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Bulk Investors And The Real-Estate 'Recovery'

Tyler Durden's picture





 

Via Ramsey Su of Acting-Man blog,

Bulk (Wall Street) buyers have been receiving a lot of attention recently. It's time to take a closer look.

There is little data available pertaining to bulk investors and even less meaningful analysis. Historically, Wall Street has never been active in direct ownership of single family homes, so there is no past histrory to learn from. We need to start from scratch.

How big are these bulk buyers? A few months ago, I read a report that Keefe, Bruyette & Woods estimated Wall Street had raised $6 billion to $8 billion so far, which is really a paltry sum in the world of high finance. It is impossible to estimate how much small investors are adding to this investment pool. We also have no clue how much this pool may grow over time, or whether it will  soon be exhausted and shrink instead.

Investors typically buy lower end properties. Say at an average of $100,000 per unit, the $6 billion to $8 billion raised so far would not even amount to 100,000 homes.

On the national level, and using the most recent releases, Existing Homes Sales and New Homes Sales combined are coming in at a pace of just over 5 million for 2012. The median price is $178,000 for existing homes and $242,000 for new homes. 100,000 homes would not even show up on the radar.

As for foreclosures, there are 5.6 million total non current loans in various stages of default. The current estimate for under water mortgages still exceeds 10 million, or about 20% of all mortgages. The Wall Street bulk investors are unlikely to put a dent in the distress property arena for the foreseeable future. In comparison, when the Resolution Trust Corporation (RTC) was dissolved back in 1992 due to the sunset clause, investors cleaned the entire inventory of REOs and loans off the books with just a few auctions.

On the localized level, it is a slightly different story. I am going to use three Western metro areas as examples. Phoenix, Southern California and Las Vegas were hotbeds of the subprime bubble and are once again the most sought after areas, this time by bulk investors. Using September data from DQNews, investors purchased 38.6%, 27.3% and 48.5% of all sales respectively. The actual number of absentee buyers for the four areas totaled 9,885 for the month of September. I expect this number will grow for the current months and into the near future, as investors eagerly place their funds. There is no data that separates absentee buyers into specific classes, such as Wall Street funds, local syndicates or small investors. However, if the bulk buyers are actively accumulating in these select markets, it is safe to assume that they do have some influence. The question is for how long.

Of the aforementioned metro areas, Las Vegas is the most out of whack. There were 4,570 sales in October.  50.2% were sold to absentee owners, 52.5% in cash (43.2% were short sales, 16.7% were REOs) and 36.1% FHA financed. I have never seen a market where over half of the buyers paid cash and over 1/3 of the sales were financed via the FHA, leaving only 14% of sales in the "other" category.

In just the months of September and October, Las Vegas sold 4,278 single family units to absentee owners.  Assuming a majority of them will show up as rentals soon, if they haven't already, how much more can the market absorb? If this trend continues, how many months will it take to swamp the desert with single family rentals?

Even more out of whack is the "it's cheaper to buy than rent" theory. I am not disputing the math but rather the conclusions.  Just the fact that it is cheaper to buy does not mean that renters should buy. Maybe housing is simply unaffordable and rents are way too high.  As the supply of rentals continues to increase, natural economic forces should be driving down rent and home prices. Furthermore, if renters are buying because it is cheaper than renting, won't there be even more pressure from this supply of rentals? Where are the additional 2,000 renters going to come from each month?

Finally, it is mind boggling that they are still building in this market. Here are some of the new homes for sale.  Just this website shows 100 communities on the market.

As an investor, why would I touch the Las Vegas market? Check out the popular websites such as craigslist or rentals.com. There are countless houses, condos and apartments for rent, all chasing after this phantom demand.  Cash investors have to ability to lower rents to the level that the market will bear, but can current investors compete? With so many renters, are neighborhoods going to deteriorate, driving even more under water mortgages into foreclosure?

I took a number of these rentals in Las Vegas and did a quick analysis on their return. It is impossible to come up with a reliable vacancy allowance. It is entirely possible for a bulk investor today to be sitting on a bulk of vacant houses tomorrow. While the option exists to lower rents, that can cause a chain reaction which may result in more foreclosures, more distress properties and a new round of depreciation in value.

Phoenix was probably the first region to experience an investor driven rebound. The most recent data from DQNews for September are already showing a sequential as well as a year over year decline. I am eagerly waiting to see what the October statistics will look like. Is that recovery already running out of steam?  The median price has been appreciating to $155,000 but it is still 41.3% below the all time peak of $264,100 in 2006. I am not suggesting that the subprime peak was reasonable, just that there is still a boatload of homeowners who have little or no equity in their homes.

Here in Southern California, the herd mentality is in full control with buying increasing at all levels. How long will this feeding frenzy last? Will the bulk investors be able to generate enough returns to whet their appetite for more? Will the local investors continue to ride on the coattails of the Wall Street moguls? Will owner occupiers continue to overpay for new homes because the 1%ers are paying cash and squeezing them out of the non-FHA market?

Stay tuned.

 


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Tue, 11/27/2012 - 16:23 | Link to Comment tradewithdave
tradewithdave's picture

Central Bank raided by military force. 

 

http://tradewithdave.com/?p=13810

Tue, 11/27/2012 - 17:01 | Link to Comment redpill
redpill's picture

'It is impossible to estimate how much small investors are adding to this investment pool.'

 

Uhm, no it's not.  Nearly 40% of homes purchased so far in 2012 were bought with cash, and half of those were investors who weren't going to live there.  Multiply that by the average price of those homes and you get approximately $111 billion.

 


Tue, 11/27/2012 - 17:49 | Link to Comment kaiserhoff
kaiserhoff's picture

I've seen this crap for decades on a smaller scale.  "Investors" always expect to get perfect tenants who pay all their rent on time. 

They also underestimate repairs and maintenance, by an order of magnitude.

Tue, 11/27/2012 - 16:30 | Link to Comment mayhem_korner
mayhem_korner's picture

 

 

In the aftermath of the collapse, my PMs are going to help me recover a lot of real estate.

Edit:  This is a game of The Bigger Fool.  Rule #1 in that game is don't get in until there's no one left standing.

Tue, 11/27/2012 - 17:34 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

I'm not sure there will ever be a collapse like you are thinking of.  A free market would have cleared years ago.  But FED and government intervention could extend the stock and RE markets for a generation.  A very gentle slide with nominal values dipping slightly while inflation does most of the work.

 

 

Tue, 11/27/2012 - 17:53 | Link to Comment I Am Not a Copp...
I Am Not a Copper Top's picture

They already have done that and it does not work any more - now will come the collapse

Tue, 11/27/2012 - 16:28 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

"I have never seen a market where over half of the buyers paid cash and over 1/3 of the sales were financed via the FHA, leaving only 14% of sales in the "other" category."

Wait a while. This puppy ain't even begun to pee all over the carpet.

<Down boy. Leave my leg alone.>

Tue, 11/27/2012 - 16:58 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

You are all cats and dogs today ;)

Tue, 11/27/2012 - 17:33 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Mrs Cog just chatted me and told me to STOP it.

Seems I'm making a scene. :)

Tue, 11/27/2012 - 18:12 | Link to Comment Panafrican Funk...
Panafrican Funktron Robot's picture

Yeah, just maybe kinda figured out the game at play here:

Step 1:  Crash housing, sell the distressed inventory to the Fed at par.

Step 2:  Buy back the distressed inventory.

Step 3:  "Surprise" end to mortgage interest tax deduction, housing crashes again.

Step 4:  Sell the distressed inventory to the Fed at par (ergo the Jan 2013 resumption of MBS buying).

Rinse, repeat.  Bitchez.

Tue, 11/27/2012 - 18:36 | Link to Comment RingToneDeaf
RingToneDeaf's picture

In Phoenix area for the winter, all I see is closed stores in strip malls and empty malls.

Building is ongoing in the outskirts meanwhile, retail gas prices are lower near the new stuff drawing traffic.

Not sure about the housing except when I walk the dogs in different neighborhoods there are lots of empty houses.

Banks do not seem to mind holding foreclosed inventory, ignoring decent shortsale offers.

It is all on the level surely, just waiting for some sanity before i buy, waiting and watching, walking the dogs in different neighborhoods, looking...

 

Tue, 11/27/2012 - 16:40 | Link to Comment buzzsaw99
buzzsaw99's picture

Like a dog that returns to his vomit is a fool who repeats his folly.

Proverbs 26.11

Tue, 11/27/2012 - 16:41 | Link to Comment RopeADope
RopeADope's picture

Bulk real estate investors will generate decent returns once house options are tradeable in a few years. Massive losses to public capital incoming.

 

You can have your cake and eat it too in the new crony capital world.

Tue, 11/27/2012 - 16:46 | Link to Comment buzzsaw99
buzzsaw99's picture

i'm sure there are no cloudy mers titles in there. :roll:

Tue, 11/27/2012 - 19:40 | Link to Comment NotApplicable
NotApplicable's picture

Nothing that a little martial law can't fix.

Tue, 11/27/2012 - 19:19 | Link to Comment Offthebeach
Offthebeach's picture

20 million fleeing Chinese Communist Party members and their minions will buy them. Plus they'll be up to American crony corruption and one party with two fake rule.

Tue, 11/27/2012 - 16:41 | Link to Comment PhattyBuoy
PhattyBuoy's picture

I am going to get rich flipping Vegas real estate (again) ...

Tue, 11/27/2012 - 16:44 | Link to Comment Skateboarder
Skateboarder's picture

Thank you for the report - I appreciate the severity of the numbers presented, but as CogDis said, this aint nothin yet.

Bundling mortgages and gambling with 'em is one thing, but commoditizing shelter to the point of bulk sales to absentee buyers paying in cash...

For fuck's sake, your house aint even yours lol.

Tue, 11/27/2012 - 16:52 | Link to Comment chunga
chunga's picture

Same pricks that blew the bubble on the first go 'round.

Tue, 11/27/2012 - 18:19 | Link to Comment waterhorse
waterhorse's picture

yep, welcome to the rentier class.

Tue, 11/27/2012 - 17:02 | Link to Comment q99x2
q99x2's picture

The people buying bulk are the targets of the financial terrorists. They think they are getting into a great opportunity at a really good price. Suckers.

Tue, 11/27/2012 - 17:04 | Link to Comment Titus Flavius C...
Titus Flavius Caesar Vespasianus Augustus's picture

Isn't the whole point of controlling the issuing power of a fiat currency {via the fed's outright hocus pocus or frac reserve loaning} to exchange the useless bits of paper for... real shit?

 

I'm no historian, or Lizard King, but weren't there panics after 1913 wherein banks outside the fed reserve system tended to fail and be bought up by in-system banks, and didn't they buy up a whole bunch of real shit?

 

I'm just not surprised that a fringe benefit of blowing a bubble is getting more by way of real/tangible assets in the hands of fewer and fewer people...  and/or the government, which presumably will be renting to those of us whom Our Savior does not, in his mercy, send to the Hope Camps.

 

 

I wasn't trained in economics, but I have read a lot of Paul Krugman's blog.   I really don't see why none of you geniuses on here have not proposed hiring gang members to burn down all the vacant houses. It will increase home prices [no one's questioning that being a good thing, eh?] while giving troubled youths jobs.  And because the police will likely get in more gun battles with these folks, local businesses selling astringents and salves and the like will clean up!

Tue, 11/27/2012 - 17:28 | Link to Comment Toolshed
Toolshed's picture

You should definitely keep reading Krugman's blog.

Tue, 11/27/2012 - 19:46 | Link to Comment NotApplicable
NotApplicable's picture

LOL of The Day - pt. 2

Tue, 11/27/2012 - 20:34 | Link to Comment hairball48
hairball48's picture

That's mean :)

Tue, 11/27/2012 - 17:32 | Link to Comment adr
adr's picture

Why would you hire gangmembers to burn down abandoned homes when you could hire gang members to burn down your own home and collect the insurance money, most likely more than your house is worth. You could easily remove valuable items and still claim they were there.

If you are going to turn to crime, at least make it pay.

Tue, 11/27/2012 - 19:46 | Link to Comment NotApplicable
NotApplicable's picture

LOL of The Day

"I wasn't trained in economics, but I have read a lot of Paul Krugman's blog." (New Holiday Inn Express ad campaign?)

BTW, you can burn every empty home to the ground, yet that does NOTHING to increase demand. That takes people with jobs and available credit. Prices are set at the margins with actual sales. Supply is only one variable.

Tue, 11/27/2012 - 17:07 | Link to Comment FLUSA.com
FLUSA.com's picture

Probably time to hit up Dubai on the cheap before these greedy fuckers get in on it (Sarc)

Tue, 11/27/2012 - 19:47 | Link to Comment NotApplicable
NotApplicable's picture

They're not making anymore sand, ya know!

Tue, 11/27/2012 - 17:13 | Link to Comment Navigator
Navigator's picture

This RE market is supported by nothing but cheap money and banks withholding supply.  Without job and wage growth there will not be RE price increases for very long.

Bulk buyers, flippers and would-be landlords might want to review the definition of a Wile E. Coyote moment.

http://www.bing.com/images/search?q=wile+e+coyote&id=111D975C77B5FAFCDA7...

Tue, 11/27/2012 - 17:40 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

What's to stop them from bailing out bulk buyers?  They're the same old assholes, aren't they?

Tue, 11/27/2012 - 19:50 | Link to Comment NotApplicable
NotApplicable's picture

That's all a question of club membership. Many may believe they're a card-carrying member, right up until the instant they lose it all.

Old Money just loves absorbing New Money. Get richer while reducing the competition.

Tue, 11/27/2012 - 17:15 | Link to Comment gnap
gnap's picture

Its easy math ... during the housing boom, build a house for x amount and you were able to get a home equity loan for 0.5x.  Use that 0.5x to build 5 or 10 more houses (depending on your area) and get equity loans for (lets under-exaggerate and use 5 new houses) 0.5x times 5 houses = 2.5x.  Repeat this until the bubble bursts.  For each round, multiply by 5, so the first round is one, second is 5, third is 25, etc.

Cash out the equity loans, wait a year or so, walk away from the homes and declare bankruptcy.  Hand the cash to someone else to buy these liquidated homes at 0.25x.

If the bubble burst after round 1, you can buy 2 liquidated homes.  Round 2 yields 10 homes, round 3 yields 50 homes!

Tue, 11/27/2012 - 17:19 | Link to Comment Let The Wurlitz...
Let The Wurlitzer Play's picture

Whats the carry cost for 100k homes?  Est taxes at 3k per house = $300m.

This does not include insurance, maintanence of property, legal cost for leases and evictions, vacancies, administrative costs, valuation risk, etc etc

Only soemone investing another persons money would try this.

 

Tue, 11/27/2012 - 19:52 | Link to Comment NotApplicable
NotApplicable's picture

Or anybody with access to BennieBux. ZIRP is their friend.

It's hard work, but hey, somebody has to 'stimulate' the economy.

Tue, 11/27/2012 - 17:43 | Link to Comment socalbeach
socalbeach's picture

Contrary opinion on r.e. by Bruce Norris who accurately called the rise in 1997 and collapse in 2006.  Unfortunately, much of the presentation applies to CA only.

 

10-27-2012

California Real Estate Update and Trust Deed Investing

"... He had 94 offers in the first day.  The winning bidder was one of these multi-billion dollar hedge funds, that outbid every owner occupant.  And their proof of cash letter said they had $193 million dollars to close the purchase.  Now if you were a seller, wouldn't that be tempting to take that offer?"

Tue, 11/27/2012 - 19:26 | Link to Comment rlouis
rlouis's picture

I congratulate him on his successful bet on Central Planning, a lot of good CA information, but I still question the Peaches and Cream outlook, and $500K FHA loans make me want to puke,

Tue, 11/27/2012 - 19:53 | Link to Comment NotApplicable
NotApplicable's picture

Hey now! You gotta flip a lot of burgers to come up with that $15k down.

Tue, 11/27/2012 - 17:25 | Link to Comment Rainman
Rainman's picture

No reason to live in the big city projects anymore. Follow the section 8 money to a formerly nice suburban community near you. ObamaNation Part II. 

Tue, 11/27/2012 - 17:44 | Link to Comment kaiserhoff
kaiserhoff's picture

What's the average bid on a former crack/meth house?

Tue, 11/27/2012 - 19:59 | Link to Comment NotApplicable
NotApplicable's picture

I sold my house to a lady a few years back who made the mistake of moving to a brand new subdivision filled with $175k+ homes, right near a brand new jr. high school. That school gets locked down around once a month from all of the shootings nearby. Seems the developer just kept everything that didn't sell, and filled it with Section 8 peeps.

Tue, 11/27/2012 - 17:29 | Link to Comment adr
adr's picture

In the wealthier suburbs by me the weekly real estate transfer list usually has 3-5 sales per week. Sometimes none at all. My middle class neighborhood usually has a dozen or so, half that being banks transfers and government buyouts. The rest is mostly investors buying homes to rent.

All six of the homes that were bought near me in the past three months were bought to rent out. It is nice that there aren't as many for sale signs, but the firesale prices the investors are getting the properties for is driving down home values like crazy.

Of course if someone offers you $110k cash for your home listed at $125 without getting a realtor involved, most people will take the cash.

Tue, 11/27/2012 - 20:00 | Link to Comment NotApplicable
NotApplicable's picture

You'd be stupid not to.

He who bails first, bails best.

Tue, 11/27/2012 - 18:10 | Link to Comment dexter_morgan
dexter_morgan's picture

Somebody should inform Zillow about this cause my values sure aren't recovering according to them ......

Tue, 11/27/2012 - 18:12 | Link to Comment dexter_morgan
dexter_morgan's picture

 

"What's to stop them from bailing out bulk buyers?  They're the same old assholes, aren't they?"

A+++ for bicycle repairman!

just another way to transfer our wealth to the banksters.

Tue, 11/27/2012 - 18:24 | Link to Comment Rustysilver
Rustysilver's picture

Warren Buffett just said on Charlie Rose that housing is in full recovery. I believe him because everybody else is lying and data is all wrong

Tue, 11/27/2012 - 20:02 | Link to Comment NotApplicable
NotApplicable's picture

How would he know? He hasn't bought a house in like, forever!

Wed, 11/28/2012 - 03:58 | Link to Comment Floodmaster
Floodmaster's picture

The bank holding company makes up 17% of Warren Buffett's portfolio.

Tue, 11/27/2012 - 18:41 | Link to Comment bankerbackbacon
bankerbackbacon's picture

Just join Japan's slogan for everything: "Please do not worry"

http://www.zerohedge.com/news/2012-11-17/japans-official-advice-bond-inv...

Tue, 11/27/2012 - 19:10 | Link to Comment devo
devo's picture

At the end of the day, you need qualified, human inhabitants earning good wages to buy these homes. Anything else is asking for disaster. What I predict is home prices stagnating once the investor demand ends and more and more people moving in with family. People owning these properties will either have vacant homes or very low rents. 

Tue, 11/27/2012 - 19:24 | Link to Comment My Days Are Get...
My Days Are Getting Fewer's picture

I have been a residential landlord for 4 apartments for more than 25 years.  My properties are mortgage-free.  Most new landlords will learn how to become demoralized and disappointed:

Residental real estate rental is a managment intensive enterprise:  either pay a manager or do it yourself - like:

collect rents; evict tenants; get new ones; and make repairs.

In NJ, real estate taxes can go up 5% per year.  Insurance goes up.

My rents maxed out in 2006.  6 years later, rents are down by 30%.  But, expenses (ex-mortgage) are up collectively at least 2% per year x 6 = 12%.  So, today, my net cashflow is down 42% and that fact is reflected in market for re-sale.

Would you take $500,000 cash out of the bank and buy a property with a guaranteed net cash flow $18,000 per year (3.6%) return on investment.

To get that return, you have to do all the work yourself.  If you sell the property, the broker get 6%.  So, realize that you are working for the first two years for free just to pay the sales commission.  And, that calculation is with zero vacancies and zero evictions and zero costs for tenant damage.  However, the property is in a desirable location.

Those are the realities of being a landlord.

Tue, 11/27/2012 - 19:42 | Link to Comment devo
devo's picture

So at a 3.6% return you're actually negative after inflation (assuming you don't convert rent into another asset as soon as you receive it), correct?

That bulk investors are buying housing implies investors are willing accept negative yields.

This is so fucked up.

Tue, 11/27/2012 - 19:59 | Link to Comment Rainman
Rainman's picture

I suspect it's a long, long, loong term appreciation bet. And yes, it's all fucked up.

Tue, 11/27/2012 - 20:30 | Link to Comment My Days Are Get...
My Days Are Getting Fewer's picture

You are 100% on the mark.  

 

People like me have depreciated the property to zero ( but not the land value).  I aborbed the costs of ownership a long time ago.  If I sell now in 2012, I will net about 65% of the purchase price after depreciation recapture, capital gains taxes, NJ income tax, brokerage commission and transfer taxes.

Then, what is my reinvestment with proceeds?  My non-real estate investments are 90% gold and silver.

What galls me is that my insurance company requires me to insurance the building for replacement value.  They say it will cost $750,000 to replace the building.  But, the market place says that the land and building are only worth $500,000.

Only a lunatic would invest in real estate today.

Rents can only go up when renters earn more money.  And, when too many would-be renters drive up the rents.  Demographics say that the population of well-paid earners is declining.  So, how can rents go up.  Only expenses will increase until those new landlords, with 1% mortgages, have a negative cashflow.

Since I absolutely do not know what to do with my real estate, I will do nothing.

Tue, 11/27/2012 - 21:04 | Link to Comment devo
devo's picture

Accidentally burn the buildings down, collect the insurance, sell any remaining scrap metal, wood, etc, convert procedes to gold, and keep the land. I think land is good; houses are bad.

Of course, I'm joking, as this would be insurance fraud. But maybe only rent out to known pyromaniacs or arsonists.

 

Wed, 11/28/2012 - 00:32 | Link to Comment Jon Bong Jovi
Jon Bong Jovi's picture

Sorry you're having a hard go of it mate. I'd say dump the bitch and reinvest in NNN commercial real estate. Your other option is do nothing and suffer. It's hard to be small investor in residential.

If you're going to stick it out ask your underwriter if you can insure for ACV (Actual Cash Value) as opposed to replacement cost. That way you can insure for what the property appraises for as opposed to replacement cost. If you own the bitch outright, you could self-insure if you have the balls for it. 

Don't know how Assessor works out there, but if its an income producing property, it should be valued on its cash flow. Your NOI and a cap rate should be enough ammo to get your assessments lowered.

Wed, 11/28/2012 - 02:23 | Link to Comment Lord Of Finance
Lord Of Finance's picture

I just heard Warren Buffet say

 

Warren Buffet was silent during the inflating of Greenspans and the Bush administrations housing bubble. I believe Warren is an idiot-savant. He's a genious at recognizing good companies to get behind, but an imbecile when it comes to understanding that the economic fundimentals are now standing on quicksand.

 

Plus, he is a devoted backer to the whole administration. He is chearleading and it is quite sickening. To actually hear Obama politic for his tax increase proposals by calling it the "buffet rule" was some real shit stinking.

Wed, 11/28/2012 - 03:45 | Link to Comment Floodmaster
Floodmaster's picture

3X zip code income or mid-1990s prices are where we are heading, the world housing property bubble is starting to deflate. Boomers and millionaire grannies will scale down. Banks can't fight demographics.

Wed, 11/28/2012 - 05:07 | Link to Comment jover
jover's picture

Would the banks invest government donated funds via that wall street fund to buy off some foreclosed upon properties?

 

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