market changing quickly?

Question

I recently spoke with a listing agent who was the original listing agent for my property that I eventually bought from a wholesaler. I was looking up my property under zillow and saw her name listed. I wanted to see if I could get more leads.

She gave me some bad news(for investors), saying that number of foreclosures has dramatically decreased this month. She typically sees 5000/month in the Houston area but now down to 900! She thinks its due to Obama's policies that delay foreclosures. I'm assuming that she's referring to HARP (Home affordable refinance program).

I'm not sure if that is an accurate assessment or not. However, that kind of significant drop from 5000 to 900 foreclosures is nothing to sneeze at. It may be a combination of factors including rising housing prices especially in the Houston market which then allows homeowners to refinance and/or sell their property once above water. Also, jobs are continuing to grow in Texas. (Houston fared better than the rest of the country during the recession)

What do you guys think about the current market in 2014 thus far?

At the end of 2013 and beginning of 2014, I was trying my best to close on good deals as fast I could (with my limited experience and knowledge). I know there are always deals to be found one way or another, but wondering what other's are experiencing in this current market?

What if interest rates jump up end of 2014 or early 2015, will that cause more opportunities or less (for investors)?

Anyone considering this: start hoarding a bit of cash/equity and reduce debt burden and start slowing down the acquisitions at this time?

Sharon Tzib · Answer

Joe, I've read that Houston has about an 8-10% foreclosure rate, and I don't think it's ever had a lot of foreclosures, even during the crisis, like other areas of the countries due to home prices rising gradually, until about a year ago. Even now, however, with double digit appreciation over the last two years, I mostly see homes selling for at or 1-2% over list price, which is quite reasonable when you compare it to some seller markets like Calif where 5, 10, 20% or more over asking is not uncommon at all - although I think that has even slowed down in Cali. 40-48% of all sales are now cash, so I don't see mortgage rates rising affecting all investors. Those that still use leverage may have to put down more or find a lower price point to buy at, but they will continue to buy if they have the cash. With the wage stagnation that is occurring now, I don't think you will see rates rising this year, as sales are slowing down in most parts of the country and that is not good for the economy, so the fed will be cautious before they make a change.Hedge funds are quite happy making 4-5% returns for their investors, and as long as they can continue to do so, they will. Eventually yes, they will become sellers, but I've never envisioned it panning out as a glut of property coming on the market at once, esp. in Houston, whose growth I believe will continue for many, many years to come. Even if a hedge fund's portfolio did go belly up and a bunch of property did become available, in my mind that's good for investors, as long as you don't own a home in that neighborhood that you were looking to sell any time quick.As an investor, you just have to learn to go with the peaks and valleys of the economy that occur every 5-7 years and adjust your strategy accordingly. It just goes with the territory.

John T. · Answer

@Joe Kim I'm a real estate investor in Montgomery County, Texas. My strategy is to acquire, restore, lease and manage single-family homes. I seek to acquire properties with a capitalization rate equal to or better than 6%. As a preliminary screening tool, in this area I use the "one percent rule, which means that a good cash flowing rental will bring at least 1% of its total value each month.For me, the golden years in this area were 2010 through early 2013. It was a buyer's market. As a cash buyer, I was able to pick and choose among many properties and drive hard bargains. Suddenly, in January of 2013, the market turned and home prices jumped 10% to 15% in this area for the typical 3-2-2 SFR. Now that the market has changed to a seller's market, it is difficult to find SFRs that meet or beat the 1% rule.I attribute the rising SFR prices in this area to (a) lower housing inventory and (b) improved economic growth. To a lesser extent, I note that competition in the real estate business is growing due to the lower returns available from other asset prices, like Certificates of Deposit and bonds. I also have a sense that there is a real estate investment mania developing (akin to the Tuplipomania, the South Sea Bubble, etc.). I'm seeing so-called real estate investors in this area buy SFRs that cannot possibly meet the 1% rule and undercapitalized newbie investors who are destined for failure. Note the ever increasing newbie introductions on this website.Another word of caution: Houston lives or dies by the energy sector. The energy sector is cyclical and it can crash at any time. It will come without warning; like a thief in the night. I remember when the energy sector crashed in the early 1980's. I remember when the energy sector crashed in 1987. Overnight, working class subdivisions became vast uninhabited waste lands. Foreclosures and bankruptcies skyrocketed. There was mass migration out of the Houston area. Try collecting rent from the unemployed. In your message you wondered whether anyone was considering to “start hoarding a bit of cash/equity and reduce debt burden and start slowing down the acquisitions at this time.” I adopted this strategy in mid-2013.

Mike Landry · Answer

I'm trying to find my first SFR in spring, conroe area. I can't believe what they are selling for. It's really discouraging when I know I could have bought for %50 less a year or two ago. I think investors have driven things up in our area with the Exxon thing. I might just sit this out for now and washout for things to stabilize. Also thinking the play right now is in flips not buy and hold.

Joe Kim · Answer

Oh, she also mentioned hedge funds coming and buying up tons of properties. when are those guys (hedge funds) going to stop buying? More importantly, what will turn them into sellers? If these guys (hedge funds) are buying at inflated prices, at the "right time", will they sell at inflated prices or dump a hoard of properties as fast as they can at reduced prices?Any thoughts?