The flood of investors into the real estate market is no tiny trend. This has been a big force in the market for a few years now. Someone in the real estate industry commented in an e-mail that FHA buyers are viewed as the new subprime when it comes to the hierarchy of buying a new home. They didn’t mean this in a derogatory sense but meant that if they have an all cash offer with a quick close versus a loan with high leverage, chances are the all cash offer will win out. This is simply the case in this low supply market where the last thing people in the industry want to do is extend the process trying to close on a property only to see it fall out of escrow. With an all cash close, you can get the deal done rather quickly. We’ve never seen this level of institutional buying in the housing market for this prolonged of a period. What are the implications of Wall Street’s current fascination with rentals?
In general, Americans are very poor when it comes to saving money. One of the stunning revelations that came out of the financial crisis was that the median household net worth fell from $126,400 in 2007 to $77,300 in 2010. What was even more interesting in the report put out by the Fed Consumer Survey was that median home equity fell from $110,000 to $75,000. Think about this for a second. Most of what Americans have in what we would consider as wealth is locked up in housing. In fact, non-housing equity wealth was $16,400 in 2007 and fell to a paltry $2,300 in 2010. Is it any wonder why so many Americans depend on Social Security deep into retirement as their main source of income? While the stock market has rallied dramatically from the lows reached in early 2009 the housing market is still far away from the peak. What is interesting is the lack of move up buyers in the current market. With such little inventory I’ve been seeing the first-time home buyers diving in simply with maximum leverage. Americans if given the chance would borrow a million dollars at zero percent (the big banks are doing this). What does the future hold for the next wave of young home buyers?
The amount of investor buying hit a record in 2012. Last year for California over 32 percent of all homes sold for all cash based on property records where no mortgage was recorded with the sale. Some of these homes went to owner occupied sales but the vast majority based on “absentee buyers†signifies that the majority went to investors. The sustainability of investor demand is contingent on the perception of future prices gains. The trend from 2007 has been unmistakable and this is a countrywide phenomenon. Talking to various investors, some are pulling out of certain markets given that yields are weak. Some are still buying into momentum with the intention of selling the place shortly given that rental yields are lower. Keep in mind these are all cash buyers, not mortgaged buyers so lower interest rates only incentivize their actions if there are lesser investment options in the market. I would imagine the rising stock market would pull some investment money back into Wall Street. The all cash buying trend is significant but after five years, will this continue into the next few years?
Desirable areas in Southern California have always carried some sort of premium. Yet the days of bidding wars and having to make offers with limited contingencies are back. Agents have told buyers that unless they make a bid that day with a cushy reserve, they are likely to lose out. Culver City is another prime example of how insane the current market has become. How crazy are things? Inventory is down by a stunning 75 percent from two years ago and the median list price is up over 100 percent. There is obviously no sustainability to this current market trend and the story continues to be the dwindling inventory causing people to lose their sanity and dive into homes with no contingencies and fighting over a home as if they were bidding on a baseball card on eBay. It is important to see what is going on in Culver City currently since this is a desirable area that is seeing some fascinating trends.
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