You have seen the shows. You have read the news. You have heard the stories. Real Estate Investment is back and its not going anywhere. But like all things, too much of a good thing is usually a bad thing.
Recent articles like THIS ONE keep asking “If Housing is back, why aren’t the Home Builder stocks showing results?”
The answer is because of real estate investors like me.
We all remember what happened in 2005-2007. Real Estate prices were going up for infinity so the more houses you could build and buy the more infinite returns you would receive. Well, until it stopped at least.
The result was a lot of empty homes with no owners, all over the place. But eventually prices dropped low enough to where people like me saw value.
In places like Phoenix, you could buy a 3 bedroom 2 bathroom home for under $70,000 and rent it out for $800/month. Not only that, there were a lot of people needing to rent homes because sadly, they had their homes foreclosed on and couldn’t get financing. Here was a prime example of a market inefficiency.
A huge pool of potential renters, a small pool of places to rent (Banks aren’t in the rental business.)
Given enough time, all market efficiencies dissolve (often swinging too far in the opposite direction). Eventually many people caught on, including hedge funds and businesses searching for yield in such a low interest rate environment. In addition, new families continued to be formed, immigrants continued to move here and foreclosures slowly started to erase themselves off people’s credit records.
Thus we started to have more buyers looking for homes, but too many homes listed for rent and not to purchase. A new market inefficiency! 2011 and 2012 was the year of the fix & flip for Phoenix. At least the year of actual returns. You even saw it in the rise of the flipping shows like the clip from above.
But like all inefficiencies, they do not last forever. Where there was once no competition for 20-30% returns, there is now intense competition for 5-10% returns. When you are buying a house and doing major repairs, 5% is a VERY small margin of error. This is what we are seeing today.
Shows like Property Wars and Flipping (insert city here) are made for your entertainment. Like all reality shows, they are based on very very little reality.
The reality is that when you are flipping a home, your profit comes from your purchase. If you buy it cheap enough, you will make money.
It doesn’t matter how much money you put into it because home values are determined by comparable properties. Period.
Additionally, the investment impact is starting to be seen in the stock market. Everyone knows that interest rates are rising, and home prices are rising, but why aren’t homebuilder stocks rising?
1. Housing is a bottom up recovery. The lowest price homes are the ones that are rising. There are no more $70,000 3 bed 2 bath homes in Phoenix anymore. The floor has risen while the ceiling has remained the same (even falling in some places.)
2. Institutional Fix and Flippers as well as Mom and Pop investors know the golden rule: Location Location Location. Where do new builds take place? Where there is vacant land. And where is there vacant land? Further and further away from cities… where the jobs are. Fix and Flippers are smart enough to know where to buy. We buy the dilapidated homes in areas people want to live. Homes that were built in the 1970’s and then never touched again.
Home Builders will not truly see the effects of a recovery in housing until all these homes are scooped up and there is no choice but to start building new homes. While we are not there yet, we are surely getting close.
It is important to understand the housing is a regional market and every market is different. When news report on housing they are looking at it on a national level, but you cannot compare the housing market in Silicon Valley to the one in Detroit.
And as an investor, you must always be searching for the next market inefficiency, and the next one just might be Home Builders.