I recently read the article titled “Cities face hurdle to buy foreclosed homes” by Sanford Nax (http://www.fresnobee.com/business/story/1700707.html ). It is a very thought provoking piece full of facts and solid reporting. But as an investor in Fresno real estate and given my chosen framework of a blog I thought I would share a couple of thoughts the article sparked.
From my read the article had two main points. The first being it took the city a lot longer than other cities to get the program in place. While it is easy to say it would have been better months ago (without question) I can only imagine the waste that may have happened. Speed is generally a trade off for quality so I will assume the city chose to insure our money was not wasted.
As for their second point I am little confused. It seems the city is frustrated that they can not buy cheap foreclosures because investors are beating them out. The article basically says the city can not over pay but individual investors can. As an investor I take exception to this theme because wasn’t one of the original goals of buying foreclosures to put a floor under the market? Well good news the market has already done that and now the market is building a solid base from which we can grow out of over the next couple of years (maybe 5 years).
If the city is having trouble competing for the older homes that investors like me are buying (The older 3/1 or 2/1 that offers options) then they might want to focus on an under served area that would provide a ton of future value for the city. In Fresno you still have a fair amount of 1Bd / 1Bth homes around 600 sq ft. Now I know some investors like these types of homes but I can tell you it is a very small list. So maybe the city should turn to buying very small homes on 6,000 sq ft lots. They could create very simple 3/1’s that would be more valuable to the city as years go buy with increased tax revenue. Plus the contractors working with the city could employee more people full time as they add 700-900 sq ft of living space verse simply polishing a junkie house.
As the article indicates one of the stated objectives of the city funds is to produce available low income housing for owner occupants, which is very admirable. However, I do have a growing concern for the average renter in the low income areas. I am seeing a larger number of small multi families come on the market. If this trend continues and banks continue to vacate these properties we may have a real shortage of safe and secure rentals. Perhaps some funds could be pushed in this direction. You could still sell the duplex or fourplex to an owner occupant if you had too (not ideal).
In the end the low end of the market has seen a lot of interest from owner occupants, who very likely will get a 10% discount on the house via tax credit, investors as the properties will cash flow and now the city programs are kicking in dollars. It is no wonder we are all having trouble locking up deals because we are all competing for the same finite listings.
Good Investing
Sunday, November 8, 2009
Saturday, November 7, 2009
Has Fresno Real Estate put in the market bottom?
This question really depends on which way you look at “The Market”. As an investor in the market who reviews listings everyday I thought I would take a shot at providing my answer to this important question. Feel free to comment with your thoughts.
First when I compare the market we have today with the one that existed at the beginning of the year it is clear the banks (sellers) fear has subsided. At the beginning of the year you could tell the banks were scared and ready to deal. I suppose the loans from the government to the large institutions did the job and gave them the cushion to be a little more selective and less trigger happy to dump properties. At the outset of the year they wanted CASH and they wanted to sell.
Another characteristic that is unquestionable is that there are more buyers in the market for low priced rental properties. Given the low rates found in most savings accounts and the unsteady nature of the stock market it makes sense that more people are turning to low end rentals for return on their money. Therefore the supply demand equation has tipped dramatically since the beginning of the year. It should also be mentioned that the low end market has also seen a dramatic up tick of home buyers given the available tax credit for first time buyers.
Now let’s review the statistical metrics called out most commonly by the media.
Has the mean or average price of Fresno homes bottomed? For review the mean is simply the amount of all homes sold divided by the number of homes sold. At the beginning of the year when the large price drop in single family homes was recorded, what was selling? Well from my experience I know for certain that the cheap and very cheap houses were being dumped by banks. I also know that almost no high end homes were sold because financing was shut down. So you had a market with transactions highly skewed to the low end. Given only one side of the market was functioning it should have been obvious to us that the average price would fall dramatically at the beginning of the year.
Another metric sometimes trotted out by the press is a slight variation on the theme above. They say has the “Medium” price changed. The medium is a different statistical metric that is simply the middle price. Think about listing all the sales in Fresno from cheapest to most expensive and then finding the transaction in the middle. For example if there were 100 homes sold you would find the 50th home sale in the list from cheapest to most expensive and that would be the Medium price. Like the mean/average above this statistic is greatly exaggerated by the dominance of the low end transactions at the beginning of the year. In a market where 80% of the transactions were low end you will find a market were the medium is found in the low end transactions.
Fast forward 10 months to November, 2009 and I can tell you first hand that the low end of the market is still the most active but homes are going for 20-30K more than they would have gone in Jan/Feb of 2009. In addition with the loan market on better footing the move up and high end market is functioning better than early this year.
This rebalancing of the market will lead the media to create additional positive press articles stating the bottom is in and all is clear on the real estate front. The more positive press will lead to more buyers and you know what happens when more buyers show up, yep prices go up again.
So yes I think the bottom of the market has been found and we will work our way slowly back to replacement cost. Please understand that I mean slowly back to replacement cost.
First when I compare the market we have today with the one that existed at the beginning of the year it is clear the banks (sellers) fear has subsided. At the beginning of the year you could tell the banks were scared and ready to deal. I suppose the loans from the government to the large institutions did the job and gave them the cushion to be a little more selective and less trigger happy to dump properties. At the outset of the year they wanted CASH and they wanted to sell.
Another characteristic that is unquestionable is that there are more buyers in the market for low priced rental properties. Given the low rates found in most savings accounts and the unsteady nature of the stock market it makes sense that more people are turning to low end rentals for return on their money. Therefore the supply demand equation has tipped dramatically since the beginning of the year. It should also be mentioned that the low end market has also seen a dramatic up tick of home buyers given the available tax credit for first time buyers.
Now let’s review the statistical metrics called out most commonly by the media.
Has the mean or average price of Fresno homes bottomed? For review the mean is simply the amount of all homes sold divided by the number of homes sold. At the beginning of the year when the large price drop in single family homes was recorded, what was selling? Well from my experience I know for certain that the cheap and very cheap houses were being dumped by banks. I also know that almost no high end homes were sold because financing was shut down. So you had a market with transactions highly skewed to the low end. Given only one side of the market was functioning it should have been obvious to us that the average price would fall dramatically at the beginning of the year.
Another metric sometimes trotted out by the press is a slight variation on the theme above. They say has the “Medium” price changed. The medium is a different statistical metric that is simply the middle price. Think about listing all the sales in Fresno from cheapest to most expensive and then finding the transaction in the middle. For example if there were 100 homes sold you would find the 50th home sale in the list from cheapest to most expensive and that would be the Medium price. Like the mean/average above this statistic is greatly exaggerated by the dominance of the low end transactions at the beginning of the year. In a market where 80% of the transactions were low end you will find a market were the medium is found in the low end transactions.
Fast forward 10 months to November, 2009 and I can tell you first hand that the low end of the market is still the most active but homes are going for 20-30K more than they would have gone in Jan/Feb of 2009. In addition with the loan market on better footing the move up and high end market is functioning better than early this year.
This rebalancing of the market will lead the media to create additional positive press articles stating the bottom is in and all is clear on the real estate front. The more positive press will lead to more buyers and you know what happens when more buyers show up, yep prices go up again.
So yes I think the bottom of the market has been found and we will work our way slowly back to replacement cost. Please understand that I mean slowly back to replacement cost.
Friday, November 6, 2009
What does 10.2 Unemployment mean for Real Estate Investors?
All I can say is this is interesting times we live and invest in. The first thing that jumps out at me is that cheap money is here to stay. Several articles I reviewed today talked about the Fed being on hold until the middle of 2010. I suspect the Fed will stay very accommodating through out 2010 and I suspect there is a fair chance they do not raise rates above 1% until 2012. I haven’t heard any talking head on TV thinking this far out.
The headline number for unemployment is going to get worse over the next 6-9 months with unemployment peeking above 11%. Then it will take a year or so for the country to build a base we can grow from. The unfortunate truth is we can not pay for all the sins of the last 10 years in only a year or two. We are probably in the fourth of fifth inning. Note I suspect the steepest part of the drop has already been felt but we are not done with the pain.
Another area that is certain is the move up and high end home markets are going to continue to crack under the stress of job losses. It would not shock me to see homes that went for 600-800 in various markets to go for under 300K as the market begins to show maximum stress.
However, the low end market is likely to get health quickly because cash is paying next to nothing in the bank and people will need to chase return with controlled risk. Given the low end of the housing market is selling for 60-70% of replacement cost with fairly stable rents I suspect investors will continue to jump in with both feet. We have already seen a tremendous change in the low end market.
Given the long road a head I suspect we will see more public homebuilders consolidate to remove capacity from the system. I don’t see how building homes on any type of scale is going to be profitable until at least 2012-2013. However, if the builders would just change their business model slightly I suspect they could continue to churn out profits while waiting for the building wave to build again. I propose that builders should focus on buying foreclosed homes in large tracks built over the last 5 years. They could pick up 10-20 homes and rehab them and put in some special touches and really help save neighborhoods. Talk about good karma!!!
Another item I suspect that will come to pass in the next 6-9 months given all the bad news is a big bank that is currently perceived as rock solid will be owned at least partially by us the US tax payer. We will need to send them 20-40B to maintain capital ratios. The bank will be so large that FDIC will NOT be able to let it fail. So we the tax payers will buy some preferred stock or convertible to inject the required capital. My fear is it may be worse than expected and require 2-3 extra injections at which point we may own more than 50% of the bank. (Just a hint when this happens we will be very close to the bottom and ready to grow again).
Buy and Hold will still be the preferred long term investment but their will be some very busy flippers taking beaten down foreclosures and turn them in to FHA approved homes. If you could flip 4 homes a year and make 20K that is an extra 80K of income before taxes. I suspect this type of activity has at least 2 more years to play out.
Good Investing
The headline number for unemployment is going to get worse over the next 6-9 months with unemployment peeking above 11%. Then it will take a year or so for the country to build a base we can grow from. The unfortunate truth is we can not pay for all the sins of the last 10 years in only a year or two. We are probably in the fourth of fifth inning. Note I suspect the steepest part of the drop has already been felt but we are not done with the pain.
Another area that is certain is the move up and high end home markets are going to continue to crack under the stress of job losses. It would not shock me to see homes that went for 600-800 in various markets to go for under 300K as the market begins to show maximum stress.
However, the low end market is likely to get health quickly because cash is paying next to nothing in the bank and people will need to chase return with controlled risk. Given the low end of the housing market is selling for 60-70% of replacement cost with fairly stable rents I suspect investors will continue to jump in with both feet. We have already seen a tremendous change in the low end market.
Given the long road a head I suspect we will see more public homebuilders consolidate to remove capacity from the system. I don’t see how building homes on any type of scale is going to be profitable until at least 2012-2013. However, if the builders would just change their business model slightly I suspect they could continue to churn out profits while waiting for the building wave to build again. I propose that builders should focus on buying foreclosed homes in large tracks built over the last 5 years. They could pick up 10-20 homes and rehab them and put in some special touches and really help save neighborhoods. Talk about good karma!!!
Another item I suspect that will come to pass in the next 6-9 months given all the bad news is a big bank that is currently perceived as rock solid will be owned at least partially by us the US tax payer. We will need to send them 20-40B to maintain capital ratios. The bank will be so large that FDIC will NOT be able to let it fail. So we the tax payers will buy some preferred stock or convertible to inject the required capital. My fear is it may be worse than expected and require 2-3 extra injections at which point we may own more than 50% of the bank. (Just a hint when this happens we will be very close to the bottom and ready to grow again).
Buy and Hold will still be the preferred long term investment but their will be some very busy flippers taking beaten down foreclosures and turn them in to FHA approved homes. If you could flip 4 homes a year and make 20K that is an extra 80K of income before taxes. I suspect this type of activity has at least 2 more years to play out.
Good Investing
Thursday, November 5, 2009
Why all the talk of a "V", "U", "W" or "L" shaped recovery
As real estate investors it is very important for us to watch the economy. All of the alphabet soup listed in the title are options for how the recovery might look (in the rear view mirror).
A “V” shaped recovery means we will come back as fast and as sharp as we went down. As an investor this means you need to push all your chips to the table now. We don’t see this as likely as too many of the problems still exist and other are still in front of us namely resets on Pay Option Arms and commercial real estate. But don’t be confused the government will do all it can to produce a quick recovery as a 20% rise in real estate would fix a lot of the problems and make banks wildly profitable as the “write up” their portfolios of loans they have marked down to nothing.
The “U” shaped recovery means we will spend a fair amount of time on the bottom but as we come out of this mess it will be fast and profitable. An investor that sees this market should be placing strategic bets over the next 6-18 months as we put in the bottom. The type of recovery seems more likely than the “V” shaped recovery because it takes into the account that we have a few more shoe’s to drop.
The dreaded “W” shaped recovery means an investor should be very picky with any investment now and wait for the next wave of stress in the market. This particular recovery option keys off the idea that any up-tick has been artificial and it won’t hold once the stimulus is taken a way. You need to know this is the least favorite outcome to our government. We are confident that if they smell anything close to a double dip recession that the printing press will go on overdrive. They will create a second stimulus focused on shovel ready projects and they will spend – spend – spend.
That leaves the “L” shaped recovery. In this case the investor has time to make their investment decision. They should buy investments as they make since and plan to hold them for 5-10 years as we take a very slow grind out of this recession. This slow grind will rebuild the foundation of the financial system, consumer balance sheets, etc. It will not be fun by any stretch but we have survived worse and we would survive this too should it come to pass.
In the end you need to understand the environment we are in at a macro level so you can make wise micro decisions. Not that we are experts by any stretch but as of today our current guess of the likely outcomes is as follows (Assuming these were the only options):
V Shaped = 5% - Doesn’t seem likely give future pain ahead
U Shaped = 30% - If the stimulus holds and no other major surprises are found
W Shaped = 10% - Government would fight this with every dollar they could print
L Shaped = 55% - Capitalism works it self out and we reset the balance sheet
Good Investing
A “V” shaped recovery means we will come back as fast and as sharp as we went down. As an investor this means you need to push all your chips to the table now. We don’t see this as likely as too many of the problems still exist and other are still in front of us namely resets on Pay Option Arms and commercial real estate. But don’t be confused the government will do all it can to produce a quick recovery as a 20% rise in real estate would fix a lot of the problems and make banks wildly profitable as the “write up” their portfolios of loans they have marked down to nothing.
The “U” shaped recovery means we will spend a fair amount of time on the bottom but as we come out of this mess it will be fast and profitable. An investor that sees this market should be placing strategic bets over the next 6-18 months as we put in the bottom. The type of recovery seems more likely than the “V” shaped recovery because it takes into the account that we have a few more shoe’s to drop.
The dreaded “W” shaped recovery means an investor should be very picky with any investment now and wait for the next wave of stress in the market. This particular recovery option keys off the idea that any up-tick has been artificial and it won’t hold once the stimulus is taken a way. You need to know this is the least favorite outcome to our government. We are confident that if they smell anything close to a double dip recession that the printing press will go on overdrive. They will create a second stimulus focused on shovel ready projects and they will spend – spend – spend.
That leaves the “L” shaped recovery. In this case the investor has time to make their investment decision. They should buy investments as they make since and plan to hold them for 5-10 years as we take a very slow grind out of this recession. This slow grind will rebuild the foundation of the financial system, consumer balance sheets, etc. It will not be fun by any stretch but we have survived worse and we would survive this too should it come to pass.
In the end you need to understand the environment we are in at a macro level so you can make wise micro decisions. Not that we are experts by any stretch but as of today our current guess of the likely outcomes is as follows (Assuming these were the only options):
V Shaped = 5% - Doesn’t seem likely give future pain ahead
U Shaped = 30% - If the stimulus holds and no other major surprises are found
W Shaped = 10% - Government would fight this with every dollar they could print
L Shaped = 55% - Capitalism works it self out and we reset the balance sheet
Good Investing
Wednesday, November 4, 2009
Loans are the hardest part of investing today ...
If you're a newbie investor with decent credit and enough capital to put 20%-25% down you are in a great spot. As 30 yr mortgage money is CHEAP and the price of foreclosures are CHEAP. So at a mimimum go buy 4 properties and set yourself up for the rest of your life.
If you chose to buy more you can get loans #5-10 done but it will take time and a lot more people will need to look at the loan. The extra pain shouldn't stop you but just know loans 5-10 will be tougher to get.
If you own more that 10 properties or you try and buy property 11+ go luck. The traditional lender market is all but shut down for owners of lots of property. So buyers with a lot of proeprty are turning to hard money lenders and paying high rates with lots of points but if the deal works with the high rates great because sometime in the future you should be able to refi out of this loan.
At some point this will change but it might take awhile. So guy buy what you can and always keep fighting because if the deal is good enough you can always find the money.
Good Investing
If you chose to buy more you can get loans #5-10 done but it will take time and a lot more people will need to look at the loan. The extra pain shouldn't stop you but just know loans 5-10 will be tougher to get.
If you own more that 10 properties or you try and buy property 11+ go luck. The traditional lender market is all but shut down for owners of lots of property. So buyers with a lot of proeprty are turning to hard money lenders and paying high rates with lots of points but if the deal works with the high rates great because sometime in the future you should be able to refi out of this loan.
At some point this will change but it might take awhile. So guy buy what you can and always keep fighting because if the deal is good enough you can always find the money.
Good Investing
Monday, November 2, 2009
Did you hear? Pending Home Sales up 8 months in a row!!!
Well the good news in this report from our perspective is it validates that the low end of the market is very active. Big surprise with 8K first time buyer incentive at risk of expiring.
This report also means we are close to the mysterious bottom from an average price perspective. But as we have stated before we believe this is more of a statistical issue because we are foreclosing on and selling more homes in the traditional move up market with the upscale markets soon to see a wave of Alt-A foreclosures coming.
Also we have to remember that more pending homes do not mean more actual sales as the buyer must still get a loan. Also we suspect a fair amount of the rise in pending sales are actually short sales that are just as likely not to close because they take so long to process and approve.
So in the end we still have a market that is unhealthy due to various external issues.
Anyone think more foreclosure moratoriums are coming around the holidays that could be another negative wrench?
We also suspect more families that are currently paying their mortgage are going to decide it is better to withhold payment. If we can’t turn the value around this negative feedback loop could get even worse.
Commercial real estate is a hammer that is going to fall in 2010 and add pressure
But remember our motto “More Problems = More Opportunity”
Good Investing
This report also means we are close to the mysterious bottom from an average price perspective. But as we have stated before we believe this is more of a statistical issue because we are foreclosing on and selling more homes in the traditional move up market with the upscale markets soon to see a wave of Alt-A foreclosures coming.
Also we have to remember that more pending homes do not mean more actual sales as the buyer must still get a loan. Also we suspect a fair amount of the rise in pending sales are actually short sales that are just as likely not to close because they take so long to process and approve.
So in the end we still have a market that is unhealthy due to various external issues.
Anyone think more foreclosure moratoriums are coming around the holidays that could be another negative wrench?
We also suspect more families that are currently paying their mortgage are going to decide it is better to withhold payment. If we can’t turn the value around this negative feedback loop could get even worse.
Commercial real estate is a hammer that is going to fall in 2010 and add pressure
But remember our motto “More Problems = More Opportunity”
Good Investing
Sunday, November 1, 2009
Thoughts on the current market in Fresno
Deals at the lower end of the market are still very competitive with most listings going for over asking price. The biggest question we have is this current market for the lower end tight because of some artificail means or is it something more urgent that we need to take notice of.
At this point it feels very artificail, it feels like some just turned of the hose without telling anyone. The agents we work with don't have as many listings and speaking with our escrow we learned that active escrows are down 40% from last month. Something just feels very wrong.
We might be off base and we will reconsider our standpoint if listings are not up by the beginning of December.
Something else to note if you have some really big bucks is that for the first time we are seeing large apartment buildings foreclosed (50+ units).
Things are going to get very interesting next year (2010) as the apartment market implouds much like the single family housing market has this year.
At this point it feels very artificail, it feels like some just turned of the hose without telling anyone. The agents we work with don't have as many listings and speaking with our escrow we learned that active escrows are down 40% from last month. Something just feels very wrong.
We might be off base and we will reconsider our standpoint if listings are not up by the beginning of December.
Something else to note if you have some really big bucks is that for the first time we are seeing large apartment buildings foreclosed (50+ units).
Things are going to get very interesting next year (2010) as the apartment market implouds much like the single family housing market has this year.
Subscribe to:
Posts (Atom)