As 2015 progresses, the real estate market is improving in almost every part of the country. In some areas prices are at or above the peak we saw in the mid 2000’s possibly indicating another housing bubble. In my market prices have gone up at least 20 percent in the last two years, if not more. This is great news for many home owners who lost thousands and thousands of dollars in equity when the market tanked. Even though the price increase is great for those who already own homes, it can make it difficult for those looking for a new home. Buyers are having to compete with multiple offers and are forced into bidding wars to have a chance at finding a home.
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Do the higher prices indicate another housing bubble?
For investors like myself, rising prices make it very difficult to find good deals on homes that will cash flow as rentals. There is also concern that the market could drop again in a few years, and we could see another housing crisis. As an investor I have made the decision to keep buying rentals, but only if they still meet my guidelines and criteria. I can’t get swept up in the market frenzy and buy houses for too much money because those are the only homes available. One of the biggest mistakes investors make is paying too much for properties that cash flow too little. I can pay a little more now than last year because rents have gone up with the prices, but it is going to take a lot more work to find deals even if I do pay more. I wrote an article on how to find a good deal, and I am definitely going to have to start using more of those techniques to buy properties. Despite the rise in prices, I am still confident that I can reach my goal of purchasing 100 rental properties by January 2023.
I have had to pay more for my investment properties due to higher prices
For me the price increases have been good and bad. I have been able to refinance two properties and use that cash out to buy more rentals. I had planned on refinancing those properties originally, but the price increases have allowed me to take more money out than I was anticipating. I have also seen increased rents due to the increasing prices and low inventory of houses for sale and for rent. My most recent properties have all rented for more than I expected when I bought them.
Due to the lack of inventory and prices increasing, I have not seen any deals on MLS that are close to my buying criteria in the last few months. I have begun using different purchasing strategies and hopefully those will show some results later this year. Those techniques involve sending letters to absent owners and people who have inherited properties.
What is causing the high real estate prices and possible housing bubble?
In my market, it is definitely a lack of inventory that is causing our price increase. There are many home buyers looking for houses and there are very few houses for sale. Sellers are realizing they have the advantage and they are raising their asking prices. Buyers have been forced to pay those higher prices because there is so little available on the market that they are forced to pay more if they want a house. Most of the United States is seeing a lack of inventory right now and it is mostly due to low foreclosure numbers. We went from an extremely high number of foreclosures to a very low number of foreclosures in a very short time frame.
In other areas of the country, we are seeing many factors contributing to price increases. Hedge funds have become massive buyers of investment properties and in many urban areas like Atlanta, Phoenix, Las Vegas and Chicago where they are buying up thousands of homes. Naturally that kind of buying is going to drive up prices and decrease inventory. We have not seen much hedge fund buying here, but we are not in a major metro area either, I have heard the funds are starting to move into the Denver area.
Why is there so little housing inventory?
A few years ago, we saw record numbers of foreclosures on the market and they caused a huge decrease in prices. That decrease in prices virtually stopped new construction dead and the market had to rely on existing homes to fill demand. Most sellers could not afford to sell their homes so buyers depended heavily on foreclosures for purchasing options. The foreclosures slowly started to decrease after 2008, but many of us in the real estate industry kept hearing about a tsunami of foreclosures that would be coming on the market soon. From 2010 to 2012 we kept hearing next quarter the flood gates will open and the inventory will increase substantially. We are in the middle of 2015 and the inventory never came, in fact it has decreased! I think that threat of the oncoming foreclosure tsunami stopped many builders from beginning to build sooner.
The experts predicted many of foreclosures would flood the market because there was a huge amount of non-performing loans. Non-performing loans are loans that have had payments missed and are in danger of defaulting and going through foreclosure. Many people refer to these non-performing loans as shadow inventory.
Why have those non-performing loans failed to become foreclosures and is there still a shadow inventory looming over us?
1. The market increased in most areas due to the lack of inventory and this has allowed some homeowners who were under water on their homes to have equity again. There is motivation and hope for homeowners who may be behind on their payments but have equity in their home. Not only do homeowners have increased motivation to make their payments, they may be able to sell their home now that prices have increased.
2. Short sales have become a bigger and bigger part of the market. Short sales allow home owners who are behind on their mortgage to sell their home before it goes through foreclosure for less than they owe the bank. The banks like short sales because it costs less than taking a property through foreclosure and takes less time. Short sales have increased significantly and have become much easier to complete in the last couple of years. This has greatly decreased the number of homes that go through foreclosure.
3. Government interventions and lawsuits against big banks have slowed things down as well. Government programs have forced banks to try many solutions to keep defaulting borrowers in their homes. The banks must offer loan mods, short sales and other alternatives before they can foreclose. This has delayed the foreclosure process and extended the foreclosure timeline on many properties. The Robo-signing lawsuits also put a halt to many foreclosures as most banks did not want to foreclosure until they knew exactly what they had to do to foreclose legally. That lawsuit was not fully settled until 2013 and many banks completely stopped all foreclosure proceedings until that was settled. Many banks are just now beginning the foreclosure process on properties again. This has caused a huge delay and backlog in many large banks’ foreclosure departments.
4. Many states have also implemented stricter foreclosure guidelines meant to help home owners who are behind on their mortgage. These guidelines have increased the time it takes to foreclose significantly. In New York it can take well beyond two years to foreclose! These state guidelines have prolonged the foreclosure process and delayed many properties from foreclosing and coming on the market.
5. The increasing practice of selling non-performing loan portfolios has also slowed down the inventory. Many large banks have decided to sell off large chunks of their defaulting portfolios to hedge funds or other buyers to avoid all the regulations put in place by the government. Every time they sell off a pool of loans, it takes months to complete a sale. Values, condition, occupancy are just part of what has to be determined before these loans are sold. The loans are then bid on, transferred to new owners and the new owners have to determine exactly what they have and what they want to do with these loans. The process of selling a loan can add 9 months to a year onto the foreclosure timeline.
Is the shadow housing inventory still there?
I have actually heard there are just as many or more non-performing loans now than during the peak of the foreclosure crisis. Due to short sales, note selling, and government delays, these properties are either selling before they become foreclosures or they have sat in limbo for years. Even with the increase in short sales and market prices, I still believe there is a large number of properties that will go through foreclosure and come on the market. Now that the government issues have mostly been figured out and market prices have increased, banks have more incentive to put their defaulted assets on the market.
Will there be a flood of housing inventory?
I think the inventory will slowly increase, but I do not see a flood coming on the market. I don’t think the government will allow a flood to occur and I don’t think the banks want to destroy the market either. I have heard from many industry experts and they agree, that there will be an increase in inventory either at the end of 2015 or in 2016, but they do not see any tsunamis coming any time soon.
What happens to the market when foreclosure inventory increases?
The price increases have allowed home builders to get back in the game again. I am seeing a high number of new construction projects in my area for the first time in 7 years. I checked how many builders had new houses listed in MLS in my county and there were 42 different builders with new construction homes on the market. A couple of years ago, there may have been one or two builders with new houses on the market. However, almost all the new construction in my market is priced above $200,000 and our average price is much lower. The new construction is adding inventory to the higher price ranges but it is not going to solve the problem of the lack of inventory in that middle and lower price range. I have talked to builders in the area and they would love to build lower prices homes, but they all agree it is not possible due to city and county fees on utilities, land, and other new construction costs.
In my area, I believe we need an increase in foreclosure inventory to meet buyer demand. I think there are enough buyers to absorb that inventory without a market pull back. If we don’t see the foreclosure inventory increase, I think prices will continue to rise and I don’t know if the economy is improving enough to support that rise in prices. I also do not know how long interest rates will stay as low as they are. If interest rates rise significantly that will decrease the amount a buyer can qualify for and lower buyer demand. I actually think we have a higher chance of entering a housing bubble if we don’t see increased foreclosure inventory than if we do.
Will there be localized housing bubbles?
I am only an expert in my market, but I have heard many scary things in other parts of the country, mostly from California. Prices in California are rising at incredible levels and many places have seen prices that are higher now than at the peak of the market in the 2000’s! Another scary thing about California is many reports are saying prices never dropped down to their historic average. Incomes are not going up significantly, but house prices are and many people are wondering how that can possibly continue. Here is a great article from Forbes on the most undervalued and overvalued markets in the country. While I don’t think our area is in a new housing bubble, I can’t rule out other areas of the country that are seeing higher appreciation and inflated prices. There is a great blog dedicated to the subject of another housing bubble at http://thehousingbubbleblog.com/index.html. This blog has many articles on how a housing bubble may be forming in different markets across the country.
Are we in another housing bubble? I think most areas of the country will see increased inventory in the next two years and that will ease appreciation. However, I think most markets need increased inventory right now to become healthy and function properly. I don’t believe we will see the foreclosure tsunami that so many predicted a few years ago, but I do think we see increased foreclosures soon. Another factor that I did not discuss in-depth was the economy and that is because I have no idea what the economy will do. If we end up in a double dip recession and unemployment goes up sharply, then who knows what will happen with the housing market.