Large real estate investor purchases steeply decline in California
Large real estate investors in California reject higher prices and stagnant rents and dramatically slow their purchases over the last 18 months.
Sales are slow across the country, but particularly in California, because prices are too high. When prices were low enough that investors could obtain a sufficient yield, they bought them; in fact, they bought a great many of them, so many that they absorbed all the available inventory and drove prices up to the point that they no longer make sense on a cashflow basis. The theory was the owner-occupants would step up, pay higher prices, and sustain the market momentum. It hasn’t worked out that way.
In the past, whenever affordability became a problem, lenders would come up with some
innovative toxic loan product, allowing people to buy homes they really couldn’t afford; thus the cycle of Ponzi lending and borrowing would begin. During the bubble from the late 80s, toxic products such as adjustable-rate interest-only loans became common, and prices were pushed up to the limit of fake affordability these products created. During the most recent housing bubble, we hit what should have been a peak in late 2003, but lenders “innovated” again and began originating and securitizing option ARMs that pushed prices up to ridiculous levels.
To prevent the deflation of that housing bubble, the federal reserve engineered low mortgage rates by first lowering the federal funds rate to zero then printing money to buy mortgage-backed securities to push mortgage rates down from 6.5% to 3.5%. In the process they made stupid bubble-era prices affordable — which is where we stand today.
The difference today is that lenders must now deal with the Dodd-Frank restrictions of qualified mortgage rules and the ability-to-repay rules. These two rules effectively ban the toxic mortgage products used in the past to make unaffordable house prices temporarily affordable. So what happens when prices get too high and toxic mortgage products are unavailable? Home sales volumes crumble. Combine that with a pullback of institutional buying, and you end up with sales volumes well below last year’s below-average levels.
May 22, 2014
Overall, institutional investor activity has been falling in the markets we have been following over the past few months. That being said, single-family purchases have not entirely fallen out of favor with large-scale investors and there is still appetite where prices, demand and supply remain attractive, like in the Midwest cities and Miami. Although, as the interest in these markets will surely not last long,
Their interest in these markets will last until prices rise high enough that cashflow values no longer make sense. Back in 2011 and 2012, every property made sense; now, very few do.
The following three charts come from various Southern California markets. Note that each shows a spike in December of 2012 and a steady and notable decline since. The decline from 2013 to 2014 also explains part of why overall sales volumes are down.
Los Angeles, California
Orange County, California
Inland Empire, California
So what does a decline in investor purchases mean for California housing?
High negative equity, high prices, low inventory cripple sales
Trey Garrison, May 22, 2014 12:31PM
Home price gains in the Golden State have lifted more underwater homes into positive territory, pushing the share of equity home sales to their highest level since late 2007, the California Association of Realtors says.
The share of equity sales – or non-distressed property sales – continued to increase in April, rising to 88.4% in April, up from 87.6% in March.
After a slight decline at the end of 2013, equity sales have been rising steadily again since the beginning of this year. April marks the 10th straight month that equity sales have been more than 80% of total sales. Equity sales made up 75.4% of sales in April 2013.
Meanwhile, California single-family home and condominium sales in April 2014 were up 20% for the month but were down 13.3% from April 2013, according to PropertyRadar.
Despite April gains, year-to-date sales volume was the lowest since 2008.
For the month, both distressed and non-distressed property sales posted gains. April 2014 distressed property sales gained 13.1% from March, while non-distressed property sales were up 21.8%.
“Despite back-to-back double digit sales gains in both March and April, total sales volume since the January continues to lag sales in 2013,” said Madeline Schnapp, Director of Economic Research for PropertyRadar. “In fact, what is surprising to me is that year-to-date sales volumes in 2014 are the lowest since 2008.” …
This isn’t very surprising if you consider the logical results of banning affordability products.
“Despite lower sales volume, the median price of a California home continues to march higher,” said Schnapp. “The rise in median home prices is being driven by the change in mix between the sales of distressed properties versus sales of non-distressed properties. Higher priced non-distressed property sales now dominate monthly sales numbers, so it should come as no surprise that median prices are up.”
Can a market truly recover on low sales volume? If recovery is defined by reaching a certain price level and maintaining it, then yes, a housing market can recover on low volume. Lender policy of can-kicking until collateral value is restored on their bad loans works, and I see no reason it won’t continue to work.
The bottom line for California? Schnapp is pessimistic about the rest of 2014.
“While most real estate analysts are forecasting a robust real estate recovery for the rest of 2014, our data suggests anemic sales growth,” said Schnapp. “Elevated negative equity, high prices and low inventory are depressing sales volumes and crowding out potential buyers.”
Most real estate analysts are projecting their fantasies, whereas Foreclosure Radar is looking at reality. Sales will be weak in 2014 because prices are too high for investors and job growth is too weak for owner-occupants to pick up the slack. It’s a simple as that.