Archive for the 'Think Big' Category
Warning: What follows is a long, dry, stat-heavy summary without much original commentary or insight. It’s here because putting this together helped me think through the subject better. Proceed at your own risk. Hopefully at least one other person will find it interesting…
I came across an article a while back that I’m still trying to wrap my head around. It’s a wide-ranging piece on the Bloomberg site called Private Equity Has Too Much Money To Spend On Homes. The author/editors include quotes from a huge range of people, and the narrative bounces around to all different points of view. It’s a dizzying collection of factoids and thoughts that covers a market we have very little visibility to here in Greater Hartford.
The overriding theme is that investors have raised a lot of money to buy and operate distressed single-family homes as rentals, but so far they have not been able to acquire many properties at all. Below I’ve reorganized the points to first focus on the supply and then the demand side of the equation.
Supply of new distressed homes has been down in recent years, and is controlled by a limited number of mortgage lenders and government entities.
Fannie Mae is reviewing final bids on the bulk sale of 2,490 properties. A couple paragraphs later the author cites a Guggenheim Securities LLC note that said future REO-to-rental bulk sales by Fannie Mae and Freddie Mac may be delayed to “monitor the properties in the pilot program.”
Fannie Mae’s bulk sales will be based on regional pools – Atlanta, Chicago, three regions of Florida, Las Vegas, Southern California, and Phoenix. Pools will either be sold outright or used for joint ventures with Fannie Mae. 85% of the homes have rental tenants. Buyers will face restrictions on resales to prevent flipping and flooding a market. A March filing showed that Fannie owned 114,157 foreclosed homes and that 8% of them had tenants.
The FHA (Federal Housing Administration) manages about 35,000 repossessed homes, and “plans to sell 5,000 properties with delinquent loans.” (KB: It’s not clear if this would be a bulk sale or individual property sales. Also, how do you sell a property with a delinquent loan? I can understand selling a loan. Or foreclosing and selling the property. But not “properties with delinquent loans.”)
Bank of America is avoiding bulk sales with their REO inventory, preferring to approve short sales, sell properties through real estate agents or auction them off individually.
Foreclosure processing – the taking of homes – has not yet recovered after the robo-signing issue and related settlement.
Short sales are increasing, and RealtyTrac expects them to exceed the number of REO sales in the second quarter of 2012.
CoreLogic reports that there are 1.6 million homes that are either owned by banks and not yet for sale, or are more than 90 days delinquent on their mortgage. They refer to this as shadow inventory.
PIMCO (Pacific Investment Management Co) believes that 6 million homes will be lost through a distressed sale in the next five years, and that will create demand for 4 million new rental units. By their calculations, $6 billion spend on foreclosures, at an average price of $150,000, only equals 40,000 homes. So the opportunity is much larger than $6 billion.
On the other side of the equation, there are many different groups hoping to buy and rent single-family homes in the United States. Here is what they are seeing in this market.
Investors have committed at least $6.4 billion to this investment theme. A managing director in the real estate investment banking group of Jeffries Group Inc. is quoted as saying “less than $2 billion of institutional capital has been spent.”
A company called PropertyAccess currently manages about 10,000 single-family rentals for banks and investors, and is expecting to be able to buy 500 to 1,000 per month by the fourth quarter. The gentleman quoted from that firm thinks the ability to buy these types of properties is more of a challenge than the ability to operate them.
Private Equity firm Colony Capital hopes to buy $1.5 billion worth of single-family houses by April 2013, and believes the operation of the properties is more of a challenge than the acquisition. The gentleman quoted estimated that 7.5 million homes with a market value of $1 trillion will be lost to foreclosure by 2016.
Investors at Carrington Capital Management LLC, who received a $450 million commitment from an Oaktree opportunistic fund, believe the primary challenge is finding homes to buy.
GTIS Partners, another investment firm, hopes to buy $1 billion worth of single-family houses by 2016, but prefers not to buy in bulk. Their chairman is quoted as saying “if you buy by the pound, I think you’ll underperform” since you haven’t done your due diligence on the individual properties and will end up with a lot of junk.
Delavaco Properties Inc, an owner/operator that is planning to go public, focuses on single-family homes that generate a stable rental income. They own 450 homes and also like to be selective in their purchases.
The Phoenix area was specifically mentioned a couple of times, with the point being that investor demand for distressed home is outpacing supply.
Landsmith LP sold 75 homes they had previously bought in the Phoenix area for about 3.4x their purchase price. (KB: No information was provided about how much they spent improving the properties) They are now looking to other markets that are earlier in the foreclosure cycle.
American Residential Properties, Inc., a REIT that is planning to go public in 2013, also sees the Phoenix market as more competitive.
Finally, it was noted that real estate agents hate the idea of foreclosed homes selling in bulk. One reason is that brokers feel the buyer market is deep enough to absorb the coming inventory. Additionally, the Chairman of brokerage firm Realogy was quoted as saying that large-scale foreclosure sales “would put further downward pressure on home prices, take away local investment opportunities, and enrich Wall Street investment funds.” The author concludes by noting that real estate agents do not receive commissions for the bulk sales.
Since this article was published, Fannie Mae has put out this press release about the next step in their REO program.
Now that I’ve sorted through all that information…
There aren’t enough distressed situations in Greater Hartford to warrant bulk sales of repossessed homes. There are a handful of agents who seem to have relationships with the banks and government organizations and they handle all the REO sales. The rest of us – the vast majority of local real estate agents – work directly with owner/sellers who are not in distress. There are short sales periodically, but they are not overwhelming the system either.
A billion dollars is a lot of money. For example it would be almost enough to buy all of the single-family houses in the City of Hartford (about 7,100 of them), which the Assessor valued at $1.12 billion as of October 1, 2012 in the most recent revaluation. If another billion-ish dollars were laying around it could be used to buy all the two-family and three-family properties in the City (another 6,300 total), which were valued at $1.11 billion.
Six million homes (or 7.5 million) lost to distress is an even larger number. So they’re saying that nationally the problem is about 1,000 times worse than if every single-family home in the City of Hartford were lost to foreclosure.
According to this recent housing survey on census.gov, there are about 79.7 million detached single-family homes in the country and 125.5 million residential units in total. So somewhere between 5% and 10% of them are going to be lost, with much higher concentrations in some areas.
What does this mean for Connecticut real estate and for Greater Hartford in particular? Are we late to the foreclosure party, or was the housing boom and bust so tame in this area that we’re going to miss the mass foreclosures entirely?
Yesterday Amy noticed a story come across the wire about a new Microsoft patent. One of the main benefits, which appears in the abstract of the actual filing, is that it will allow walking directions to be provided that take into account “unsafe” neighborhoods.
The story caught our attention because as real estate agents we are not allowed to talk about neighborhoods as “safe” or “unsafe.” An area’s level of safety is a personal perception and by expressing our opinions we could be steering our clients to areas we like and away from areas we don’t like, which might not be right for them. Instead, we have to allow our buyers to make their own decisions. We can point people in the direction of crime statistics. And we can encourage them to visit an area during different times of the day. But we cannot characterize a neighborhood as good or bad.
So how will this new patent be implemented? What factors will be used to determine if a particular area should be avoided by pedestrians? How granular will the data be – if crimes occur in one part of town, will the entire town be declared unsafe? Will factors related to the built environment, like a lack of sidewalks, factor into the algorithm? At this point there are obviously far more questions than answers. It will be interesting to see what kind of information Microsoft, or any potential licensee, is able to incorporate into their maps.
Taking a step back, I would love to see a block by block map for crime, perhaps in the form of a heat map. Since crime statistics sound like an input to the pedestrian route algorithm, this should be a relatively easy task. The primary challenge would be getting programmatic access to the crime statistics from each community. If it were possible, and if the resulting maps were intuitive and sufficiently granular, then they would be a huge help for home buyers trying to understand a new region, town, neighborhood, and block. (Perhaps a good one already exists? I know of a couple sites that show crime stats, but they seem user unfriendly in their interface and overburdened by advertising.)
Everyone has an opinion about which areas are safe and which are unsafe. Those opinions are often strongly held in the Greater Hartford area. They are also often based on what “everyone knows” rather than data or even personal experiences. Presenting factual data in an accessible format would definitely be helpful, and could surprise a lot of people.
Warning: What follows is quite dorktacular. You have been warned.
Last week we looked at the really big picture transactions data for Hartford County in 2011. The main concern we had with how the numbers turned out was that the average single-family home price appeared to rise slightly from 2010 to 2011, which was not what we saw in the market on a house by house basis.
There is no easy way to track the price trends in a region because every house is unique. Repeat sales is the best method I know of, but it’s too hard for us to use. Anyway, we were talking averages in the post. Our hypothesis as to why the average might be misleading in this case is that averages can be influenced by a change in the mix of homes that sold between the two years. They are especially susceptible to sales of expensive homes since one million dollar property contributes as much to the total sales volume as five $200,000 homes.
The first step we took to test our hypothesis was to look at how the mix of sales changed between the two years.
The chart shows that the number of sales increased in the sub-$100,000 price band and also in all three price bands above $500,000. It also shows that the $100,000s remained almost exactly the same. Finally, the number of deals in the $200,000s fell by about 20%, while both the $300,000s and $400,000s fell by about 12%. The chart confirms our anecdotal observation that there is was more interest in high end properties in 2011, but doesn’t address our hypothesis in a convincing manner.
What if we plotted the total sales volume for each price band instead of the number of deals? That would put each of the price points on equal footing in terms of their contribution to the average.
This chart shows that the homes that sold for less than $100,000 matter very little in the average. But otherwise the chart is not conclusive about whether the average remained the same due to prices holding steady between the two years or some other reason.
Maybe we should just throw in the towel on the average as a proxy for home prices and move over to the median. Between 2010 and 2011 the median single-family home price in Hartford County fell 3.3% from $230,000 to $222,500.
Or we can just trust our observations of the market … home prices fell in 2011.
Last year we gathered up all the Hartford County residential transactions since the beginning of the CTMLS in 2000 and showed how the very high level trends had changed over 10 years. Today we update those charts with the data from 2011. As always, the CTMLS is deemed reliable but not guaranteed.
The total number of single-family home transactions fell again in 2011, decreasing about 8% from the 2010 total. With the latest data point, activity for this type of property is about 41% off the 2005 peak in Hartford County. Last year we wondered whether we had seen a bottom in the number of deals – clearly 2010 was not the bottom.
As sales volume fell, showing a decrease in overall demand, the average sales price was apparently not changed. We don’t put a lot of faith in average prices because they are strongly influenced by the mix of homes that sold in a particular year, so we think something else is going on.
Our anecdotal experience is that home prices are still falling in all the towns and markets in which we do business. We also see more interest in higher priced homes, which will tend to inflate the average, and believe that’s why the average sale price edged up slightly. We’ll work on building the case to either prove or refute this hypothesis and share that result too.
Big picture analysis like this is never especially satisfying since we usually end up with more questions than answers. What are you guys seeing out there as you follow the markets? Michael called 2011 almost perfectly in the comments from last year’s post, so we clearly have knowledgeable readers!
Also, we have this data broken down by every single town in Hartford County. If you’re interested in a specific town, email us and we’ll send you the charts.
The incandescent light bulb. Once a symbol of American ingenuity, it is now under attack as a wasteful.
Just about everyone I know has strong feelings about the incandescent. Most prefer the light they provide. Most would also agree that they are inefficient compared to compact fluorescent lamp (CFL) and light emitting diode (LED) technologies. Some argue that the newer technologies are inferior due to their color spectrum and their turn on time, though both of those characteristics have been improving with each generation of the technologies. Others are just turned off by the higher prices of the newer bulbs.
Congress got involved with the Energy Independence and Security Act of 2007, which was supposed to take effect at the beginning of 2012. The plan was to gradually halt the production of incandescents starting with the 100W bulb this year. The 75W would have been phased out in 2013, and the 60W and 40W in 2014. However, action by Congress during December of 2011 has effectively pushed out the start date until October 2012.
I have two perspectives on the matter. At the personal level, I think that efficiency is important and have been testing out the various CFL products for years. They were very poor at first, and I think they earned their bad reputation. Some of the newer bulbs I’ve bought have been much better, almost as good as the incandescents. I do still have a problem with the smaller specialty bulbs that are visible. Coiled CFLs just don’t look right in a nice chandelier, and I haven’t been impressed with the performance of “decorative” CFLs I’ve bought.
At the professional level I am a really big fan of incandescents. I’ve shown buyers enough homes to know that they are always more impressed with a property well lit by incandescents than they are by CFLs. One issue is that the quality of the CFLs vary depending on which generation technology the sellers have. So it’s common to see older CFLs that play right into the negative stereotype, which gets a buyer thinking about the lighting instead of the house.
My main recommendation at this point is to sellers. No matter how you feel about the different bulb technologies, you will make your home sell faster, and potentially for more money, by replacing all your CFL bulbs with warm incandescents. Think of it as part of the staging process, and remember that you can pack up your CFLs to bring to your new home.