The bidding wars seem more intense than 2006

[Tom Fidrych]

I bought several rental properties in 2004-5 before the bidding wars drove prices to the point that it didn't pencil to rent them out. At the time, agents told investors that you would make it back through an almost guaranteed price appreciation. I didn't buy that argument and stopped purchasing and good thing. I say good thing because my other business took a major hit during the downturn and If I was feeding the rentals each month then perhaps may have had to walk from them. A couple years later it was surprising how many real estate agents and mortgage brokers submitted rental applications having been foreclosed upon. I'm just sayin'.

Here we are 15 years later and to me it seems the bidding is even more frenzied than 2006. It seems once again that investors are buying rental property that doesn't cash flow and planning on continued price appreciation(that may not occur). Also, based upon bids I just received for a place that was listed last week, there are many FHA buyers putting 3% down and asking for a credit to pay closing costs. This could be perceived as buyers being stretched thin with little skin in the game.

My net perception is that a market top appears to be present and I'm selling half my places. Obviously low rates are driving pricing but if you've purchased building materials recently, you can't help but notice virtual hyperinflation within the building materials category. Is the FED going to eventually drain the punchbowl(thing back to late 70's hyperinflation and 18% home loans) or let the party continue indefinitely? I'm not sure so that's why I'm not selling 1/2 my rentals.

To newbies, caveat emptor. Don't necessarily assume continued price appreciation. If it pencils and your planning to hold, no problem though.

The only time I can recall such bidding was 2006, and the savings and loan fueled buying frenzy of the late 80's, early 90's. Wasn't a soft landing, ehh?

Perhaps some folks with grayer hair than mine can enlighten me as to why it's different this time.

Thanks in advance.

[Joe Bertolino]

I will just speak on the Sacramento market. 

1. People can afford what they are buying.  The bidding wars are funded by cash/equity rolled forward.  Average equity in the area is north of 30% (per Black Knight).  

2. We have not built a significant number of housing units since 2008.   In those peak years we were building 18,000 units a year in Sacramento... since then we have built 4-8K while we are getting 20,000+ Bay Area transplants.  

3. The bidding wars are pretty heated for dialed in houses that are intentionally under price...  and that is what we focus on but the reality is that not every house is getting 40 offers and going for 100K over.  In Sacramento there are 1051 houses that have been on the market for over 30 days as of this minute.  There are under 300 active listings under 30 days.   

4. I see investors that cannot cash flow at the current rents but they will cash flow easily at market rate rents. The rental market is Sacramento is extremely tight with a lot of upward pressure. The landlords that are cashing out are mostly selling to families (who pay more than investors on FHA loans with 3.5% down) so the existing rental stock can command large increases (outside of covid issues). Look on CL, FB market place and zillow... in any zip code there are 3-5 rentals that get snatched up in days. Many of the older long term landlords in the area have people in place paying 60% of less of market rate. I am selling a 4plex house that will get $1500/mo for a 1/1 when renovated but the current tenant is paying $550 because they have been there 16 years. There are deals all over the place that cash flow easily at current market rents. You have to do the work to turn them over but the numbers are solid.