, however, can feel intrusive to others. In the Osbornes’ home, one resident who keeps a close eye on things is referred to as “Nosy Neighbor.”

Carl Osborne, 26, who parks his boat and the DirecTV van he drives for work out front, rents the house across the street from Ms. Holcomb with his wife, two children and collection of exotic birds. “We just look for somewhere that’s safe for your kids,” he said. “That’s all I’m worried about, my kids and my wife.”

Hillshire does not have a homeowners association to enforce rules about uncut lawns, abandoned cars or rented units. And despite the changes, the neighborhood is largely trim and neat. But in cities like Las Vegas and Atlanta, where homeowners associations are more common, some have struggled with how to handle the influx of renters.

When investors started buying town homes in the small, Atlanta-area community of Austin Park, where units that once sold for over $100,000 now go for as low as $30,000, homeowners did not at first enforce a rental cap because they preferred landlords over vacant units that were no longer paying association dues.

After a summer of loud music, barking dogs, prostitutes and two tenants served with a murder warrant, the board changed its mind, said Joi Aikens, the president of the homeowners association.

Phasing out the rentals will take time, since the association has to wait until a home becomes vacant or is sold.

“You’re caught between ‘I want the dues paid’ and ‘I want a peaceable, nice existence,’ ” Ms. Aikens said.

Investors, however, say they have done a service to neighborhoods plagued by foreclosures.

Memphis Invest’s tenants stay two years on average, the company said, and about two out of 10 are former homeowners who lost their homes and want to maintain a similar lifestyle while they repair their credit.

Those reluctant renters dislike other renters almost as much as many homeowners do.

Monica Costict is the last homeowner left on the cove. She, too, is looking to get out of the neighborhood and buy somewhere else. “When we leave,” she said, “we’re going to rent out the house.”

http://www.nytimes.com/2013/08/29/bu...gewanted=print

[zoog]

Re: Rental Mania Tipping Point?

Have to wonder how quickly the big investors are going to try to unload their rental empires. As implied in the article, the Wall Street mentality would suggest a quick exit. Will the "smart" money unload early enough to sell to "dumb" cash investors? Or will they all end up with properties lagging on the listings because real homebuyers can't get mortgages to buy them?

I don't know to what extent, if any, the big funds have been buying houses for rentals here. But the low vacancy and climbing rents have spurred a flurry of apartment building projects around the city. Inevitably, they are going to build too many, which should eventually put a damper on rental rates.

[thriftyandboringinohio]

Re: Rental Mania Tipping Point?

Managing rental property for the long term is actual work, with sizable fixed expenses and substantial risk of loss. Plus, there is a hard cap on the upside possibilities for gain; the rent on your unit is never going to suddenly quadruple in a good year.

I have always assumed that the Wall Street boys will flee the business once these realities become unavoidable.

[Milton Kuo]

Re: Rental Mania Tipping Point?

Managing rental property for the long term is actual work, with sizable fixed expenses and substantial risk of loss. Plus, there is a hard cap on the upside possibilities for gain; the rent on your unit is never going to suddenly quadruple in a good year.

I have always assumed that the Wall Street boys will flee the business once these realities become unavoidable.

I believe it's been stated on another thread somewhere here that Wall Street is getting out through two scams, one old and one new: dogs-with-fleas IPOs (American Homes 4 Rent) and rent-backed securities. It doesn't seem likely to me that Wall Street will be able to use a simple, straightforward transaction, such as just selling the houses, without taking a loss.

[zoog]

Re: Rental Mania Tipping Point?

I believe it's been stated on another thread somewhere here that Wall Street is getting out through two scams, one old and one new: dogs-with-fleas IPOs (American Homes 4 Rent) and rent-backed securities. It doesn't seem likely to me that Wall Street will be able to use a simple, straightforward transaction, such as just selling the houses, without taking a loss.

Perhaps these houses will join the rest of the shadow inventory and be slowly dribbled out, via some FIRE bailout mechanism whereby the funds get to claim them as profits rather than losses.

[c1ue]

Re: Rental Mania Tipping Point?

I have always assumed that the Wall Street boys will flee the business once these realities become unavoidable.

I have always assumed that this was all a 2 part scam: the first part to get OPM, the second part to skim bonuses then run.

There are definitely those who are in the business to run a rental business, but I know for a fact that most of them are not.