Craziness is still reigning in the market

Personal Finances Buying or Selling a Home
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At least in the Seattle east-side suburbs. Joel’s house went under contract last week and we are still shocked and in disbelief. It’s a 1670 sq ft 2 BR 2 1/2 BA townhouse (1 common wall) with a bonus area for an office and an attached 2 car garage. Both bedrooms are on the 2nd floor and each has an ensuite bathroom, and there is a powder room on the main floor. He did a lot of updates/improvements since he purchased in 2012:

  • changed out all the flooring (mostly carpet and vinyl, except one bathroom that had tile) to bamboo and tile
  • added closet organizers to the walk-in closets in both bedrooms
  • added an organizer and hanging rack to the laundry area
  • remodeled all 3 bathrooms, replacing vinyl floors with tile, tile counters with marble in the 2 ensuite and with tempered glass in the powder room, and updating the master shower and tub
  • new interior paint when he moved in and then again after he moved out
  • new exterior paint
  • painted kitchen cabinets and added new hardware (it already had quartz countertops)
  • replaced the stove
  • replaced the deck (some of which was rotting) with a new deck and a paver area

He had a pre-inspection done, and corrected almost everything except he had not replaced the original double pane windows, 3 or 4 of which have lost their seal - he had already disclosed that on the disclosure paperwork.

He topped off it all off by getting it staged so it looked like house out of a magazine.

His agent suggested that he list it for about 10% under what the average estimate that Realtor.com, Zillow and Redfin were showing, to help ‘drive interest and multiple offers’. Well, even she (a 25+ year agent) didn’t realize what she was getting into. It went on the MLS on Thursday, 3/17, about noon, with a commitment to review offers on Monday, 3/21. By Thursday evening there had already been 15 - 20 showings. By Sunday evening, there had been a total of 95 showings and his agent had a collection of probably 75 business cards from other agents. He had at least 9 potential buyers who wanted to present offers early, but he stuck to the Monday offer review date.

When his agent called us Monday evening, she had 26 offers*, at least 9 of which were more than 20% above list. He took an all-cash offer that was 36% over list price with no contingencies, no appraisal requirement, and a $50k non-refundable incentive payment, rather than earnest money - so if they back out, he still keeps the $50k, and he can move on to the next offer on the list. The $50k showed up in his bank account on Wednesday, 3/23. It’s probably going to close on April 1 (15 days after listing). It could have closed earlier, except that he needs to give notice to the staging company to get the place de-staged, and his contractor needs to finalize the bill so that it can be paid out of escrow. He also wanted to wait to get the money until April 1 so that the gain (the vast majority of his income this year) would be realized in the 2nd quarter, so he can wait to make his quarterly estimated tax payment until 2nd quarter payments are due - because even after adjusting the basis for all of the improvements, taking out the selling costs and exempting $250k in capital gains, he’s probably going to owe taxes on over $300k in capital gains.

Once it closes, he said I could share the listing and the actual figures.

AJ

*When I asked her if this was the most offers she’d ever had on a listing, she said yes, and shared that back in 2005/2006, one of the agents in her office had a listing that got 22 offers, and they didn’t think that would ever be topped.

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Congratulations to Joel.

The winning all cash bids are making it near impossible for regular folks to get the good properties…or any properties for that matter. That’s going to end badly as it is an unsustainable trend. It’s also one that we will copy if Youngest decides he wants to buy a house next year, after spending a year in his new city and new job. We will become the bank. But as I stated when discussing this on the METAR Board, how many of us can do that for their kids? Is the American Dream of owning your own home becoming usurped by corporations who can then ramp up the rental rates even further?

It’s a dangerous time to be a renter, IMO. Currently, Youngest pays close to $1K for a bedroom in a 3 bedroom townhouse in the suburbs of Charlotte, NC. That does include utilities and is a 3 month lease, but he is having a heck of a time finding even a studio apartment for close to that. He could buy a house that we finance, easily paying us back by having a couple of roommates. I don’t know how his generation is going to own a home without parental involvement.

IP

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The winning all cash bids are making it near impossible for regular folks to get the good properties.

Not sure who regular folks are but in my neck of the woods, they are often people 50+ moving to a different size/place/etc.

I don’t know how his generation is going to own a home without parental involvement.

I gave each of mine $10K after they decided what to buy but before closing. I wanted them to buy wha they could afford. Each actually bought their first houses as singles but I suspect couples could also be regular folks. They may not live in their most desired neighborhood or size of house but they could buy. At least one of mine lives in a house I like but I wouldn’t live where he does. However, for him, it also meant an easy commute to work and easy access to the airport.

I am pretty sure people were saying the same kinds of things when we bought our first house where we were lucky to get an 11% mortgage which a few months later would have been 17%. To save for the downpayment, we lived in the smallest legal apartment for two people.

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When his agent called us Monday evening, she had 26 offers*, at least 9 of which were more than 20% above list. He took an all-cash offer that was 36% over list price with no contingencies, no appraisal requirement, and a $50k non-refundable incentive payment, rather than earnest money - so if they back out, he still keeps the $50k, and he can move on to the next offer on the list.

It is crazy and I just bought into the craziness. My offer had $110k in due diligence money. I hope the craziness hold out this summer when my home goes on the market.

PSU

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I am pretty sure people were saying the same kinds of things when we bought our first house where we were lucky to get an 11% mortgage which a few months later would have been 17%. To save for the downpayment, we lived in the smallest legal apartment for two people.

In some parts of the country, I do think it’s different this time. I’ll give my own neighborhood as an example. Most of the homes were built in 1999-2000 for around $300k. Fast forward to 2020, the homes were being sold for low $400k. Then in 2021, my neighbor’s house sold for $540k which a lot of people thought was too high. Then in 2022, another house down the street sold for $710k.

It took 21 years to appreciate the first $100k. It took one year to appreciate $140k more. Then it took one year to appreciate another $170k.

PSU

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…lucky to get an 11% mortgage which a few months later would have been 17%…

We paid 16% and were thrilled to later refi to 13% (early 1980’s).

That said: while in our mid-20’s, we bought a nice 3/2, which has changed hands a few times since then, and most recently sold for $800k a year ago (worth even more now).

$800k! That’s double what DS & DIL can afford, and they’re two lawyers in their mid-30’s. They’re in a not-very-nice house for which they paid about $400k (2017), and now with a baby they’re flat broke and feeling cramped.
DD bought a bank-owned foreclosure in 2009. In retrospect, great timing. Even though she’s a well-paid 40-something, she wouldn’t be able to afford to buy a house now.

Granted, we were super frugal, and they’re not, but I don’t think that’s enough to explain all the difference. Belt tightening will get you only so far when housing prices are as steep as they are now.

According to Realtors I’ve talked with, the only young people buying houses recently are those with substantial parental subsidies, not just the 2% my parents loaned DH & me. I’m feeling somewhat guilty that DH & I didn’t help our kids at all when they bought their first houses. Didn’t feel we needed to. But if they were buying for the first time now, yeah, I think it’s different. It does feel like a bubble.

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In some parts of the country, I do think it’s different this time.

Sort of my neighborhood -

https://www.zillow.com/greenwood-village-co/home-values/

but neither I nor my kids ever expected them to be able to live there. There are other places in the metro area they could afford and did.

The biggest appreciation I have seen is in Steamboat Springs but again, there are outlying areas that are less expensive.

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The winning all cash bids are making it near impossible for regular folks to get the good properties.
…
Not sure who regular folks are but in my neck of the woods, they are often people 50+ moving to a different size/place/etc.

Sorry, should have been more specific, but was being rushed out the door and rushed my post.

“Regular folks” are basically those requiring a mortgage to get a home. They are getting beaten out over and over and over again by cash buyers. Very demoralizing for these mortgage requiring buyers who are getting locked into super high rents.

Our house is being bought by a surgical resident. House is being paid for in cash by the Bank of Mom and Dad. I’ve had surgical residents apply for rental of the same house, and even when the rent was 20% cheaper than it would be going to in June, they didn’t meet the earnings 3X rent requirement I have on the application. Residents get paid pretty poorly, but in a couple of years will be making big bucks and will be able to afford it just fine. Doesn’t really matter as long as the Bank is happy.

IP

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The craziness was funded by the Fed’s ZIRP policy that overheated the real estate market (Case-Shiller percent changes look similar to 2006) and the stock market (Shiller PE is 37, about twice the long-term median of 16). ZIRP is slowly ending, with hopes of a soft landing. The craziness will end but could go on for years, like the booming 1920’s.

S&P/Case-Shiller U.S. National Home Price Index
Change from Year Ago, prevous peak was 22% October 2005.
Prices now are about 44% higher than 1 year ago.
https://fred.stlouisfed.org/series/CSUSHPISA#0

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The craziness was funded by the Fed’s ZIRP policy that overheated the real estate market…

Maybe, but I don’t think so. IMO, the craziness is based on a skewed supply demand balance, with almost no supply and increased demand. Covid prompted more elderly people to remain in their home, with one news story after another about uncontrollable mass deaths from Covid in retirement homes. Covid created a demand for more space in the home as kids were schooled from home while parents worked in their home offices. While the concern for young healthy people being in the midst of society has mitigated a bit, it left a new awareness about the importance of plenty of space at home. Another side effect of Covid seems to be a stickiness to work from home, requiring a home office or two. Eldest is permanently WFH, with his company having sold the office space, and even Youngest, who just started his first professional job, has been told he can WFH in 3-6 months, when he is done with hands on training. WFH also allows people to move to where they want to be, rather than where they can commute to work from.

So the Baby Boomers are staying in their homes while the Millennials have finally decided it’s time to buy. IMO that is the basis of the nationwide shortage of available housing. Additionally, there are many older Boomers who would like to downsize, but are intimidated by the crazy process of buying and the crazy prices that go with it. We would sell, but what could we buy, is often what I hear from older acquaintances. Lots of money on hand from lack of availability to travel or go out during Covid gives more cash to throw at housing in short supply. Add to this the corporations that are scarfing up SFHs to rent out at high high rents.
The problem compounds and feeds on itself. Some areas are worse than others. Our area has less than one month’s supply.

I don’t think it is as simple as low rates.

IP

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Add to this the corporations that are scarfing up SFHs to rent out at high high rents.

60 minutes ran a piece on this last Sunday. Pretty interesting to watch.

https://www.youtube.com/watch?v=ZEwxYvQVU5g

Their reporting is that investment firms are buying up starter houses to rent out. I suspect they get their funding from the more general corporate bond market rather than the typical mortgage market. That lets them pay cash for the house and offer very quick closings.

The corporate guy they interviewed claim that the industry is buying less than 2% of the market volume. But it’s unclear if that’s 2% of the total home market or 2% of the starter home market. In either case, 2% may be enough to drive prices up. It doesn’t take a lot of added demand to start pushing prices up.

The industry tends to do some basic rehab and a good cosmetic fix up before renting. Each company tends to have its own rehab and maintenance staff, so they aren’t buying those services on the general market. Another guess from me is that because these are employees of the owner, in some markets they may not need all of the licensing generally seen in contractors. That’s another cost cutting move.

It also makes sense for each company to stick to a few markets. That let’s them concentrate their repair workers in a smaller geographic area, keeping them busy and efficient, and minimizing travel and down time between calls. And that wraps back again to the 2% of the market claim. Two percent of the national market, concentrated in just a few mid-size and larger cities can be a much larger portion of the local markets. That would almost certainly drive up local prices for homes.

I don’t want try to blame all of the price increase on these investment firms. There are plenty of other factors. But they are one factor that may be increasing local prices.

–Peter

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The corporate guy they interviewed claim that the industry is buying less than 2% of the market volume.

That’s not what he said.

At ~7:05 He said “Corporate landlords represent 2% of all single family rental housing”

That isn’t a statement about how much they’re buying.
That’s a statement of how much of the single family rental market they have now.

There are 70-75M SFH in the US. https://www.infoplease.com/us/census/housing-statistics
14.5M of those are rental units. https://www.statista.com/statistics/612959/number-of-househo…

2% of 14.5M would be 290k

How many of those 290k were bought in the past year?
It seems that this is a growing business model, so it’s likely it’s not just a small fraction of those 290k.
There were projected to be 7.1M home sales in 2021*. If 50k sales were to corporate rental companies, that’d be 7% of all SFH sales. And could easily be a lot higher percentage of “starter” homes. I think I’m being conservative with the 50k number - so it could easily be significantly more. And I would expect the extra demand from them to have an exponential impact on prices. If they’re winning 10% of contracts I expect they’re likely making offers on >20% of homes for sale. So they’ll increase prices on those by virtue of being additional competition. And for the ones they do win they result in increased comps because it (likely) sold for more than it would have without their offer.

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That’s not what he said.

At ~7:05 He said “Corporate landlords represent 2% of all single family rental housing”

Very misleading statement, because corporations tend to focus, understandably, on markets where the rents have the potential to be higher based on the economy, ignoring large swaths of the country wide market. I started to notice this trend back in 2012 when I started to look at buying in Atlanta when Eldest was in college, continuing to follow that market for several years. With the housing bust in that area around 2008, corporations swooped in and scooped up properties hand over fist. I don’t blame them, it was a great buying opportunity, but it has made it very difficult to buy a starter home and raised the rents in a big way.

We live in a small city with a great diverse economy and constraints to building new homes. Our area rents, relative to purchase price, were already pretty high, which is why we kept the house as a rental after we found a home we preferred two years later. In fact, I told DH as we toured the home, that this would make a great rental if we decided to move elsewhere. Even when we bought 5 years ago, the market was super tight, with homes often under contract before they hit the MLS. (The Realtors here have developed an excellent strategy to protect themselves from internet facilitated FSBOs and discount Realtors.) Covid intensified the sales demand and process further. We have many corporations and Mom and Pop landlords with many many properties. So while “Corporate landlords represent 2% of all single family rental housing,” their 2% of national market represents a MUCH higher percentage in desired regions. The housing economy has to be looked at locally, and IMO has large problems with numbers being extrapolated to national trends.

IMO, it is local and Federal gov’t that needs to control this, in order to continue to provide affordable housing to the locals. Currently our city is eliminating SFH zoning in favor of 3+ units, which will only make buying properties more interesting to investors and compound the problem. One way to mitigate the growing affordability problem could be to change the tax rules for owner occupied vs rentals, or perhaps for more than X rentals, be that 1 or 4, or whatever. Locally, that could be a higher tax base for rental properties than owner occupied. Property taxes have skyrocketed in our city, with escalating sales prices, causing long time owners, many elderly, to have to sell their home. Escalating assessments are kicking many who were previously in the real estate tax waiver program to lose the benefit simply because they stay in their home as it’s value escalates past the max home value for the program, while their income does not grow. Federally there could be take backs for over X rentals of many of the great tax breaks one gets on a rental property. There is a feeding frenzy from corporations because they see the purchase as a great deal. Tax law changes could mitigate those benefits for investors and even the playing field a bit.

Corporations will understandably continue their feeding frenzy until actions like these are taken.

FWIW,

IP
appreciating the high value exit to the rental business, but really not wanting to experience the revolts that will come if things don’t change

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Investors bought 18.4% of the U.S. homes that were purchased in the fourth quarter (of 2021), a record high… roughly 80,000 U.S. homes…
and, no surprise to IP:
Investors had the highest market shares in Atlanta, Charlotte and Jacksonville.

https://www.redfin.com/news/investor-home-purchases-q4-2021/…

18.4% is pretty steep. And, what’s even more distressing, is that institutional investors pay less, not more, for the houses they buy. Institutional investors offer all cash and no contingencies. To a seller, that’s often more attractive than a higher price from a buyer who has a financing and/or inspection contingency.
(I wish I could find the Washington Post expose on this, but apparently I haven’t hit on the right phrase to search on.)

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That’s not what he said.

At ~7:05 He said “Corporate landlords represent 2% of all single family rental housing”

Thanks for the correction. I was going from memory on that statement.

I still think he’s trying to make their participation in the market sound innocuous when I don’t think it is.

–Peter

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Wow, thanks for that link. Sounds as though I wrote it, LOL.

"Investors buying up a record share of for-sale homes is one factor making this market difficult for regular homebuyers,” Bokhari continued. “It’s tough to compete with all-cash offers, and rising mortgage rates have a smaller impact on investors because they often don’t use mortgages at all.

Even the objected to imprecise use of “regular.”

Mid-priced homes are gaining popularity with investors, representing 32.3% of their purchases in the fourth quarter, a record high (essentially tied with 32.4% in the third quarter) and up from 24.1% a year earlier.

I apologize in advance if this thread is skewing too far into the Real Estate Investment board’s purpose, but it is clear that investors are impacting the owner occupied market, so I don’t think it is too far off topic for here. For years now, I have been talking with a friend, who owns 13 properties in our city, about the benefits of renting out a higher end property. She had been focused on the cheaper side of the market and while I would get fewer tenant applications for our property, I would get better qualified tenants with fewer problems than her properties. Of course, she had tenants for several years, mostly because they could never afford to buy here, while mine lasted a year or two max. That also gave me the opportunity to raise rates every year, and I even had tenants pay for improvements that they wanted in the house, with my agreement and the understanding that the improvements became mine. You typically have many fewer problems with a more expensive rental, which demands a higher credit score which is worth the tenant protecting by paying on time. Can’t get blood from a stone, so when her tenants trashed a place, not much recourse other than to boot them out and move on. She has since 1031ed 2 of her older SFH into new luxury townhouses, which command much more rent than the houses she sold.

I expect the continued investment purchases into more mid-priced homes until there become impediments to their purchase via increased costs for investors or rent control.

IP

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This discussion has focused on investors buying single family homes but has not touched upon the fact that developers and investors are building to rent home communities where they can acquire 50-200 acres to build a new community from the ground up with the homes to be rented out instead of sold to individual home buyers who intend to reside there.

Probably not so much in the northeast or or where undeveloped land supply is limited but not true in Texas and the Southwest.

Regards, JAFO

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I don’t know how his generation is going to own a home without parental involvement.

I would point out that there are companies who are offering to fund all-cash offers for buyers. Check out Homeward https://www.homeward.com/buy-with-cash and New American Funding https://www.newamericanfunding.com/cash-offer/ among others.

Yes, they charge a fee. But for someone who doesn’t want to wait until there is more inventory on the market, and who doesn’t have parents that can provide funding, it could be an option.
AJ

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I would point out that there are companies who are offering to fund all-cash offers for buyers.

Wow. Of course there is.

We’ll close on your home as soon as the title is ready. You can move in the very next day and rent from us until you buy it back.
…
Once your mortgage is ready, you’ll close on your new home by buying it back from us.

https://www.homeward.com/buy-with-cash

It’s like setting up your own rent to own situation. Isn’t Capitalism great.

IP
wondering what’s next?

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I’m in Texas – far NW Austin, to be more precise – and we are very, very fortunate to have hit the housing market just right. In 1997, I paid $215K for this house; per Zillow it went to $600K a year ago and is almost $800K now.

https://www.statesman.com/story/business/2022/02/02/williams…

The above article features a new development and you can almost see my home in the upper part of the picture featured in the article. We’re also only a few miles from the new Apple plant (slated to employ 15K people), the new Apple hotel, the doubling in size of the old Motorola/Freescale plant (converted to general office space), and about 1,000 acres of ranch land now being planned out as a major new office/retail/residential center which may include a branch campus for Univ of Texas. Funding has already been committed to turn the four lane highway to six lanes and the county is talking about building a flyover to avoid congestion caused by an intersection with another major highway and a RR crossing.

DW will be here several more years for various commitments, then we’ll hightail it to a less expensive area. We both turn 68 this year and expect the equity to really jack up our retirement savings. We have been very, very fortunate.