Supply and Demand: YEE-HAW style

Supply and demand is in my opinion the single largest factor in determining real estate values. I know we could get into affordability, interest rates and jobs. I think those are all important but the single largest factor to me is: supply and demand (people want more properties than are available, prices go up and not enough demand for properties prices go down)

There are different forms of supply and demand in the market today. The reality is that over the last 4 to 5 years we have seen a substantial amount of distress in the markets. By distress I mean forced sales, foreclosures, short sales, and tax sales. As a result we have seen a lot of demand from investors on both the individual and institutional levels. The homeowners have been doing their small part of this as they are absorbing the properties in post distress state via equity sale. However a large portion of this distress has just been pulled off the market in the form of rentals. (Invitation homes, Homes 4 rent, Blackstone, Colony)

In those last 4 to 5 years I have been on the forefront of buying up those distressed properties and been in a unique position to watch the markets transform from the driver’s seat. But now in the last year or so I have seen a shift in the market. It has been a complex shift.

1st) is the amount of distress in the market has waned (less foreclosures).

2nd) is we have recovered a significant portion from the bottom. These range by area but some are 50-80% recovered and in fact some areas have new record values.

3rd) is because of 1 and 2 we are seeing less investor activity. (Not as many deals and not as good of a price, no need to invest)

 What I am seeing as a result of that is markets that were dependent on investors driving demand have cooled off, and as a result it’s left to the “regular” equity sales to sustain those levels.

The problem I’ve identified is that in markets that have been stimulated by investor demand for flips and rentals could be at risk for a pull-back in pricing because they don’t have the underlying fundamentals necessary to sustain that recovery. (The demand reduces, the supply increases and prices fall)

Does that mean the jig is up and we as investors need to just go home now? That really depends on what your expectations are on returns, what your long term goals are and where you are located.

To me the answer is no, but I am also more cognizant about about where I look to invest and at what margins I am willing to invest. As I prefer to be in and out of markets “flips” I look to markets that can sustain growth based on factors outside of investor demand. Which to me boils down to population.

Below I have attached a chart of the top 10 metro areas of over 1 million that have seen the largest percentage of growth from 2010-2013.

Firebird Investment Group 2014

As you can see from the highlighted section, 4 out of the top 10 are in Texas. With over 1M new residents just in those 4 metro areas which is more than the top 6 California metro areas combined. My interpretation is that there is more demand just based on the simple population increase.

There are other factors I look at beyond just population growth. Like new housing starts, unemployment rates, affordability but this is one of the most crucial components to driving prices. More demand = higher prices.

God bless and looks like everything IS bigger in Texas,

-          Jake

Investor's take on the NAR Housing Data

Investor’s Take on the NAR Housing Data

I often am out there talking to my compadres in the real estate investing world, as I find it helpful to not only look at reams of data but also talk to other people within my industry. I have also discovered over the years that very few investor types actually network with each other. Usually it is the old school mentality that they might steal my deal or idea or maybe because we have become so accustomed to beating each other up on properties that we have some underlying resentment towards each other. In my younger years my only reference was some old school developer types that were (probably still are) highly secret about anything they are doing. To put those fears aside I have found that in today’s technology day in age it is actually very difficult to get any proprietary deals, and people pretty much see everything if they wanted to look. I’m not saying that proprietary deals don’t exist but ironically enough they are usually sourced through your network. I have also found that as I network more I am exposed to new ideas or variations on my ideas. And I’m not talking the MLM (multi-level marketing) networking, I am talking about making genuine connections and building friendships and relationships.

Challenge: When was the last time you reached out to someone and had some coffee or lunch? Go do that, I promise you it will be more worthwhile than the cost of the lunch.  

Back to my point, my fellow investors don’t really need a NAR report to tell them what is going on in the market as they are living the data on a day to day basis and what we are seeing is the regression to the mean on these DOM and a slight pull back on pricing. Their sentiment is that the market in Sacramento and most of the West coast is much softer these days. Given the overall lack of distressed “good” deals and buyers being even more picky than usual. The buyers that watched Blackstone (Invitation Homes) come in and buy up several thousand homes for rentals helped stimulate a 15-20% market appreciation (Which is good if you own a house, bad if you are looking to buy one). Well those buyers feel like they have missed out on getting an affordable house. As a result the prices are much higher and rates are slightly higher (4.19% 30 year fixed currently) so they are holding out and looking for that perfect house and some are actually being unrealistic but there is nothing in the market to externally motivate them.

My take on the market is we are seeing a lot less distress in the market. The investors, me included have been picking the low hanging fruit “Deals” for several years now. With the lack of low hanging fruit the competition has been forced to do 4 things.

     1) Move to areas with more deals/less competition

     2) Accept lower and lower returns

     3) Find a new niche or value add component (additions, new builds, commercial)

     4) Close up shop and move on (take their ball and go home)

The fact that we are seeing less distressed properties being sold. The bidding wars coming to an end, plus the DOM are on the rise this business gets less and less profitable by the day. I have been seeing many of my competitors do some variation of all 4 of those options. 

DOM (Days on Market)

I’ve mentioned it a few times in a couple of blogs. But, why do the DOM matter that much? As an investor it’s almost just as beneficial to sell a property quickly as it is to sell it for maximized price. The reason for this is a lot of investors are looking at the annualized rate of return.

---

Scenario 1)  If I invest in a house for 100k and sell it for 120k in 3 months my profit is 20k and my annualized return is 80% (20% x 4)

Scenario 2) If I Invest in that same house for 100k and sell it for 130k in 6 months my profit is 30k but annualized return drops to 60%. (30% x 2)

---

Which of those would scenarios you rather?

Well to me both are good options but it really depends on the underlying objectives and market conditions. If you have 5 million dollars and you can only buy 2 million worth of good deals because of lack of inventory. Then I would lean towards the maximize profits because you can’t source enough deals (spend all your money). If the market has a ton of deals that fit your pricing matrix then you go for lower return but higher volume as the velocity of that money is much higher at 4x vs 2x.

What usually happens is a combination of those two, you can source a certain amount of deals in this environment and you are typically holding back a little just in case that home run deal comes along. But given the opportunity to make a quick exit you will usually take it .  Now the flip side of that is the hold times start creeping up there the investor mentality is to cut bait given a 6+ month hold time. They feel like they are chasing a bad return and would almost rather cut the pricing to break even and just be done with it in hopes their next deal is better than that one.

Less properties = Less competition

Now that we are seeing less distressed properties what does that mean for the future. My take on it is that it is a good thing. The bigger funds with massive overhead have to move on to greener pastures or get bogged down chasing too few deals. The midsize funds battle it out and lean up, doing more with less and take some hits on a few properties as the market adjust to an environment where the buyers rule to roost. This will drive some of the other midsize funds to move on as well. The mom and pops in general will take the biggest hit as they typically will have all their money in 1 or 2 deals and if they take losses on those then they will quickly exit the market.

There is still levels of distress coming down the pipeline but the banks have gotten better at how they dispose of it and with levels of competition lower there will be some opportunity for a patient but well-funded investors. As the vacuum of the competition leaving the markets will allow for some deals to slip through the cracks.

But and this is a big but, since that low hanging fruit is gone all of the investments should be based on solid fundamentals not speculation of the market. I’ll go more into the fundamentals in the future.

God Bless and go network with someone

Jake

CalPERS makes big 6.6B real estate bet

CalPERS 6.7B Real Estate Bet in July

CalPERS makes big bet on real estate. It was announced today that in July the 300 billion dollar pension fund the largest in the US will not only be divesting its entire 4 billion hedge fund allocation but it has also committed 6.67 billion to real estate in the month of July. In one month this represents more than CalPERS has invested in real estate in the last 2 years combined.

Who and what did they invest in? They did a good job of spreading the investments across all regions and all asset classes.

- The largest single allocation was a co-investment joint venture of 1.3 billion to Institutional Multifamily Partners with GID Investment Funds for acquisitions and development of multi-family.

- Little over 1 billion was earmarked for Institutional Mall Investors and targeting dominate regional and superregional shopping centers.

- 985 million was co-invested with First Washington Realty a Bethesda Maryland based real estate investment group focusing on neighborhood shopping centers.

- 933 million was committed to large scale office and mixed use properties through Los Angeles based CommonWealth Partners by way of Fifth Street Properties (FSP).

- 412 million went to Institutional Core Multifamily Investors, a partnership with Invesco Real Estate targeting multi-family in the west and mid-west regions.

- GI Partners of Menlo park received $823 million for two existing joint ventures, TechCore and CalEast Solstice which focuses on technology related industrial properties.

- A follow-on commitment of 600 million with Institutional Logistics Partners, a partnership with Bentall Kennedy with a focus on dominate industrial properties.

- Rounding out the larger investments was a 200 million commitment to Pacific Multifamily Investors, a joint venture with Palo Alto, California based Pacific Urban Residential which will target class B multi-family properties.

So the breakdown is a little over 2 billion to retail via malls and shopping centers, just under 2 billion to multi-family and 1.4 billion to industrial properties and a 900 million investment to office and mixed use properties plus a handful of other under 100 million dollar commitments

All in all this is in-line with what I am predicting as we will see more capital being allocated towards real estate for the remainder of this year and beginning of the next year. As investors and funds will look to be in some more secure positions with a basis in solid assets to hedge against an inflation risk. Plus with the stock market at or near record highs in both the Dow and S&P 500 it would be a good time to take some profits off the table.

God Bless and Profitable Investing,

Jake

Sacramento Sales YTD

Numbers:

Some of you out there are like me and spend a lot of time looking at the numbers. I have updated some of the raw sales data for July and gives us a look at the first half of the year. As predictable we have seen a steady growth of both the amount of sales and volume. This is a pretty standard sale cycle as we peak midway through the year and then start to see a steady decline as school starts back up and the holiday season creeps up on us.

Resale Market:

We will see how the rest of this year pans out, we have seen the DOM rise heavily in the rural areas as well on housing over the 500k price point. I have seen a resurgence in activity on areas with older established neighborhoods that are on the lower end of each area. Such as old Rocklin where the prices are high 200s to low 300s. South Natomas areas, and the areas surrounding historic Folsom. This makes sense as the prices have gone up, entry level buyers are looking for places they can still afford.

New Homes:

Even though new homes have seen an increase in activity we are still far off where traditionally we would be in a normal market. Tim Lewis has had a steady pace on his Crowne point subdivision off Sierra College and I80 as Bass Pro Shops has recently broken ground. K Hovnanian is in full swing of building out the once stalled Paseo Del Norte off Pleasant Grove in Roseville.

Projections:

For the rest of the year I predict a tapering off on both the volume of sales and number of sales as mentioned before with school starting and the holidays fast approaching. Interest rates should stay down for the remainder of the year. But be aware by middle of next year we could see the Fed start raising rates. Also the mid term elections could play a small role in the upcoming market just as lenders and buyers do tend to sit on the sidelines during election time.

If you want a full excel spreadsheet of the numbers feel free to send us an email and we can get a copy off to you.

God Bless and Happy Investing.

Jake Harris

View fullsize

View fullsize

View fullsize