Any housing observations?

[eweppl]

I realize housing isn’t the end all be all of economics, but I bring it up because it’s an integral part of the machine, and because it’s something that most people are exposed to in their part of the universe.

A major area for me investment-wise is parts of Cobb County, GA - places called Kennesaw or Acworth, Smyrna, Marietta.

These areas - are sort of on the upswing and in the latter two - experiencing what some call gentrification. My focus has been solely on single-family, and Townhouses - under $350k. Not too upscale - -but not bad either. Not quite Millennial Mayberry - - meaning less stainless steel and backsplashes - but decent complexes that look and feel safe.

In 2021 I saw = like most of the country - units selling within 3 days, bringing multiple offers and well over asking parts.

I think it’s too soon to judge how much the higher rates are effecting things - it’s mixed:

*The units that were $240K last year… were easily $320K this year - selling within 3 days. HOWEVER…I see a handful of units - asking $330k…and still on market after 8 days. Also…some of the units that were glaringly overpriced - are still on market after 2 weeks, OR seeing small - $5k, $8k price reductions. Inventory - -is slightly higher.

Zillow values on these are rising nicely -but that accounts for PREVIOUS sales - sales that were closed just before higher rates.

FWIW - A fixer upper was asking $200K this week. I offered $215k. I didn’t get the darn thing and was told there was 27 other offers on it.

I’d summarize as not crazy-stupid-hot like the last 18 months…but nowhere NEAR a buyers market by any vantage point yet.

Anyhow dear reader, reading this was probably worth less than a dime with a pile of buffalo poop on it - but I’d thought I’d report nevertheless.

Geez I just re-read this post. Buffalo poop? Who just randomly writes that? As a famous fellow once said - someone call Dr Finkelstein, tell him we got a whole new set of issues to work on, we have to put Mom to the side for the next session.

[Watty]

Any housing observations?

Hi Neighbor,

I actually live in that area.

Here is one anecdotal observation. I live in a large subdivision that is a tiny bit above your price range and one thing we have been experiencing is that a lot of houses have been bought by large REITS who then rent them.

I was having a problem last year with a rental that is behind my house where some trees had fallen down in a storm that were not being removed by the local property managers. I was doing the “write a letter to the CEO” thing(it worked) but when I was looking up his name and address I happened to see some of the press releases about them selling more bonds.

I did not do an in depth analysis but as I recall last year when interest rates were lower they were selling short to medium term bonds at maybe 3%(ish)with typical lengths of maybe 5 years or so.

I can see where borrowing money at 3% to buy houses to rent would give you good numbers even when the homes are not quickly appreciating in price. When home prices are going up a lot each year the numbers could be fantastic when you borrow money at such low interest rates.

The observation I have is more of a question in that I have to wonder what happens in five years or so when those bonds mature. If they want or need to issue new bonds with possibly a much higher interest rates then how will their number look then? If their numbers no longer work then I would suspect that the large REITS will be selling a lot of rental houses especially if it looks like home prices might decline. In the worse case that could be a viscous cycle where declining prices cause more people to sell before houses decline even more.

Take that with a huge grain of salt since that is mostly just thinking out loud but it might be worth researching the debt of large residential housing REITS to see how that might impact the housing markets in a few years.

[WendyBG]

<I recall last year when interest rates were lower they were selling short to medium term bonds at maybe 3%(ish)with typical lengths of maybe 5 years or so. … I have to wonder what happens in five years or so when those bonds mature. If they want or need to issue new bonds with possibly a much higher interest rates then how will their number look then? If their numbers no longer work then I would suspect that the large REITS will be selling a lot of rental houses especially if it looks like home prices might decline. In the worse case that could be a viscous cycle where declining prices cause more people to sell before houses decline even more.>

Thank you for sharing your excellent insight.

Everything depends upon what interest rates are when the bonds mature. When yields rise, companies (and countries) with short-term debt are squeezed, as you noted. Literally trillions of dollars are riding on this question because countries all over the world (including the U.S.) are in the same situation as the REITs you mentioned.

The Federal Reserve would undoubtedly step in to cut interest rates and boost the money supply if a catastrophic situation appeared to be developing. But we learned in 2008 that a crisis can develop suddenly due to unbalanced borrowing and defaults.

Since this is happening in your neighborhood, it’s best to be alert. You don’t want your own home to lose value because the neighborhood is declining due to lack of maintenance by REITs.
Wendy

[syke6]

Here’s an observation: In 1981, the average principal and interest payment in the United States was $810/month.

In today’s dollars, that would be the equivalent of $2,576.22/month. However, in 2022 the average P&I in the US was $1,557/month. So by that measure, housing has actually gotten more affordable on average over the decades.

https://calculatedrisk.substack.com/p/lawler-the-sharp-incre…

Geez I just re-read this post. Buffalo poop? Who just randomly writes that? As a famous fellow once said - someone call Dr Finkelstein, tell him we got a whole new set of issues to work on, we have to put Mom to the side for the next session.

TMF is like “The Good Place” where you can’t actually swear.

https://youtu.be/29iKAAeRvI4

[jerryab2]

I can see where borrowing money at 3% to buy houses to rent would give you good numbers even when the homes are not quickly appreciating in price.

True. However, lower prices/higher interest rates might not be a big deal.

If the houses went up in value by 50% ($150k to $225k), then the only issue they need to consider is a basic mathematical one:

How many houses do they need to sell (at what price?) and still keep a big chunk of the remaining houses as long-term investments.

Remember: To the company, this is inventory–nothing more, nothing less. Being able to sell at a fat profit is great. But that is a one-off deal. If the rental market for the houses is still strong, then sell as few as necessary and keep profiting from the ongoing rental revenue from the rest of the portfolio for years. THAT could be collateralized and sold as investment grade bonds because it has a solidly documented history of consistently generating revenue.

[bjurasz]

In Cedar Park (north suburb of Austin) we saw our house nearly double in just over 4 years, which is insane. About 6 months ago the same floor plan sold on street over for $150k over asking price. Another house close by sold a few weeks back and is immediately up for lease. However, I have recently started seeing homes need to have their asking prices drop. Start of a reversal? Or did sellers simply start listing the asking price much higher than before? Unsure.

[inparadise]

We are seeing similar real estate activity in Central VA. We are very supply constrained.

FWIW,

IP

[eweppl]

IN my 20+ years in business - - I still haven’t matured in that I hate missing a deal. And yeah, if making a “deal” means overpaying then I missed nothing.

But whether it’s these houses - or back in my good ol days, small companies - I always had to have mentors and elders remind me “there’s always another deal”.

Right now I"m operating as if there will be a leveling off. I feel America and Americans run on this concept ‘how much is it a month?’ - and if monthly payments are affordable - they’ll pay more for goods, and vice versa for higher monthly payments. So due to rates - I’m thinking a leveling off - and return to more normal appreciation.

I don’t see a ‘crash’ in that I feel that so far - the underwriting of mortgages while imperfect - has been much much better than it was leading up to the crash.’

Yes, in places I have units - there’s a shortage too. I look at the new developments of townhomes- of course, nicer, newer, more modern. Those puppies are fetching $425K plus.

So I feel my $300k stuff – will be ok.

Sadly I’ve never been a home run hitter - but I like my singles and doubles consistently.

[Notehound7]

Here is one anecdotal observation. I live in a large subdivision that is a tiny bit above your price range and one thing we have been experiencing is that a lot of houses have been bought by large REITS who then rent them.

Watty,

On a fishing trip to Lake Lanier in the northeast exurbs of Atlanta (South Hall County), I recently drove past a brand new subdivision of under-construction single-family 1,600SF to 2,000SF 3BR & 4BR/2.5BA homes almost identical to a recently sold-out subdivision of $300K-$350K homes nearby. When I stopped to read the marketing sign at the under-construction development, it announced the following:

"New Luxury Homes for Rent - [subdivision name] -
A Lennar Homes development
in association with
Blackstone Group"

In the last few years, I have seen a number of press reports and marketing releases similar to the following:

Once relegated to small investors who owned a patchwork of rental homes scattered in traditional neighborhoods, the single-family rental market has grown to attract big institutional investors. Names like JPMorgan Chase & Co. and Blackstone Group have invested in single-family rentals or rental companies.

Numerous homebuilders are breaking ground on or expanding their rental portfolios, including Lennar Corp., DR Horton and Toll Brothers, which established a $400M joint venture with BB Living to develop single-family rentals in Phoenix, Denver, Las Vegas, Jacksonville, Dallas and Houston.

Just this week, Invesco Real Estate agreed to back single-family rental firm Mynd Management to spend $5B to buy 20,000 single-family houses in the U.S. over the next three years.

https://liverangewater.com/southeast-multifamily-developer-j…

Publicly-traded companies and REITs have utilized their deep pockets and unlimited venture capital to out-bid or displace young adults who would normally aspire to become first-time homebuyers, seeking to build equity while raising new families.

The REITS and huge corporate buyers are negotiating with national homebuilders to purchase entire developments in a single huge transaction that in the past would consist of hundreds of separate sales transactions to individuals, families, and independent real estate investors.

The foundation for this trend started in 2010-2012, when Fannie Mae, Freddie Mac, HUD, and all the major banks and mortgage companies unloaded large portfolios of foreclosed REO properties at fire-sale prices in the wake of the subprime mortgage crisis which led to a collapse in real estate prices.

“The American Dream” of home ownership has been co-opted by corporations and REITs front-running aspiring individual home buyers in much the same way that high-frequency trading operations have been front-running individual stock investors for the last 10 or 12 years.

Unfortunately, it makes perfect sense for home builders to sell starter homes in volume to cash-rich corporations rather than to sell to individual people, since bulk transaction costs are a fraction of what they would be if the builder were dealing with thousands of unique individual human beings as they had to do in the past.

[eweppl]

Hi Watty, thanks for posting your observations.

Certainly it must have been a concern when trees were not removed. I guess like all industries - there will be good eggs and bad eggs vis a vis property managers. A majority of my units are townhomes and unlike many investors I actually like HOAs…I belong to 2 HOA’s in Cobb…and I actually like that they’ll issue warnings for stuff. It totally absolves me of being the bad guy:) And keeps things in good order.

I’m not a sophisticated stock investor - but certainly the picture you paint vis a vis what happens if rates who up—and perhaps appreciation doesn’t keep up is well received. Frankly. many of these corporate types are campus-bred people who are using other people’s money for paper temporary gains. More often than not I have experienced this with the corporate types and I fully believe that someone had to bring it to corporate’s attention to do something glaringly visible and obvious - like trees.

Like any investment - there’s risk and housing is not impervious to it as we saw not too long ago. I"ve kept my bets diverse and not gone overboard and have hoped/planned for appreciation that is slightly less than averages over periods of time. I’m banking on jobs - I think that area continues to grow vis a vis employment and population - and I’m hoping that decent homes, rentable@1800-2200 per month will have steady demand.

If not, well, gonna have to downgrade to small fries instead of large at McDonald’s.