The Sellers Market is Over - Be Careful (Now What)

114 Replies

@David Song - Amen - I am trying to save people as I can see this coming in the data and some folks are going to go broke as hold times expand, prices drop, etc I saw so much pain last time and I am trying to help
@Charlie MacPherson the point of my article was to create awareness for investors to at least double check their numbers. I was not trying to say the sky is falling but simply watch out the market has changed and in the past that has caught people off guard and boom they went bust
@Lance Barnett I am a landlord and I welcome sellers markets being over. My experience says I lose more quality tenants in a sellers market than a buyers market as everyone thinks they can be rich buying a home but when houses go on sale no one buys them. Counter intuitive for sure but I bought the most and best inventory in a buyers market and I will do it again for sure
Originally posted by @Michael Zuber :
@David Song - Amen - I am trying to save people as I can see this coming in the data and some folks are going to go broke as hold times expand, prices drop, etc

I saw so much pain last time and I am trying to help

Unfurtunately, a lot of newbies on this site are still chasing a declining market.  In SF bay area, we had two months (August, Sept) price declines (month to month) already. This recent house that I saw yesterday is in a familiar area where I used to flip house (zip code 94080). I fliped one house right across the street in 2013. I know exactly how much it would have been sold a few months ago. Now it's down at least 10-15% from the peak.

I talked to the listing agent and she felt that the last 6 weeks there was a sudden drop in buyer activity, might be due to the increase in interest rate or other unknown factors.

As we are approaching winter months, the market typically will slow down and price will show further seasonal drop. Therefore, whoever bought in summer of 2018 in bay area has already lost about 10-15% equity as of now.

Timing is everything in real estate, wake up. Not cash flow. Anyone bought houses in 2006-2007 period, no matter how smart they were and how good the cash flows were, they were losing their shirt. I was told about a person who used to own over a dozen properties in bay area went bankrupt in 2009 crash. A very experirenced investor.

@Michael Zuber All excellent points. The newbies coming into the market are the ones that are going to get hit hard by the gurus and the 'experts' and the hype. They will feel compelled to get in and wholesale, flip and add rentals. But most will do it wrong and end up losing their money and feel burned and then scorn the industry and tell everyone they meet about their experiences. Its why BP is so important, to educate those who are new now about what a lot of us experienced 2007-2011. 

All real estate is local. So what happens in San Francisco in terms of the DOMs and Appreciation is not what is happening in my neck of the woods in Jacksonville, FL. I will convey that the only price point that has seen fewer Days on Market and high demand is the $150,000 and under segment. Below the city average for a starter home, so investors are still buying properties. I surmise this will happen for another 12 to 18 months until the sellers market really hits home. 

The housing supply in our area has begun to go from declining to increasing and by 2020, the local realtors are predicting 2020 to be a real buyers market. That won't help the Students who have 160k or more of 4-year college debt, but then again, I don't see people buying 4 or 5 properties now, flipping them to get an extra 20k of appreciation every other month.

According to NAR, 60-66% of the population is always going to be renting. There are people who would rather rent, not own, not deal with responsibility other than renting. There will always be burned out landlords, people looking to cash out, people needing to get out. Their timing may stink, but it happens. They may get less in 18 months than now, but they did not think about selling today.

The people I am ready to see get taken to the cleaners are the wholesalers that are greedy pigs. More than a few are pumping out properties for a quick 20k (in my area), inflating ARVs to ridiculous numbers and looking to take advantage of people like its 2004/2005 all over again. I've never purchased a wholesale deal for more than 5k, and never plan to do so for a SFH with 3 bedrooms. I'm waiting for the market to come down hard on the wholesalers that are the greedy ones. The market will weed them out, just a matter of time. 

Capital is cheap, money is cheap, I'm not worried about funds and money, that is the easiest thing to find once you get going in this business. 

According to NAR, 60-66% of the population is always going to be renting. There are people who would rather rent, not own, not deal with responsibility other than renting. . 

 It's opposite: one third of the population is renters, two thirds - owners

@Jack Bobeck Thanks for your post it's good to see some information about the my local market. As a newbie investor it is good to get insight from an experienced investor about where they think your local market is headed. I enjoy reading your posts they are very helpful.

@Marcus Auerbach Thanks for the market breakdown! It's interesting to see the market shift and when comparing past years we're all very excited to see where everything is going within the next few years. 

I feel like I read this 3-4 years ago

@Jack Bobeck - I think the people in the most trouble are the Flippers from the last 5 years as they have no idea how hard and fast the market can change.  Most wholesalers I work with don't actually own properties but instead control properties and thus will continue to burn marketing expenses as smart buyers dry up.

The world is changing and it is going to hurt some people bad

@Dustin P. Really 3 Years ago?  2015 was a great Sellers market and maybe one of the best ever.  But 10 Years ago you definitely read this before

Originally posted by @Michael Zuber :

@Jack Bobeck - I think the people in the most trouble are the Flippers from the last 5 years as they have no idea how hard and fast the market can change.  Most wholesalers I work with don't actually own properties but instead control properties and thus will continue to burn marketing expenses as smart buyers dry up.

The world is changing and it is going to hurt some people bad

 Its all about "culling" the herd.......I agree the flippers need cash to burn through the 5 other deals they have going on right now. 

I think it is hilarious how many people have posted stats of their market to state the market is not changing or correcting. These will be the same people unprepared for future changes/corrections. As @Michael Zuber posted, he has noted some “red flags” early and shared them. Ignore them at your peril and if you think the exact same factors are needed each time to warrant a market correction (such as inventory levels), think again. In decades past, a healthy market was said to be a 6 month supply. In the last decade, the new 6 months is 3-4. Here in Los Angeles, the market has increased so much and sellers continued to break price records in many areas, but practically over night, the numbers and ratios on actives, pending, and solids has flipped and sellers are dropping prices, DOM’s are increasing, and buyers have suddenly walked away. Some of this is seasonal, but a lot of it is a sign of a coming correction. You can deny it or prepare for it, your choice.

I noticed each of the 3 red flags pointed out in Michaels first post about a month ago and have since taken steps to prepare for the future. If I am wrong and it happens later rather than sooner, so be it, I didn’t lose much of anything but if I am right, I will have avoided some hefty negatives.

@Jack Bobeck What makes you say that the wholesalers are the greedy ones in this business? If I'm able to get a property under contract for a dollar and I flip that out to you for 50K, will you get mad at me for making the 49,999?? You wouldn't do business with a guy who doesn't leave enough spread for you but to call all wholesalers the greedy ones is doing an injustice to where you get most of your deals from

To add to my post above, I believe several of the factors occurring now are the following:

Buyers pool compressing

Seasonal

Stock market recent corrections

Interest rate hike (this was no surprise as the fed said they would be doing this all of 2018 but the media has spun it as a huge surprise).

Affordability index dropping close to concern levels (in my area of So Cal, can’t speak for rest of nation).

Talk on the street between agents in the know who have had recent Group meetings at their brokerages examining the trends and looking for ways to prepare for what has already started to happen.

@Will Barnard to improve affordability, there will be new credit scoring system - UltraFICO score based on cash in the bank. If the applicants haven't overdrew their bank accounts within 3 months - approved. That will be new 2006-07 all over again.

When that easy approval ends, then we will see real decline as a recession. Now it's seasonal decline of the real estate market and slight correction of the stock market

Don't forget the new tax law makes home ownership much less appealing and affordable for high value states like California. We have yet to see its full impact, but its an additional consideration worth noting. 

Originally posted by @Alex Shin :
@Jack Bobeck What makes you say that the wholesalers are the greedy ones in this business? If I'm able to get a property under contract for a dollar and I flip that out to you for 50K, will you get mad at me for making the 49,999?? You wouldn't do business with a guy who doesn't leave enough spread for you but to call all wholesalers the greedy ones is doing an injustice to where you get most of your deals from

 Alex - I am not mad about a wholesaler's greed, but I cannot wait to see them get taken to the cleaners. We can all search the internet and learn what a property sold for and is now listed. So the greed factor catches up with people. 

Newbies - It is worth the extra 5 minutes to see what a wholesaler paid for a property! 

Originally posted by @Jack Bobeck :
Originally posted by @Alex Shin:
@Jack Bobeck What makes you say that the wholesalers are the greedy ones in this business? If I'm able to get a property under contract for a dollar and I flip that out to you for 50K, will you get mad at me for making the 49,999?? You wouldn't do business with a guy who doesn't leave enough spread for you but to call all wholesalers the greedy ones is doing an injustice to where you get most of your deals from

 Alex - I am not mad about a wholesaler's greed, but I cannot wait to see them get taken to the cleaners. We can all search the internet and learn what a property sold for and is now listed. So the greed factor catches up with people. 

Newbies - It is worth the extra 5 minutes to see what a wholesaler paid for a property! 

How does a wholesaler get taken to the cleaners, they hold a contract. Which they assign, if they don't have a deal they cancel the contract. There is no real estate owned by them to lose money on should values drop. 

Furthermore, being excited for the failure of another person is a sad place to be. That could be worth examining. 

Originally posted by @Jack Bobeck :
Originally posted by @Alex Shin:

 Alex - I am not mad about a wholesaler's greed, but I cannot wait to see them get taken to the cleaners. We can all search the internet and learn what a property sold for and is now listed. So the greed factor catches up with people. 

Newbies - It is worth the extra 5 minutes to see what a wholesaler paid for a property! 

 Some wholesalers have marketing budget $1-3K/month to find that contract.

It's like when you see a flip house, you'd say:"wow....they bought it for $20K and selling for $200K?!?"

However, such flip get sold in few days - because it worth it.

Same with wholesale contract - some people do it for living and I'd buy a house well below market rather than drive for dollars or mail thousands letters every month to get such a house.

Now I gave to because there are no decent wholesalers who know what they are doing.....but I don't wish all of them to go bankrupt - market will correct everything

relevant articles

https://www.cnbc.com/2018/10/24/new-home-sales-sep...

https://www.abor.com/statssep18/

https://money.cnn.com/2018/08/28/news/economy/hous...

http://time.com/money/5202597/economic-indicator-h...

I agree that the market has slowed but i think it has to be broken down by area. These are factors affecting home sales right now:

1. hurricanes/weather

2. interest rates

3. inflation

4. midterm election

5. regional concerns (emigration vs immigration) Austin TX Metro has remained strong compared to other markets

6. tariffs scare and costs on building materials

7. consumer confidence

8. home values

9. lack of real wage growth vs inflation

10. property tax increases due to home prices from sales (TX taxes are high on homes)

11. increased insurance costs 

12. seasonal cycles

I am sure i left some out.

Bottom line= some markets are showing signs of a housing recession (typical culprits) and some are just slowing down

You would really have to have your head in the sand to think markets will remain as strong as they have been even adjusted for seasonality with all the data available. It is definitely time to rethink traditional easy money investment strategies. I love these times personally. Many easy money investors will be flushed which leaves more deals available for me. 

Most new home builder stocks and etfs have been getting hammered. These stocks are typically leading indicators for recessions. 

there is a relationship between housing starts, builder stock performance and recessions 

Recessions

my opinion only

Disclaimer: I do not know anything!

Excuse grammar! I wrote this quickly.

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