What's Driving Single Family Home Investors?

Why are ordinary Americans jumping back into the real estate investment market so readily. One would think the sector would be avoided like the plague but it appears as if single family homes as investment vehicles may be more popular than ever.

Mind you, it’s hard to get reliable data on how many single family homes have been bought by investors as opposed to owner-occupants but anecdotal evidence as well as some articles I’ve happened upon indicate that investor participation is at lease equal to the level of the bubble years and in some parts of the country might well exceed the previous high water marks.

I can only come up with guesses as to what’s driving these people. Here they are:

1. I call this the hope springs eternal motivation. These investors are “true believers” who think that once supply and demand evens out we will see significant price appreciation. They are the ones who always said you can’t lose money in real estate and despite all the evidence we now have to disprove that old saw, they hew to it.
2. In the other corner are the realists. They believe that real estate appreciates slowly but that it does appreciate. By their logic, now is the time to buy because the downside is close to zero. If they’re buying at auctions with good due diligence they might be right, at least as far as the downside is concerned.
3. Next up are the cash flow seekers. They might be the most rational of the pack. From their viewpoint, single family homes are priced to be able to deliver predictable cash returns. The cash-on-cash return might not knock your socks off but they’ve discovered the virtues of conservatism.
4. Finally, you have the hopeful. They might fit into any of the above categories but they’re driven by dreams of the S&L crisis. They still regret not having invested in real estate in those days and are not about to let this “opportunity” pass them by. Normally, they remember that many made beautiful returns with property that they bought from the RTC but forget that most of those returns came from commercial real estate not residential and that it took almost a decade for the real payday to come around.

Now, I don’t want to rule out good old-fashioned salesmanship on the part of the realtor profession in enticing many of these buyers, but I doubt that works well without at least some of the motivations I outlined being present.

There is a fair chance that this will work out for a lot of these buyers. So long as they buy at the end of the market that’s been the most beaten up it’s fairly likely that they won’t suffer much if any loss of principal and to the extent they avoid excessive leverage — most seem so far to be doing so — then the likelihood of positive cash flow is pretty good. All things considered, that amounts to a reasonable investment in this environment.

As I reread this post it really seems as if I’m trying to make a case for investing in single family homes. I didn’t start out with that intent but it sure looks like that is where I ended up. Help me out and tell me what I’ve missed. Here’s one I thought of — once the market normalizes there is going to be a surplus of rental units as those who were forced into rental housing by foreclosure regain their footing and buy back into the market. That’s weak but so far the best I can come up with.

Comments

[jhartz:]

I remember attending several foreclosure auctions at the County courthouse last year. Speculators were bidding up prices on homes to about 80% of the previous peak.

At the time, all of them were cackling in glee, knowing that things would turn around again and they would end up with forty to fifty percent gains within the year.

Today, approximately one year after, these same types of houses are selling for fifty to fifty five percent of their peaks.

Next year, they'll be selling for still less. That is the nature of a deflationary asset collapse.

There is a price where it will be an excellent investment opportunity to buy such houses. Unfortunately, that price hasn't been reach yet.

Jul 07 06:43 PM

[PseudonymName:]

I bought a condo at the end of 2008 in Oceanside, San Diego County, CA. Why? Because the 3 bedroom apartments across the street were renting for more than my monthly payments are.

Now I own my own place - 3 miles from the beach in SoCal and I am paying less than the folks in the apartments across the street to live there not to mention that I have way more Sq Footage and a two car attached garage to boot.

When you can own your own place for less than the cost of renting - it is time to buy.

Jul 07 06:50 PM

[Robert Gosney:]

I'm buying now. As I pointed out in another response prices in my area are down 75% from peak. Replacement cost (including land) would be about 50% from peak, so I'm buying for roughly 1/2 of the replacement costs. So in my particular case, it's not rocket science, I'm betting that homes will appreciate up to replacement costs within a few years (thereby doubling my money). In the mean time I have a tangible asset that produces an income for me.

For my area right now, mortgage payments are less than rents. I'm sure that rents will come down but for the moment getting positive cash flows are easier than falling off a log.

Affordability is spiking too. That won't last forever.

Jul 07 06:55 PM

[nym:]

As investors lease their properties and unemployment rises, rents will go down, reducing cash flows from rent. The downward spiral continues.

Jul 07 10:19 PM

[bigmoney:]

what are the price to rent ratios on these houses?

Jul 08 12:01 AM

[cobblestone:]

You are correct.....unless rents decline.


On Jul 07 06:50 PM PseudonymName wrote:

> I bought a condo at the end of 2008 in Oceanside, San Diego County,
> CA. Why? Because the 3 bedroom apartments across the street were
> renting for more than my monthly payments are.
>
> Now I own my own place - 3 miles from the beach in SoCal and I am
> paying less than the folks in the apartments across the street to
> live there not to mention that I have way more Sq Footage and a two
> car attached garage to boot.
>
> When you can own your own place for less than the cost of renting
> - it is time to buy.

Jul 08 11:39 AM

[Fred W:]

Exactly.
Renting is a MUCH better "investment" at this time.
Obama appears to be trying to re-inflate the bubble--sad.
Prices must be allowed to fall to the level where incomes can support them. We are not even close to that point and incomes are actually falling in real terms.


On Jul 07 06:43 PM jhartz wrote:

> I remember attending several foreclosure auctions at the County courthouse
> last year. Speculators were bidding up prices on homes to about 80%
> of the previous peak.
>
> At the time, all of them were cackling in glee, knowing that things
> would turn around again and they would end up with forty to fifty
> percent gains within the year.
>
> Today, approximately one year after, these same types of houses are
> selling for fifty to fifty five percent of their peaks.
>
> Next year, they'll be selling for still less. That is the nature
> of a deflationary asset collapse.
>
> There is a price where it will be an excellent investment opportunity
> to buy such houses. Unfortunately, that price hasn't been reach yet.

Jul 08 11:58 AM

[Fred W:]

You ASSUME that someone actually wants to live where your houses are located--if they don't (often the case now for places that experienced 75% price reductions) then replacement value means NOTHING. Some banks are actually demoing the homes as it is cheaper than your approach.
good luck--you need it.


On Jul 07 06:55 PM Robert Gosney wrote:

> I'm buying now. As I pointed out in another response prices in my
> area are down 75% from peak. Replacement cost (including land) would
> be about 50% from peak, so I'm buying for roughly 1/2 of the replacement
> costs. So in my particular case, it's not rocket science, I'm betting
> that homes will appreciate up to replacement costs within a few years
> (thereby doubling my money). In the mean time I have a tangible asset
> that produces an income for me.
>
> For my area right now, mortgage payments are less than rents. I'm
> sure that rents will come down but for the moment getting positive
> cash flows are easier than falling off a log.
>
> Affordability is spiking too. That won't last forever.

Jul 08 12:01 PM

[Stephen Kanitz:]

No one pays taxes anymore ?
Mortgage Interest Tax Deductions are 30% government subsidies, since nominal rates are deductible not the real interest rate, which are practically negative.
Pay half price, negative real interest rates, and have a 30% deduction on nominal rates, what more do you want ?
A school system that teaches math.

Jul 08 02:50 PM