Wednesday, December 07, 2005

Are RE Investors Running for the Exits?

Are real estate "investors" (you know, your local postman, barber, house-wife, janitor, sales clerk, etc. RE "geniuses") running for the proverbial exits? Given how RE is Marin's only real "industry" and is such a hobby here among the wannabes, the current trends are disturbing to say the least. Houses sitting on the market, crashing condo sales, reduced sales prices, vacancies, low rent vs. carrying costs, cash offers to buyers, even cars given to buyers (I've seen examples of this here in Marin ranging from Jaguars to VW Beetles). Sound familiar? Well, we'll see...

Some choice quotes:
"Individuals are pulling back from buying homes and condos as an investment, in a move that could accelerate the cooling of the housing market."

"...fewer people are competing to buy properties as an investment, real-estate brokers and housing analysts say. Some investor-owned properties are returning to the market for sale. With the pace of price appreciation slowing, some investors who were betting on quick profits are instead being squeezed."

"The apparent pullback by investors is recent and is just beginning to show up in national data."

"Sandra Geary, a broker in California's Sonoma County, was running seminars that drew as many as 200 would-be investors. She's also taken California investors on out-of-state home-buying expeditions to Arizona, Idaho, Nevada and Oregon and bought more than 30 rental properties for her own portfolio. But in recent months, her investor sales have fallen more than 75%."

"Some brokers are advising speculators to put away their checkbooks. "I'm telling people who want to buy new construction to flip it that the gig is up," says Frank Borges LLosa, a real-estate agent in Arlington, Va."
Some more choice quotes:
"Investors who helped fuel the U.S. housing boom by bidding up prices are now so desperate for buyers that some are offering cash bonuses..."

"Inventories of unsold single-family homes are near a 17-year high as demand from speculators wanes and mortgage rates have risen more than a percentage point from a four-decade low reached in 2003."

""We're at the turning point,'' says Susan Wachter, professor of real estate at the University of Pennsylvania in Philadelphia. ``We're all hoping for a flat market, and not a plummeting market.''"

"Declining demand from speculators will help slow home sales to an annualized 6.77 million this quarter from a record 7.24 million in the third quarter, says David Berson, chief economist at Fannie Mae. ``Perhaps investors have decided this is the right time to move out of housing and into other assets,'' he says."

""The mom-and-pop investors are unloading their properties,'' says Greg Sullivan, 42, a partner in Cash Now Vegas LLC, a Las Vegas company that buys homes from investors and resells them. ``When home values were going up $10,000 a month, everyone wanted in. Now, all those properties are sitting empty.''"

"Some experts say home prices in previously hot markets such as Boston and Washington will fall in 2006. Gramley foresees "declines in home prices of maybe 10, 15 or 20 percent on both coasts on a year-over-year basis.''"


Blogger marine_explorer said...

``Perhaps investors have decided this is the right time to move out of housing and into other assets,'' he says."

Are there any signs of an investor sell-off in Marin?
There certainly has been a slowing of sales, but that might be perceived as seasonal. Has anyone detected a seller's panic?

Dec 7, 2005, 3:34:00 PM  
Blogger Marinite said...

Not yet. We'll see...

For the record, I've been talking with someone who contacted me by email today who claims to be a realtor. She says that 80% of all recent loans in Marin are of the "exotic" type. I am trying to verify that. If it's true, that is a shocking number. Sure, some of that is wealthy folks who take out such loans so as to maximize the tax benefits, but a lot of that is going to be regular folks.

Dec 7, 2005, 3:40:00 PM  
Blogger sf jack said...

marinite -

How exotic is "exotic"? Did she explain further? I suppose I'm wondering if she has any idea of when these will unwind?

It really doesn't surprise me at all that there would be an 80% prevalence of those kinds of loans.

The median home price in Marin now requires that a traditional mortgage be paid by buyers with a $184K household income, correct?

Well, we all know the median household income, even in Marin (the highest per cap income county in the USA) is only about half that - if that.

Hence, there's a lot of people taking a flyer on the Marin housing market.

I wish there was a financial instrument to short the Marin housing market.

Dec 7, 2005, 3:54:00 PM  
Blogger Marinite said...

How exotic is "exotic"? Did she explain further?

No, not specifically but we were talking IO, Neg Ams, that sort of thing. I will let you all know when I know something.

I am also trying to work my "connections" (that I didn't even know that I had) in the local lending industry to get more info. You'll all know when I know (or shortly thereafter). We'll see...

Also, if any reader knows anyone who knows anyone etc. who can get this sort of info for Marin (and is willing to tell), then let's collaborate on a post.

Dec 7, 2005, 4:02:00 PM  
Blogger mover said...

This bubble is nuts. My daughter bought a place, and called me crying. "It doubled in value!" she screamed. "Don't worry" I told her. "It's only been 2 weeks since close of escrow. Try putting some new wheels on it. It'll go up more." She got an adjustable mortage. IKn 3 years she gets evicted, but the payment is less than rent now, so why not.

Dec 7, 2005, 8:56:00 PM  
Blogger mover said...

There's an old sailor's tune that goes "when the rats leave the ship, don't be far behind". The rats know first that the ship is sinking. The loan companies are the rats. They have already red-lined Las Vegas to interest only loans to investers because they don't think they'll get their money out if the homes don't go up enough to cover the selling commission plus the principle build up. Remember, there is no deficiency judgement allowable in a purchase money trust deed. The lenders are supossed to know the value of what they are basing their loans on. So they devised a neat trick. The option ARM loans must be converted in 3-5 years to a conventional loan. This is a refinance, and a deficiency judgement is allowable. This is how they get you. Since most people my age are just waiting for their parents to kick, they are risking their inheritance by using their house as an ATM to impress their friends.
Remember, most Americans are stupid. (We elected Bush. Twice.)Look at the Statue of Liberty. " Give us your poor, weak huddled losers". Our founding fathers were on the first tub outta town. They were tossed out to preserve the integrity of Euro-trash. If it wasn't guns against sticks, We would have been the first Thanksgiving meal. Look around at the stupidity. A lexus is a Camry with gold door knobs. Granite counters, pergo floors, Hummers, and juniors stuck in the local JC. We deserve every thing we have comming to us.

Dec 7, 2005, 9:18:00 PM  
Anonymous Anonymous said...

Mover - I consider your post serious "thread drift" btw. I think you need to take a prozac. Yeah the RE market made a lot of fools, some deservedly - but you are on to Founding Father's, Euro-trash, and Pres. Bush. Is this another limo-liberal board?

Dec 8, 2005, 9:52:00 AM  
Anonymous Anonymous said...

Thread drift indeed. Anyway most Marin residents voted against Bush, but live in arguably the most out of whack real estate market in the country when you consider house prices to local incomes.
BTW it wasn't always this way. Used to be that Marin prices weren't much different for equivalent homes elsewhere. Started to change in the late 60's, and is totally out of control today.
But contrary to most Americans being stupid, I think the exact opposite. More and more people are acting totally rationally ie cashing out of their overpriced homes and moving to cheaper parts of the country. One thing that does put a floor on the price of housing in Marin is the unwillingness of the local population to tolerate additional housing units to satisfy demand.

Dec 8, 2005, 11:08:00 AM  
Blogger Marinite said...

I believe it was the environmental laws and Proposition 13 of the early 70s and late 60s that caused not just Marin but California houses to become more expensive relative to the rest of the nation. That in no way diminishes the fact that we are in a RE bubble as prices just took off from our elevated baseline.

Please stay on topic. This blog is not meant to be political in nature nor as a forum for discussing societal issues other than the housing market.

Dec 8, 2005, 11:14:00 AM  
Anonymous Anonymous said...

However, I do think the real estate problems that we are facing are somewhat a result of our government policy. The government has chosen a fast fix of our falling economy by borrowing vastly from foreign countries. These influx of cash mostly parks at our Treasury bills and this helps to maintain an artifically low interest rate. And this helps to boost the real estate value. However,I worry that if one day the influx of money gets reversed and this will be very devasting to our economy.

Dec 8, 2005, 1:10:00 PM  
Anonymous Anonymous said...

I was having this conversation the other day. One thing is that in global economies, one has to find a good place to park the money. If not in the US mortgage-backed securities and other equities, then where else? Well that may happen as this begins to bell curve down and money might move. Not sure where the Chinese, Japanese, Euro money will go.

BTW - So it is expected the Fed is raising rates again this Tuesday?

Dec 8, 2005, 2:56:00 PM  
Anonymous Anonymous said...

I think some of the foreign money is going to precious metal now. Look at Gold. It is above $500 an ounce.

There was an article mentioning that the real estate boom that we are experiencing now is signaling the last stage of economic expansion. Money is spent on speculation not on improving education, building factories, etc. The speculation fever usually ends up badly.

Dec 8, 2005, 4:41:00 PM  
Anonymous Anonymous said...

One interesting fact. I teach real estate courses at the college level and recently developed a new course specifically relating to foreclosures. News relating to Spring enrollments is that they are going down for all of our real estate course offerings EXCEPT the foreclosure class. The reason is simple.

You bring in the potential of interest rates going up under circumstances where a lot of residential real estate owners have adjustable interest rate loans. You couple that with a lack of "able" buyers. Throw into the mix the creatively financed purchases where the buyers have very little equity at the time of purchase. Include in the mix the fact that under California law, there is no personal liability for purchase money loans on residential real estate. What does this give you? The obvious potential for a booming rise in the number of foreclosures.

Dec 8, 2005, 8:26:00 PM  
Anonymous Anonymous said...

Questions for Professor:

What are the general guide lines for an average investor to purchase foreclosed properties?

Is it true that the best value would be the time when the government comes in to fire sell massive foreclosed properties like the S&L crisis in the 1990s?

Dec 8, 2005, 9:41:00 PM  
Anonymous Anonymous said...

Regarding the original thesis that investors are leaving in droves, here are my $0.02:

In cheap markets with excess capacity that have been pumped heavily by the Carleton Sheets of this world (hello Vegas and Florida), this is quite possibly happening. Here in Marin, with a shortage of supply and a very, very high barrier to entry, there are far fewer amateur speculators. To get a decent loan as an investor, you need to cough up 20% (for 70% 1st, 10% 2nd, arrangement) which around here, means $100k for a minimal condo; factor in the $10k in closing costs (on the buying AND selling end ) and a 5-6% commission to unload, the extremely poor rent/price ratio and you see this is not quite the same as dumping a poor performing stock. It is very expensive to buy, own and sell real estate here unless you have millions at your disposal. Plus, we don't have unbuilt condo towers where speculators "buy off the plan" (in other words, buying a condo that has not yet been built) as they do in FL and NV.

Flipping activity (a sign of speculation) is very low in CA, relative to other locations.

A few people who are in too deep, didn't bother to educate themselves about being a landlord, and didn't do their due diligence might feel uneasy and want out, but I would not characterize it as a stampede.

Also, to those contemplating foreclosures, this is a better time to look, but you need to see a few consecutive years of sluggish gains to really crank up the foreclosure numbers. Current foreclosure activity is nowhere where it was in the early 90s. People who bought as recently as a year ago are sitting on a comfy equity cushion that they can use to pay agents fees, etc., to unload.

Also, you have to consider your exit strategy. In a slow market, it is harder to unload that foreclosure should things go badly. A bargain property can still send you to bankruptcy if you can't sell it.

Dec 9, 2005, 4:53:00 PM  
Anonymous Anonymous said...


Your question brought back fond memories of the FSLIC and the Resolution Trust Corporation (RTC). My advice is to stay out of the market until there are simply an overwhelming number of choices. Remember that lenders are in the business of lending and not holding real estate owned (REO). The time will come that you can purchase REO with extremely favorable financial terms. A performing loan is an obvious successful conversion of an REO.

Dec 10, 2005, 9:26:00 AM  
Anonymous Anonymous said...

Thank you Professor.

I used to work at a firm helping the RTC to unload their non performing assets. It took years to finish the task.

Everyone says this time is different. The banks have better balance sheets. I guess time will tell.

Dec 10, 2005, 10:27:00 AM  
Blogger marine_explorer said...

Here in Marin, with a shortage of supply and a very, very high barrier to entry, there are far fewer amateur speculators.

However, judging from conversations I've had, there are quite a few real estate hobbyists in this county sitting on 2-5 spare homes. Personally, I'd call that an artificial supply shortage--plus there's that net outflux of population in this county (stats on request). How does that bode for future home sales and rentals?

Would anyone know the number of homes in Marin that can be counted as "investment properties"? Perhaps that will explain the high level of dilapidated neighborhoods. Do landlords neglect their property for that elusive "positive cash flow"--or are that many Marin homeowners strapped for cash?

Coming from an area akin to Pebble Beach (custom homes, oceanfront golfcourse), I was shocked by the tawdry condition of many towns here--including Ross, Tiburon, and Mill Valley. Local perception aside, we don't find the Marin price premium justified. While our home is presently comfortable, we certainly won't move up when our options can be far.

Dec 10, 2005, 11:56:00 AM  
Blogger marine_explorer said...

--far better elsewhere, that is!

Dec 10, 2005, 12:15:00 PM  
Anonymous Anonymous said...


You hit the nail on the head as far as your assessment of Marin neighborhood.

I went to see a rental property last year in Tam Valley. I was shocked! It was a Cott house which was truly delapidated. It was falling apart without years of maintenance. Inside it smelled horrible. They were renting for $3,000 per month at that time. Young professionals were seriously looking at the property. The sad thing is that is one of the many we found. Mostly in South Marin. Novato rentals are newer and nicer. However the commute is worst I have ever seen.

Dec 10, 2005, 4:02:00 PM  
Blogger mover said...

My father once told me "When you sit down to play poker with strangers, see if you can spot the sucker. If can't, it's you". An old French economist, Jean Caude Colbert, I think, said that for any economy to grow, it had to be at the expense of another, competing economy. He felt that the world's economy would not grow anymore. He was wrong, but had a point about the winners and losers in a market. Much of the money being spent on this real estate boom is financed with "FAIC" money. (Sounds like "FAKE", but rally stands for "found in a computer". This debt comes from equity, and must be repaid with real money, which must come from someone. That someone is our sucker. I apologize for digressing into Americans, Bush, Euro-trash, as someone else correctly pointed out, but try as I might, I can't avoid seeing the bigger picture of what we leave behind for our heirs. The real victims are the ones who follow us, and must clean up our mess and pay our bills. Most people reading this would not want to be starting out in their 20s now. For them, I apologize for our rampant, hedonistic, greedy conspicuos consumption that will leave them paying our deficit and retirement while paying the rent our overpriced houses that we bought with their inheritence.

Dec 11, 2005, 1:06:00 PM  
Anonymous Anonymous said...

100% agree with mover's last comments.

In addition to the debt we are going to leave behind to our youngsters to clean up, the jobs are lost to overseas at a rapid pace as well. I feel for the young generation. I hope there is a solution to this mess we created.

Dec 11, 2005, 1:22:00 PM  

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