patrick.net

HeadSet says

Location? Or just a seller who is out of touch with the market?

Exactly, as location is usually the buyer's first requirement such as location's distance to work and family. That was the case when I was working in Manassas, VA.

I did not mind driving 35 minutes from the western boundary of Fauquier County near Blue Mountain to drive to work.

I paid same price for a 2 acre detached house as I would for a townhome in nearby Centerville, VA.

.

ad says

I did not mind driving 35 minutes from the western boundary of Fauquier County near Blue Mountain to drive to work.

You lived in a beautiful area. When I travel through that area, I always go on Rt 17 through Delaplane-Paris.

Investors officially abandon Housing Market in 2023 (49% Drop in Purchases).

It's official: real estate investors have abandoned the Housing Market in 2023.

With data from Redfin reporting a colossal 49% YoY decline in investor home purchases in the first quarter of 2023. This is the biggest annual decline in investor demand in US history (at least going back to 2000).

Investors purchased 41,000 homes in the counties that Redfin tracks in Q1 2023. Which is not only a 49% drop from last year, but also a significant decline from pre-pandemic levels.

Overall investors purchased 18% of the homes that sold in the quarter. Which is a slightly higher share than they were doing before the pandemic.

However, the overall drop in absolute sales indicates that the short-lived era of investor domination of the US Housing Market is over.

Rising Interest Rates nuked Investor Demand
Going back 12 months ago I was predicting that Wall Street Investors would exit the US Housing Market.

And my logic was simple: higher interest rates were going to make being a landlord unprofitable. And cause the Wall Street buyers to drop out. A reality which you can see clearly on the graph below, which compares the 30-Year Mortgage Rate in America to the Cap Rate for investors (the unlevered profit yield from the rental).

From 2015 to early 2022 the Cap Rate was higher than the Mortgage Rate. Meaning that Wall Street investors had a big incentive to take out debt and buy up homes. Since they were guaranteed to make money after paying their lender (in the business we call this spread "accretive leverage”).

But now this dynamic has completely shifted. Mortgage Rates started to skyrocket in early 2022. And by April 2022 the Mortgage Rate was officially higher than the Cap Rate. Which is precisely the point in time that investors began to make fewer offers on home.

Fast forward to spring 2023 and the situation is completely untenable for investors. The Mortgage Rate is 6.9% and the Cap Rate is 4.6%. Meaning that any investor who takes out debt to buy rental homes is guaranteed to lose money after paying their lender (we call this "negative leverage").

(Note: some people think mortgage rates don't matter for Wall Street investors because they "buy in cash". However, the underlying source of the cash is usually debt. Often raised from the Mortgage Backed Security market. With the debt priced at a similar interest rate to the prevailing 30-year Mortgage.)

Investors bailed everywhere. But especially in the Sun Belt.
The other interesting trend revealed in this Redfin report is about where investors bought fewer homes.

Metros with Biggest Decline in Investor Purchases
Atlanta: -66% decline
Charlotte: -66% decline
Phoenix: -64% decline
Las Vegas: -60% decline
Nashville: -60% decline
Jacksonville: -57% decline
Tampa: -54% decline

The investors bailed most on all the hot Sun Belt markets they piled into in 2020 and 2021. The markets they said were great long-term places to buy because of "all the people moving in".

Well, that was a bunch of baloney. All it took was some Jerome Powell rate hikes to sour investors on the idea of buying in Sun Belt boomtown cities. So much for these investors having a "long-term strategy".

What's even more interesting are the markets that experienced the lowest decline in investor purchases. It's basically the reverse of the above list.

Metros with Lowest Decline in Investor Purchases
Baltimore: -9% decline
Providence: -10% decline
Seattle: -16% decline
Milwaukee: -22% decline
Cleveland: -23% decline
Cincinnati: -25% decline

With the exception of Seattle, the markets that held investor demand the best were Northeast and Midwest "rust belt" areas. These areas largely go ignored in the national real estate discussion with very few big institutional players raising capital to buy homes there.

Which is precisely why they held up better. These markets are less reliant on the ebbs and flows of where Wall Street wants to put its capital. Rather, they're supported by local investors with a firmer knowledge base and tie to the area.

Going forward: it's all about Cap Rate
If you are an investor, or someone who wants to be an investor in the future, I'll say this: all hope is not lost. There are still opportunities out there and some markets where you can find success.

However, your main guidepost for finding these markets and deals needs to be about Cap Rate. That is, how much rental profit you earn from the property (net income / purchase price). Because in this higher interest rate environment, cash flow is going to become the key measure of success.

High cap rate markets/deals give investors this cash flow from Day 1. You can actually buy a rental and start putting money in the bank right away. Rather than having to hope and pray for rent growth and appreciation into the future to "save your investment".

The map below shows the metros in America color-coded by their Cap Rate. And what you can immediately see is that the highest Cap Rates (rental profits) are found in the Midwest and Deep South.

Whereas the lowest Cap Rates are in the Mountain / West regions of America, as well as select Northeast markets. You can access this data for yourself by going on Reventure App and selecting "Cap Rate" under premium data points.

And just so you can understand these differences practically, let's compare two markets: Pittsburgh, PA and Phoenix, AZ.

An investor looking to buy a home in Pittsburgh would be looking at paying around $200k for the typical house and could expect to earn around $14k in net income before paying interest. Good for a 7.2% unlevered return.

Metro: Pittsburgh, PA
Purchase Price: $198,928
Net Income: $14,285
Cap Rate: 7.2%

Now, let's compare that to the experience of an investor who wants to buy in Phoenix. They would have to pay around $435,000 for the typical house and they'd take home $21,000 in net income before interest. For a measly 4.9% cap rate.

Metro: Phoenix, AZ
Purchase Price: $435,984
Net Income: $21,367
Cap Rate: 4.9%

If this investor is using mortgage debt to facilitate the transaction, they will likely be losing money in Phoenix after paying their lender. And desperately praying that rents in Phoenix will surge in coming years to bail out their investment and make it profitable.

Low Cap Rate Markets at the start of a long Bear Market?
No wonder investors are bailing on Phoenix. It just doesn't make sense to buy there. And ultimately I think we could be at the start of a long bear market for these expensive, low Cap Rate markets.

Especially across California. Where you can see that metros like San Jose, Los Angeles, and San Diego offer investors miniscule cap rates ranging from 2.5 to 3.5%. Those returns are less than what someone could get by buying a treasury bond.

Other markets with low cap rates include Austin, Seattle, Salt Lake City, Portland, and Denver. I suspect these areas are in for an investor bear market so long as interest rates remain elevated.

These markets will also likely have lower regular homebuyer demand going forward. Because a low cap rate essentially means that home prices have grown a lot faster than rents. Indicating that it's cheaper for households to rent in low cap rate markets than it is to buy (something you can confirm on

Reventure App by clicking "Rent v Buy Calculator" under premium data points).
So long as it remains significantly cheaper to rent than to buy, households will sit on the sidelines and wait for home prices and mortgage rates to drop further.

Wall Street bailing is a WIN for Regular Homebuyers
Lastly - we need to acknowledge how this collapse in investor home-buying is a WIN for the regular homebuyer in America. Especially in metros like Charlotte, Atlanta, Phoenix, and Jacksonville, where investors lost the most market share according to Redfin.

In a metro like Charlotte investors went from purchasing 33% of the homes one year ago to only 18% of the homes in Q1 2023. Similar declines in investor share (gains for regular buyers) occurred throughout much of the Sun Belt.

Of course - homebuyers in these cities are still unhappy. Because they see prices and mortgage payments that are way too high. Far beyond what they can afford in many cases. They also see low inventory levels and are frustrated from 2+ years of searching for the right home.

And ultimately this frustration is understandable. The Housing Market is frozen right now and a tough slog for both buyers and sellers. However, the thing to remember is that housing downturns take time to play out. Often 4-5 years. And we are just now exiting Year 1 of this housing downturn.

Note that back in the mid-2000s bubble the investor purchases peaked in 2005, a good three years before prices began declining substantially. The decline in investor purchases was a leading indicator about what was coming for the market overall.

Ultimately home prices and mortgage rates still have a long way to go down before they reach levels where they entice both investors and regular buyers to come back into the market.

https://www.reventure.app/blog/investors-officially-abandon-housing-market-49-drop-in-purchases

Bitcoiner says

zzyzzx says

Fingers crossed. Would like to buy another rental at a discount soon.

That sounds weird. You invested for future equity even to the degree you'd take a cash flow loss but now you'd be happy to see all of your sweet equity disappear?

Sounds like investors are still purchasing.

Wonder what happens when they start selling.

Bitcoiner says

equity in my homes going up or down doesn’t mean much to me

So the dopey Biden administration floated out the idea of taxing unrealized capital gains, so maybe you can claim unrealized RE losses, if it goes that way, on your taxes. :>))

Bitcoiner says

Sry I am not following. Why would my equity disappear? I am not selling any real estate. In fact I plan on holding my RE and hand it down to the kids. I root for lower prices so I can buy more. equity in my homes going up or down doesn’t mean much to me for the next 5 plus years. I can’t do a cash out refi with these high rates and I actually don’t plant to refinance for a while anyways.

I think you might be a Realtor...it's ALWAYS a good time to buy. Suzanne researched it.

Bitcoiner says

Now they are selling houses in my neighborhood for 450-500k more than what I paid. Get this big smile everytime i think about it.

Is Bitcoin still going to hit $100,000?

Bitcoiner says

The rents I have seen and I charge are 2.2k-2.4K for 1500-1800 Sqft in the west valley.

Yikes! Have long have you been charging that much? I only paid $1550 for our Glendale place at just over 1500sqft with pool. Had an agent show us some rentals as part of my relocation package, and he tried to tell me I'd never find a pool for under $1600. And from what I remember, the further west you go, the cheaper, and larger the housing. Over 2,000sqft for around $1,700. And this was just three years ago.

Looks like things haven't changed that much, not sure why anyone would pay over $2,000 to live outside Scottsdale...
https://www.zillow.com/maricopa-county-az/rentals/?searchQueryState=%7B%22pagination%22%3A%7B%7D%2C%22usersSearchTerm%22%3A%22Maricopa+County%2C+AZ%22%2C%22mapBounds%22%3A%7B%22west%22%3A-113.33249520703126%2C%22east%22%3A-110.99790048046876%2C%22south%22%3A32.81029779712092%2C%22north%22%3A34.22536616414657%7D%2C%22regionSelection%22%3A%5B%7B%22regionId%22%3A2402%2C%22regionType%22%3A4%7D%5D%2C%22isMapVisible%22%3Atrue%2C%22filterState%22%3A%7B%22fsba%22%3A%7B%22value%22%3Afalse%7D%2C%22fsbo%22%3A%7B%22value%22%3Afalse%7D%2C%22nc%22%3A%7B%22value%22%3Afalse%7D%2C%22fore%22%3A%7B%22value%22%3Afalse%7D%2C%22cmsn%22%3A%7B%22value%22%3Afalse%7D%2C%22auc%22%3A%7B%22value%22%3Afalse%7D%2C%22fr%22%3A%7B%22value%22%3Atrue%7D%2C%22ah%22%3A%7B%22value%22%3Atrue%7D%2C%22sqft%22%3A%7B%22min%22%3A1500%7D%2C%22beds%22%3A%7B%22min%22%3A3%7D%2C%22baths%22%3A%7B%22min%22%3A2%7D%2C%22apco%22%3A%7B%22value%22%3Afalse%7D%2C%22apa%22%3A%7B%22value%22%3Afalse%7D%2C%22con%22%3A%7B%22value%22%3Afalse%7D%2C%22tow%22%3A%7B%22value%22%3Afalse%7D%2C%22mp%22%3A%7B%22max%22%3A1900%7D%2C%22price%22%3A%7B%22max%22%3A370493%7D%2C%22sort%22%3A%7B%22value%22%3A%22days%22%7D%7D%2C%22isListVisible%22%3Atrue%2C%22mapZoom%22%3A9%7D

Bitcoiner says

GNL says

Bitcoiner says

Now they are selling houses in my neighborhood for 450-500k more than what I paid. Get this big smile everytime i think about it.

Is Bitcoin still going to hit $100,000?

I recommend we just talk RE in this thread.

Hahahaha

@Bitcoiner

My point is 1. you were wrong about bitcoin and 2. you lucked into RE. No one predicted what happened between 2020 and 2022.

@Eman is a much more reliable source of information because he gives much better information and it is not a stretch, at all, to believe he did his research in 2010(?) and went full force into RE.

zzyzzx says

Last quarter of 2023 will be interesting, with 2024 elections in November. Let's go Brandon.

gabbar says

zzyzzx says

Last quarter of 2023 will be interesting, with 2024 elections in November. Let's go Brandon.

I have a commercial realtor client and he says commercial real estate is doing very well. He/we are in northern Virginia.

GNL says

gabbar says

zzyzzx says

Last quarter of 2023 will be interesting, with 2024 elections in November. Let's go Brandon.

I have a commercial realtor client and he says commercial real estate is doing very well. He/we are in northern Virginia.

@GNL,

I think 2 asset class, that will get hit harder than others, are office and retail although Arbor had to foreclose $230M in Class C multifamily apartments from a syndicator in Houston.

We haven’t felt it here in San Jose and Bay Area in general.

This whale in my market is trying to flip this turnkey building for 4.4 cap. Who is going to pay that in the current market? It’s negative leverage right off the bat with NO upside potential. This pocket/street is weak too for the pricing.

Funny this deal came across our desk last year. We offered $5.2M for it. We believe we could make it worth $7.8-$8M when done. The listing agent was whispering $5.5-$5.6M to the deal to go down. Then out of nowhere this buyer paid $6.8M for it. We were shocked.

Eman says

This whale in my market is trying to flip this turnkey building for 4.4 cap. Who is going to pay that in the current market? It’s negative leverage right off the bat with NO upside potential. This pocket/street is weak too for the pricing.

I imagine there's an equation I could use to figure out the asking price? What is he/she/they asking for it now?

@GNL,

$9.35M. His pro-forms is pure horse 💩

I know both agents. Bought something from Mitch before. Haven’t been able to strike a deal with Carlos….yet. Nice guys. They’re sharks, but the more “ethical” sharks. 🤪

Residential agents are like Walmart and Target thieves while commercial agents are like politician thieves. When you’re swimming with 🦈 🦈, you’d better know where you stand. It’s a brutal world out there.

So, buying Tbills is better then buying an apartment building!

GNL says

Eman says

This whale in my market is trying to flip this turnkey building for 4.4 cap. Who is going to pay that in the current market? It’s negative leverage right off the bat with NO upside potential. This pocket/street is weak too for the pricing.

I imagine there's an equation I could use to figure out the asking price? What is he/she/they asking for it now?

Oh yes. There are only a few variables. Gross rent, expenses, cap rate and wishing price. Knowing other variables, you can figure out the unknown one. Interest rate is not part of the calculation when determine the cap rate. Pro-forma is “what’s the maximum rent you could achieve for the units”.

zzyzzx says

So, buying Tbills is better then buying an apartment building!

Maybe it is for you. I’m not smart enough to know to be honest.

Eman says

zzyzzx says

So, buying Tbills is better then buying an apartment building!

Maybe it is for you. I’m not smart enough to know to be honest.

Is there anyone who has achieved billionaire status investing in Tbills?

GNL says

Eman says

zzyzzx says

So, buying Tbills is better then buying an apartment building!

Maybe it is for you. I’m not smart enough to know to be honest.

Is there anyone who has achieved billionaire status investing in Tbills?

There has been 2 bond kings. One was Bill Gross and one is Jeffrey Gundlach. I don’t know if they became billionaires investing in T bills. Other than that, I’ve met a few real estate billionaires in the Bay Area, and I’m sure you can google and find plenty more who became billionaires through real estate. However, I believe most people became billionaires through entrepreneurship…..real estate included.

Mr. Zell was raspy-voiced and blunt, with little patience for cockeyed ideas or sentimentality. He exulted in his reputation for using salty language even in politically correct times. It made him popular on the speaking circuit, where attendees eagerly listened for his business insights and for the entertainment he might provide. - RIP Mr. Zell.

https://chicago.suntimes.com/business/2023/5/18/23728642/sam-zell-dies-obituary-billionaire-chicago-equity-group

https://finance.yahoo.com/news/why-rental-vacancies-continue-rise-110049461.html

Why Rental Vacancies Continue To Rise

GNL says

Is there anyone who has achieved billionaire status investing in Tbills?

It be about diversification. A 5% risk-free return ain’t too shabby.

GNL says

Bitcoiner says

Sry I am not following. Why would my equity disappear? I am not selling any real estate. In fact I plan on holding my RE and hand it down to the kids. I root for lower prices so I can buy more. equity in my homes going up or down doesn’t mean much to me for the next 5 plus years. I can’t do a cash out refi with these high rates and I actually don’t plant to refinance for a while anyways.

I think you might be a Realtor...it's ALWAYS a good time to buy. Suzanne researched it.

He's just overly enthusiastic about anything he's currently invested in, be it crypto, vaxx or now SFH rentals. =)

Bitcoiner says

Nuttboxer, you would need to ask the tenants not me. I don’t even deal with them or push the increases. It’s all handled by my PM. I saw your Zillow pull. Yes you can find rents below 2k but the quality is not comparable to the newer SFH houses, location and condition I am invested in. I never said you can’t find a cheaper place, I just shared what I see and what I charge. I don’t even look at crapshacks to be honest. You might even find a place for under 500 in someone’s garage or for a place to put up a tent. That’s not my investment area. Quality places for quality renters. My buddy rents out his casita in surprise for 2400 cash per month. Usually short term. It’s tiny but fully furnished.

I didn't cull the list, but out of 60+ properties, there were plenty of nice ones in there. So your assumption of quality is disingenuous. I honestly don't give a shit about a house being new, except that if it's new enough, there are way to many chemical in the air for my interest. Place we rented just off Greenway and 67th wasn't new, but not outdated at all. Had a speaker system wired up for the patio, high ceilings, large master, and a pool. Looks like after we moved out three years ago, the price bumped up $100 to $1,650, no idea if they've raised again, but the sweet old lady who owned it didn't raise while we lived there.

I guess just like any market, there are savvy renters, and those who will pay anything...

I'm fairly private, so not going to post it, but you should have more than enough info already if you're really interested. Just ask you don't post the address.

Bitcoiner says

Why would my equity disappear? I am not selling any real estate. In fact I plan on holding my RE and hand it down to the kids.

Same as...

"Why would my bitcoin profits disappear? I am not selling any bitcoin. In fact I plan on holding my bitcoin and hand it down to the kids."?

@Nuttboxer,

We recently stayed in Glendale while we took the kids to Universal Studios. Very nice city. I was impressed.

Actually, it's Glendale AZ, not Glendale CA. A bit further from Universal, but I would still say pretty nice(depending on which part of town).

Bitcoiner says

NuttBoxer says

I'm fairly private, so not going to post it, but you should have more than enough info already if you're really interested. Just ask you don't post the address.

I knew it! Here is another question. Instead of posting the address. Just look it up by yourself, send a screenshot of the sqft, pictures and the rental history. Don’t have to disclose the address. Can you do that?

My personal laptop uses Linux, and screenshots are not something I've ever had a need to learn. If you're ok with @Patrick sharing your email, I can send it to you directly.

@NuttBoxer If you tip Bitcoiner one cent, then you can include your email address in a short private message with the tip.

For anyone who isn’t familiar with commercial loans and the prepayment penalty, here are the rates for 5/1, 7/1 and 10/1 ARMs.

For example: if you pay off the loan in the 1st year, you pay 3% penalty of the remaining loan balance. If you pay it off within the 2 years, it’s 2% of the remaining loan balance, and 1% within the first 3 years. After 3 years, no penalty. You can refinance or pay off the loan as you wish. The loan will become adjustable after 5 years if you don’t refinance. You can let it “float” based on the terms of the “Note”. I believe the terms are 2% increase maximum per year and not to exceed 6% for the life of the loan so 7.5% in year 6, 9.5% in year 7 and 11.5% after….and it’s capped at 11.5% for the remaining life of the loan.

Patrick says

NuttBoxer If you tip Bitcoiner one cent, then you can include your email address in a short private message with the tip.

Ok, didn't see it in the comment like I used to, didn't realize we still had it.

NuttBoxer says

Ok, didn't see it in the comment like I used to, didn't realize we still had it.

Good point, I should have the tip link in comments again.

https://notthebee.com/article/dont-look-now-but-it-looks-like-the-housing-bubble-is-beginning-to-pop

Our insane housing bubble is poised to pop as prices tumbled a record amount year-over-year

The median U.S. home sale price fell 4.1% ($17,603) year over year in April to $408,031. That's the biggest drop on record in dollar terms and the largest decline since January 2012 in percentage terms. April marked the third consecutive month of year-over-year declines following roughly a decade of increases.

I'm watching several 2 bed condos and mainland SFHs, all of which were $350-$500k

They've all dropped $5k-$20k in either of the past two months and two have dropped in both April and May.

One of these was the 3 bed/1.5 bath 1200 sq ft 1980s SFH competing with a literally Brand New never occupied Horton home a few streets away (same school, etc.) that was only $30k more expensive but had a bonus room and a full second bath with a few hundred more Sqft (though half the acreage) AND the developer will pay all closing costs. They cut $20k last month to a "reasonable" $320k. Reasonable is more like $250K.

Inventory continues to be an issue. What will change it?