State of The Housing Market

Or: Live by the Investor, Die by the Investor.



The housing market in San Diego has cooled appreciably.



For the last several years one of the factors driving it higher was the "flip it in six months for $50,000 profit" mindset of many investors. They would purchase the property, perform some minor cosmetic work, and turn around and sell it as soon as that was done. In a market rising as fast as ours was until early this year, it makes anybody doing it look like a genius. Often they were selling it to other investors.



Well, that's not happening any more. Or if it is, it is rare.



When you're looking for a sale, you don't move tenants in.



So these folks are now paying thousands of dollar every month with nothing coming in. For owner occupied residences, no big deal. You need a place to live anyway and you were happy in it before, so it can't be too bad now. So little Johnnie doesn't get his own room because you're still in the three bedroom when you want a four. If it comes down to it, permits to add a bedroom aren't that difficult to get for most single family residences.



For an investor who has a $500,000 mortgage at 5.5 percent (even interest only) as I go over here, that's $2292 per month for the mortgage plus $500 or so for the property taxes plus $100 or so for insurance, plus utilities so it shows well. So that's roughly $3000 per month you have to come up with - that you're losing - if the property doesn't sell. Even a 1 percent negative amortization loan is $1608 cash out of their pocket (plus another $1000 added to their balance so they owe it on the back end), which works out to $2300 per month or so they are paying out of their pocket, plus another $1000 they're losing to negative amortization. In both cases, it's more than the $1800 or so per month that you can get in rent.



Given the average american's habit of living right up to the limit of their means and then some, most people can't do that very long. The phrase that seems to get used around here by experienced agents is "Feeding the Alligator." The bank wants its money every month, win lose or draw. You have to feed them their money. That's money that's gone forever.



This is unlikely to change. The Fed is currently biased towards continued hikes in the overnight rate (Fed officials say more rate hikes ahead). Whereas it's a fallacy to think this controls lender rates directly, there is a correlation.



I'm seeing several pieces of confirmation of this. Three bedroom houses near my office are listing for $40,000 to $50,000 less than they were in March, and with the inventory much higher, buyers have far more leverage, so sellers are coming down more off the listing price in bargaining than they were formerly. The "Investment condo" market is dead all over the city; there are a few people looking for owner occupied, and they know they're in the driver's seat. One agent in my office bought a home in the ultimate upper middle class neighborhood out of foreclosure about two months ago, he's cut the asking price by over $30,000 in just that amount of time, and there's another house with a similar story around the corner that seems to be racing with him as to who can cut the price the most the fastest.



Upshot? If you keep your head about you, the bargains are much better now than they were only a few months ago. It may be time to poke a toe back in. If you're patient and have a good agent and especially if you don't overextend yourself, there are bargains to be had from people who can't keep up the payments. The market in general will likely continue to deflate until at least after Christmas, but if you find a good bargain it's hard to find a wrong time.



San Diego seems to be a leading indicator for most of the country, and every commuting area is different, so consult someone in your area, but be prepared to dump them if they sound like a cheerleader ("You always make money in real estate! Prices always go up! Buy now and flip in six months for $100,000 profit!"). This person is dangerous enough in normal times. Right now they're a recipe for disaster.



Caveat Emptor