What Experts Are Doing About Real Estate

Casey Fleming
Feeding Frenzy Market
Bid Higher! Bid More!

If you are shopping for a home right now, are you enjoying the feeding frenzy?  (At least here in Silicon Valley…)

We’ve all heard that investors were snapping up homes left and right, paying all cash, and pushing regular home buyers out of the market.

Some of this money came from outside the country, but a lot came from institutional investors who funded companies that were buying up foreclosed properties at fire sale prices.  Several companies raised hundreds of millions, or even billions of dollars, from institutional investors.  (Think pension funds, insurance companies, etc.)  These companies then took this money and went on a buying spree.  This obviously has impacted the market, as you (the homebuyer) are competing against foreign investors, as well as companies with hundreds of millions that they have to spend the money that they raised.

So where do we go from here?

You May Not Have to Compete With Investors for This Home
Your New Home

Prices have been rising rapidly; I’m sure you’ve noticed, especially if you’re looking to get in to the market.  At some point, the prices will get to a point where you might still be interested, but the investment will no longer make sense for investors looking to turn a profit.  When we reach that point, what will happen to the feeding frenzy?  Well, it should taper off.  Are we at that point yet?  (I’m speaking only of Silicon Valley of course.)  My favorite economic pundit, the author of Calculated Risk (www.calculatedriskblog.com) has an opinion on that:


Housing Report: Institutional Investor Stops Buying, blames “stupid money”

Posted: 29 May 2013 10:22 AM PDT

From John Gittelsohn at Bloomberg: Carrington Stops Buying U.S. Rentals as Blackstone Adding

“We just don’t see the returns there that are adequate to incentivize us to continue to invest,” [Bruce] Rose, 55, chief executive officer of Carrington Holding Co. LLC, said in an interview at his Aliso Viejo, California office. “There’s a lot of — bluntly — stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible.”

Carrington, which started in 2003 as a mortgage investment fund and has managed almost 25,000 rental homes for itself and others, has been joined by hundreds of institutional and international investors buying single-family homes after prices plunged following the housing crash.

Blackstone Group LP (BX), the largest investor in single-family rentals, has spent $4.5 billion to amass more than 26,000 homes and continues to buy, according to Eric Elder, a spokesman for Invitation Homes, the rental housing division of the world’s largest private equity firm. … Blackstone’s net yields on its occupied houses are about 6 percent to 6.5 percent …

Back in late 2008 and early 2009, I started reporting on small investor groups buying low end single family properties to rent. Since then rents have increased sharply and vacancy rates fallen.

Early last year I checked back with these small investors, and they had all stopped buying. The numbers no longer made sense with all the large institutional buyers.   Now it appears the numbers no longer make sense for at least one large buyer.


Based on my experience as an appraiser, I have the feeling that Calculated Risk might be on to something.  I don’t expect all the buyers to dry up at once.  After all, the large companies still have money to spend and foreign investors might stay in the game longer than the institutional investors.  But I’m wondering if we’re going to see the crazy bidding wars taper off soon.  Besides the fact that prices have gotten to the point where profit margins are getting thinner, interest rates are rising too.  Even if an investor pays cash now, they know that when they go to sell the home the buyer is likely to need financing.  Higher interest rates will put a damper on affordability.  In Silicon Valley at least, homes may soon no longer look like a cheap, no-brainer, easy money investment.  This is good, as the market can get back to normal.

Hand Over the Keys! That's MY New House!
Home Buyers May Take Back the Market Soon

If you are in the market to sell, you might think about selling now, while bidders are still in a feeding frenzy.  If you are in the market to buy, by all means keep shopping and keep making offers.  Don’t be discouraged, because you just might find yourself with a successful bid sooner than you think.

My name is Casey Fleming, and I make mortgage loans throughout California and am based in Silicon Valley.

Casey Fleming, Mortgage Advisor

(408) 348-3442 / loanguide@outlook.com

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