Housing Bubble? Hard Finding Deals? What's Your Market Like?

88 Replies

Originally posted by @William Wiebolt :

We own a couple hundred SFRs in AZ and FL that we acquired in 2012-2013, and are currently flipping about 25 at a time in AZ. We are increasing our exposure in AZ flips, looking for higher end properties with large spreads ($100k+) and mixing in simple flips under $250k. AZ is very hot, FL has not popped yet. FL is seeing lots of pressure from builders, so average sellers are having difficulty offering a nice enogh home for people to want to pay for. Builders are offering up to 5% incentives to both the agent and the buyer, so they really have taken a foothold. I see opportunity there also, more on a buy & hold for 2 years then sell. I think AZ has 1.5 years left before a pullback but we will be out before that. We're slowly liquidating our rental portfolio, and flipping properties in the mean time.

In both the AZ and FL markets (and other southern markets with heavy investor presence), it is absolutely crucial to watch what Blackstone, Colony, and American Homes 4 Rent are doing. They own 10s of 1000s of homes (maybe 100ks?) in those markets that they are currently holding as rentals. These homes are the same kind we have as rentals, the typical starter home which is selling for $180-220k in AZ right now. There is excessive demand in that range right now and limited supply which is in part due to the hedge funds and smaller companies like us who are holding on to them and using them as rentals.

In terms of affordability, I think AZ and FL can both sustain an overnight increase to 6% on mortgages, and a 15% increase in house prices. Median income in those areas is increasing, and there have been some interesting investments made by companies like Intel (7 billion in Chandler I believe). In addition, more people are retiring every day, which is also a good thing for the southern markets as baby boomers from the north seek a warm place to retire. Dipping my toe into the 55+ markets as I see deals come through, I think there is a real demand for anything done right. We don't skimp on our flips, and we've had good success in terms of days on market and contract ratio.

My two cents. I have followed BP for awhile, but haven't posted. I'm from Fargo, ND and in the event anyone is considering this market for any reason,  I would strongly try to talk you out of it. Vacancy rates up, prices way too high, etc. 

Thanks all -

William Wiebolt

I can concur that AZ is hot in many ways. Sold some SFRs there for triple what I paid 5 years ago, all to FHA buyers, all priced to perfection for the comps, all went for over asking price, and all somehow magically apraissed (not sure if I was more scared or pleasantly surprised at that outcome).

Not sure about FL, but my second hand understanding is that because of the local laws and how they are implemented, it being a judicial foreclosure state with a boom or bust RE market, it usually takes longer to work off foreclosure backlog and recover from a big downturn like we saw and also as a result peaks later in the cycle compared to other places. Can anyone concur or add to this out of curiosity?

Jay.   yes, blueound. if you remember the area they tore down the menards right next to I 94. It's funny how this development concept is fairly new to our area and it's been done years ago in CA. We're not exactly trendsetters here in Wisconsin lol. good luck with your project. Keep me updated in the future if this chat had an impact on your development.

Originally posted by @Jeff Schneider :

@Ryan Kraft just curious what you are seeing in your market that is similar to 05-06. Is it just supply shortage, price increases or sketchy things normal buyers wouldn't do when buying a home like buying their primary sight unseen?

There are a quite a few people worried about pricing in Phoenix but in my opinion it's a supply and demand thing. I don't see any shenanigans going on now that were going on back in 05-07. In March of 2016 our days of inventory for single family homes was 93, this March it is 77 so we have an 18% drop in inventory with a increase in demand. In 2016 we saw a lot of folks come to the table that reached the point their past foreclosures so they could purchase again, 2017 is going to be another one of those years so I see demand increasing. Demand can increase/decrease at a much faster rate than pricing/inventory and demand can be influenced faster from outside sources like the stock market, fear etc. The main risk I see for Phoenix is influence from an outside source killing demand and if it happens, I don't see decreases like we did in 08 when everyone quit paying their mortgage. There are many areas of Phoenix that are still 20% or so below the high prices of the free money, no qualify needed days so I wouldn't say we're at a ceiling.

My opinion is that limited supply in Phoenix is temporary ... there are miles and miles of empty desert lots to meet demand. Doesn't mean it will crash, but tends to put a ceiling on prices IMO. I agree that demand is strong, and more real than artificial demand created by loose financing, though that is starting to slowly creep back in too, just not as crazy (yet) as 05-06.

We are in central FL, so commenting directly on Miami is not something I can do with any level of accuracy. 

Regarding the central FL market, I attribute the price drops to builders taking over the market. They are offering real estate agents bonuses for bringing clients to them, and offering buyers incentives to close. So that makes it very tough for the average family to compete when they try to sell their 5 year old home without the latest and greatest upgrades. The builders got ahead of us down there; we beat them in AZ. It's all good though, rent is about 20% higher in FL than it is in AZ so we'll still eat. And there is an opportunity right now to pick some houses up from sellers in these developments with a strong builder presence.

If you are curious what I'm talking about, just check the area out that these houses are located in. Click on a couple of the new builds that are for sale and read the listing descriptions - their giving everyone goodies. The development is called Providence and its in Davenport FL. 

I'm very bullish on FL market though, at least the area we are in. I have noticed it has followed AZ market since we got in in 2012.  Typically about 12-18 mo behind. Now the builders are holding it down by doing things that are unsustainable. I'm definitely going to buy a few more houses in the area and hold them for a year or two. It's much cheaper for consumers to buy in FL than it is for them to rent, and we have had a large amount of demand from the tenants wanting to buy our hosues from us. So it's coming, people are starting to come out of their foreclosures and getting comfortable with buying.

Regarding condos, I have had good luck in AZ but only own a few in FL. Haven't tried to sell them yet, so I don't really know. I do believe Miami was hit harder on the upswing by outside money though, so the condo market could have gotten pushed too high. If you have an address for me I'm glad to look. 

They have some crazy HOA laws in FL though, and the fact that their state is a judicial foreclosure state vs nonjudicial (AZ) is also a consideration. Govt. does everything slower and less efficiently than private sector, so naturally AZ cleared out their glut of foreclosures much quicker than FL. That is what I attribute the lag time to, if you look at AZ vs FL foreclosure rates you'll see its lagging behind about 12mo or a little more.

Cheers

@David Faulkner wow you guys type fast... I agree there will be a point in the not so distant future where either builders nut up and throw their hats in the ring in AZ, or Blackstones of the world decide it is a good time to start unwinding their portfolios, or both. I watch their supply very closely.

Agree with you on the financing piece - I just heard today for the first time that people are waiving appraisals and such. There is no way the market can continue rising as fast as it is now. I think we will go through previous highs and set new ones, but I wouldn't risk anyone's money finding out. It is also interesting to me that the foreclosure auctions have gotten so crazy. In my opinion people are paying retail for most of these properties. Until this year, we had literally bought every property we own (except maybe 20) from the auction. Never had an issue. I had to start working with wholesalers to pick up properties at a reasonable margin and I think over the last month we've picked up more than 50% from wholesalres and off market.

It's a crazy market, but a lot of fun. Just gotta keep buying them right, then there's no issue. I will watch closely what our competition ends up doing

Originally posted by @William Wiebolt :

@David Faulkner wow you guys type fast... I agree there will be a point in the not so distant future where either builders nut up and throw their hats in the ring in AZ, or Blackstones of the world decide it is a good time to start unwinding their portfolios, or both. I watch their supply very closely.

Agree with you on the financing piece - I just heard today for the first time that people are waiving appraisals and such. There is no way the market can continue rising as fast as it is now. I think we will go through previous highs and set new ones, but I wouldn't risk anyone's money finding out. It is also interesting to me that the foreclosure auctions have gotten so crazy. In my opinion people are paying retail for most of these properties. Until this year, we had literally bought every property we own (except maybe 20) from the auction. Never had an issue. I had to start working with wholesalers to pick up properties at a reasonable margin and I think over the last month we've picked up more than 50% from wholesalres and off market.

It's a crazy market, but a lot of fun. Just gotta keep buying them right, then there's no issue. I will watch closely what our competition ends up doing

 Yep! Excellent point about hedgies deciding to cash out ... they may very well leave just as quickly as they came if they decide there is not much more juice left to be squeezed from this cycle. I can almost guarantee that they are not in it for the long haul like some small B&H investors.

One of the things that I love about SoCal is that even if builders want to nut up, there are practically no empty lots near the prime areas left for them to build out, they can't build into the ocean, so the only place left to go is up, which they do but that is really expensive and time consuming, especially with CA building regs ... so regardless of if the market is super hot or just kinda hot (which is the SoCal equivalent of cold), there always seems to be a persistent shortage of housing here. And so long as the sun is shining a perfect 70 degrees in winter and 80 degrees in summer, demand stays high. AZ is more like 90 deg winters and 120 deg summers, and plenty of beach just no ocean, but at least you're not shoveling any snow, LOL. I'm joking, I actually seriously love Phoenix and would've gladly held if they were performing and I could find honest and competent management, but I could not after 5 years so I cashed in for 3X. If you can't buy them right, then you sure as heck can sell them right, and you don't even necessarily need to own them to sell them either ... that's what RE agents and wholesalers do, they sell RE that they don't own. As the old wall street adage goes, there's always a bull market somewhere.

correct me if I'm wrong on the blackstones and the hedge funds out there. they are making money off the bonds or cdo's they've developed based on the performance of rent payments not necessarily based on the value of the property. I don't recall rents going down drastically during the crash. In fact, they went up in some locations (around my market anyway) . So theoretically looking for them to sell might not be a wise decision when trying to predict a market correction???

@David Faulkner   At least Norris understood what a loser TExas was for out of state landlords and the sky high property tax's and foundation issues.. he makes some compelling cases against Texas

Originally posted by @Ryan Kraft :

correct me if I'm wrong on the blackstones and the hedge funds out there. they are making money off the bonds or cdo's they've developed based on the performance of rent payments not necessarily based on the value of the property. I don't recall rents going down drastically during the crash. In fact, they went up in some locations (around my market anyway) . So theoretically looking for them to sell might not be a wise decision when trying to predict a market correction???

I'm not really 100% sure what all the business models they are running are, but the logic does not make sense to me ... if they were into it for the cashflow alone and not the appreciation, then wouldn't they have gone for commercial more like a REIT instead of residential, and particularly single families? Also, I personally think in the beginning they were arrogant in their abilities to manage large portfolios of single families, especially in the quality of neighborhoods I saw them buying ... I've also seen how poorly hedge fund assets in general have been managed and the condition of the inventory they hold in the sub markets in Phoenix I've seen them operate in ... so, I'm keeping an eye out of curiosity and perhaps as a future buying opportunity, and I already got out in those markets and I did not use hedge fund selling as an indicator, though ... I figured they weren't performing up to spec, they were a pain in my behind, and I was sitting on a nice gain, so I sold figuring it is better to be early in that case than late. Though I'm no expert the logic presented above does not ring true to my gut feeling and on the ground observations, but I could be wrong ...

Originally posted by @William Wiebolt :

@David Faulkner

As a parting thought.. I've been searching for a market to get into that was hammered by coal over the last 8 yrs. If anyone is from coal country or knows of a good spot to take a look at I'd appreciate a heads up. 

Not sure of any depressed coal country markets, but that strategy would likely violate one of my rules for REI: never buy in a market with decreasing population.

Originally posted by @Jay Hinrichs :

@David Faulkner  At least Norris understood what a loser TExas was for out of state landlords and the sky high property tax's and foundation issues.. he makes some compelling cases against Texas

Unfortunately, he learned the hard way on TX as I understand it ... I learned out of state the hard way in Phoenix, though I aught not complain about any hard lessons whereby I triple my money in five years ... just goes to show that buying right forgives a lot of otherwise deadly sins :)

I would add that Canada isn't currently facing a downturn, Vancouver was hit a little by a tax on foreign buyers last year but news is its getting hot again, Toronto is insanely hot with prices up more than 25% year over year. There's no inventory and people are afraid to sell because they won't be able to buy their next place.

I see prices in some areas more than 20% higher than in the fall. It is absolutely crazy. I saw a house for sale for $1.2 million that sold for $2.3 million. I offered $1.15million on a place listed for $799k, and it sold for $1.38 - there were 32 offers.

I'm still buying, but it really is a full time job here to find anything at a decent price.

@Ryan Kraft you are correct about blackstone. My thought is that they do not anticipate holding the assets into perpetuity, in fact without saying too much I am fairly certain that is the case. They weren't creating a new asset class, they were buying undervalued assets and seeking appreciation. They always find a way to get as much leverage on the things as possible, so they can make as much money on the way up as possible. Right now we've all been squeezing tenants, pushing the rents up. The rents are still weak relatively speaking, but at least they cashflow at 80/20 financing now.

If you know something I don't know, fill me in. But I am fairly confident in saying they will sell the properties over the next 3 years. Whether they work a deal with an Opendoor or something like that, I don't know. I just know that this was the plan 2 months ago. I use property radar to track all the IH2 and other entities. So far nothing is moving. I'll definitley post if I see movement or if I hear anything.

I'm not necessarily waiting for them to sell. Moreso, I'm watching for it in case it happens earlier than I expect. Because if it does start happening, I will either need to liquidate quickly or lock in some long term debt and rent the houses. I plan to be out of the AZ rental market in the next 18 months, and I think that should be fine. 

@Francisco Garcia Jr Interested in your thoughts. I have opportunity to pick up 4 houses in Ancala, but they would need about $100-150k each in my opinion to get them presentable. My gut has been telling me we need to get into the higher end market a little more than we are right now, I would think it should follow eventually here. Are you talking the new builds in PV where they are knocking houses down and rebuilding? Or what developments in Scottsdale are you talking?

Our rentals are almost all in queen creek. We're flipping all over the valley, but primarily in the Chandler, Gilbert, Mesa, area. 

David Faulkner   I don't know their business models either but I am sure appreciation was a component to those companies initial investment strategy. The securitization on Wall Street component certainly seems like a long term steategy to me. A less gov regulated and possibly higher leveraging capacity investment seems like a good reason to not sell those properties. I'm of course only speculating here as I'm not the go-to person on that but it sure is fascinating. 

Originally posted by @Ryan Kraft :

coal country could make sense.  Trumps slogan in those regions was practically dig baby dig. 

Problem is coal fired power plants take 10-15 years to build, and last I checked there were 0 being built in this country.  With a large number being mothballed.

The new administration likely goes soft on new regulation enforcement, but with a very low price of natural gas, and general anti coal sentiment out there, I don't see a swing back to coal again anytime soon.  At least not without some sort of major technology breakthrough with regard to CO2.

I think you may see job losses slow down or stop in coal country, but even if coal output remains the same, the industry continues to innovate and needs significantly fewer employees .  I don't see coal country ever getting back to where it was from a population perspective.

@Ryan Kraft @David Faulkner Exactly right on the Trump call. North Dakota just went through an oil boom, and while I don't expect anything that crazy to come out of coal country, it has been a LONG 8 years for producers. The ones who survived without filing bankruptcy are definitely antsy to generate some revenue and pay down their bridge loans. The ones who are reorganizing obviously have an incentive as well. I am unfamiliar with coal country but have made a few calls. There is some foreclosure activity from what I can tell. Need to do more research.

Another interesting thing to keep in the back of your head. My plan is to invest in farm land once we are cashed out of the AZ/FL markets. If it wasn't for a bin buster crop this year farmland would be down further than it is now. Some areas around here have lost 40-50% of its value, and there is always a market for renting it. I think we've got 2 years of declining land values, maybe less if Le Pen wins in France. But too early to tell. In any event, keep it in the back of your head - it's a very attractive investment for both the financing/cashflow/appreciation side as well as the tax benefits.

Originally posted by @Alan Grobmeier :

@Jay Hinrichs  It would appear to me that you can't.  I would say get govt out of everyone's business.  I saw a post earlier today that in MN they are making landlords take section 8 tenants.  Since stuff like that seems to be the trend, I guess govt going away is not likely.  

 Seattle has just enacted a LAW that you have to take the First applicant. Social Justice at work.

Cranes in the air beware. Miami has an immense of projects on the expressway and they are overbuilding. Thus, our population has increased. The rule of thumb is you shouldn't spend 35% of your income on rent. Miami is at 57% according to the Miami Herald. There are many open developing permits as of now. We are 7% cap rate at best with commercial.

My market is nice and steady. There are a couple areas in town that see bidding wars, but nothing crazy.

Lot's of growth, jobs, and re-investment into infrastructure. New construction is booming.  Wilmington has literally exploded in population and the city has done a great job managing all of it. I usually hate the government, but I feel very confident in our leaders here!

@David Faulkner yes, that's the HQ, these are national statistics. KW economists are actually really concerned about what they call the next market shift. Excluding major subprime mortgage crisis markets are always cyclical - peaks follow troughs and so on. We are in a strong sellers market and it's hard to say if we are in stage 3 or 4 - which is the peak before the downturn. Personally I am a little bit more optimistic, because the demand is not going to disappear over night and the inventory shortage will take years to correct. As long as nothing major happens on a political or global economical level the current market state should remain for a while.