By Charles Tassell
Since the depths of the housing recession in 2009-2010, the eyes of Wall Street funds have focused on the single-family housing market. Banks, dispensing with various tranches of mortgages, sold tapes of hundreds and thousands of houses to equity groups. At pennies on the dollar to their value, somewhere wholesaled, but many were renovated to varying degrees and rented out. A small percentage were demolished providing a tax write off for the fully inflated value loss. Needless to say, the success of these early equity groups reverberated around the world as increasingly liquid monetary policy, and a flight to US safe havens poured billions into the US housing market.
With a multi-year appreciating housing market and seemingly boundless demand, savings and treasuries were anemic by comparison. Equity groups bought into plans by tech firms recognized as experts in their fields, to cross over into SFH investing. Both a fear of missing out combined with a feeling of financial wealthiness, was driving consumers to roll their equity up into larger housing. Few saw that that the scars of the housing recession created a decade-long under-build of new single-family housing, especially in urban markets, as well as a long-term shortage multifamily and rental housing. Local government opposition to anything but luxury or luxury senior, was seen as risky, especially to politicians neighboring the NIMBYs of the world.
Millennials like to buy and move in to a ready-to-live-in home. Rehabbing is not their cup of tea. With fewer foreclosures overall there are fewer to purchase/rehab and with the HGTV crowd once again entering the market as weekend warriors, many SFH rehabbers have become marginalized and experienced one of two outcomes: patient purchases with down time, and substantial profitability on those few, or churning and burning to re-engage the money resulting in smaller and smaller profits.
When this same process is tried at the corporate level, and with corporate efficiency (tongue in cheek), the forty-thousand-foot spreadsheet view can look really good, right up until it doesn’t. In other words, at some point the reality of contingencies – the kind that change your plans when you open a wall, don’t fit into the corporate cookie cutter plan. Zillow exited the rehabber market even though they were the technological value oracles. Their losses were mounting, and that was before interest rate hikes. Recently, Redfin announced they would be shuttering their renovation department and shared expected losses to be in the hundreds of millions of dollars.
It really begs the question: If Institutional rehabbers are getting killed in the market, even with massive appreciation, what happens when there is a slight decline in values?
Considering many people shop for houses by payment, just like a car, the interest rate has a huge impact, especially if inflation is eating away at their paycheck. The young couple trying to purchase a $2k payment has changed their plans from a $600K house at 3% interest to a $375K at 7.5%. In most regions across the country, those are two very different markets. With substantial inflation keeping most longer-term homeowners’ proverbial head above water, the newer owner, and especially the small down payment buyer of the last couple years is getting nervous. Several high-flying cities, Denver, Phoenix, and states like FL and CA are seeing price drops and large increases for time-on-the-market offerings. The seller’s market, where letters pleading for the chance to buy the house on “first day over-bids” has converted to a more conventional buyer’s market.
Let’s diverge for a moment and consider the next likely real estate headlines: China’s housing and property bubble. Little by little information on the bubble that is China’s housing and property bubble has been leaking out. From protests in regions unable or unwilling to mortgage payments and large investments in to empty apartment buildings, office buildings and industrial facilities, the problems are being recognized as possibly the largest in the world, considering the inflated yuan. As this reset happens, and it will, there will be shockwaves felt around the real estate world. Before the talking head patter citing the next institutional rehabber going under with losses in the millions, consider a few differences including corporate process as noted above, and a demographic difference. While patient money is always best, local knowledge and acumen is essential.
Demographics…
For decades the one-child policy of China has resulted in a historically abnormal family situation, and according to many Chinese an environment that, even with the expansion of the one-child to two and now three children policy, discourages them about the future. With birth-rates trending down, substantially in some regions, the next generation is expected to be 25% the size of the current generation. That reduction and a rapidly ageing population dominated by single males (who outnumber females by over 33 million) will put new stresses on the so-called Asian Dragon.
In the U.S., a maturing millennial demographic is more hopeful, and while coming of age later than traditional American families, are settling down with a baby-boomer-echo impact. Birth rates are continuing and the shortage of housing, especially entry level housing, has put upward pressure on the price and value of U.S. single family housing. Interestingly, the shortage has caused some homes to revert to the more historically traditional multi-generational housing, with the older generation providing the capital for second and third stage housing. With Boomers considering all types of estate transitioning options, multi-generational housing may see broader adaption…if we can live with our in-laws!
While the demographic trend may provide a floor or at least an upward pressure on a cooling housing market, it will not be enough to protect corporate entities focused on rapid reallocation and dependent on appreciation. Correspondingly, there is the mixed bag of inflation. Yes, mixed. While books have and will continue to be written on the subject, the benefits of owning an appreciating asset well outweigh the ongoing losses of inflation eating away at a storehouse of funds. The key is making sure that future deflations of currencies are planned for and offset with individual level planning. For example, as the economy goes through a shake-up with employment possibly falling and the ramifications of that: specifically people offloading assets at a discount. There will be a deflationary impact.
One key asset to observe is the second home. Purportedly there is a 3 million home shortage in the U.S., and yet there are over 10 million second homes. The number of those second homes that re-enter the market will have a distinct impact on housing values. As ageing baby-boomers, surprised at the prices they can still claim, increase their offerings of second homes to the market, values could sag even more. This does not mean a return to housing deflation like the 2008-09 period though, as that reset was institutionally forced. However, other than a few unemployed offloading an in-demand house, the rest of the market, even the ageing, can wait in an ersatz seller’s market condition. Hence it will be all the more important to watch local housing markets, regional unemployment and not be swayed by institutional or international headlines. Patient money will be rewarded…at least that’s what my fortune cookie said!
Charles Tassell is the Chief Operating Officer of National REIA.
