A double dip housing recession?
Speculators helped drive up prices during the real estate bubble, snapping up everything from pricey downtown condos to neighborhood triple-deckers and rapidly reselling them for big profits.
Well these down-and-dirty real estate investors are back at work, snapping up foreclosed units at rock-bottom prices. And now a pair of the nation’s top housing experts is warning this latest speculative frenzy could derail a housing recovery, Bloomberg reports.
On the surface, it looks like good news. Everyone from small time builders to big investors starts buying up distressed property, taking off the market the excess supply of foreclosed homes that has been dragging down prices.
But only if it were to work that way. Instead, Joseph Stiglitz, the Nobel laureate economist from Columbia University, and Robert Shiller of Yale, warn that such investors will sit on their newly bought bargains, only to throw them back on the market when prices rise, bogging the market back down again.
Stiglitz even talks of a potential “double dip’’ in the housing downturn if this were to happen.
Sounds pretty bad to me.
“We’re creating a shadow inventory of homes that will be right back on the market as soon as the economy and the housing market begin to improve,” Stiglitz told Bloomberg. “We could see a double-dip in the housing recession if that happens.”
Stiglitz predicts that housing prices could begin to stabilize in 2010, but worries that positive step could get delayed by a deteriorating economy and rising speculation.
Shiller, whose S&P Case/Shiller housing index is widely followed, is also adamant on the issue.
Shiller contends the frenzy of bargain shopping by speculators may be preventing the market from truly hitting bottom now. And when all those homes come back on the market, it could send prices crashing down again.
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Sounds just like the 'flippers' that were all the rage - take an affordable property, do shoddy work, then sell it at an unaffordable price. sigh...
Calculated Risk thinks Shiller is wrong. He says these aren't speculators, purchasing to flip; but investors, buying up properties that can currently be rented out to positive cash flow. This is a very good point, because cash flow investors are indeed the ones who will provide the eventual bottom for the market, and in certain markets, prices have already fallen enough to make some properties cash flow positive.
There are two big risks to CR's position, though.
First, we don't know how many of these investors really plan to rent for now and flip in two years or less. That would indeed make them short-term speculators, and produce the double dip that Shiller and Stiglitz warn about.
Second, even if they aren't speculators, they may be bad investors. Household size is now increasing and rents are falling; they will fall much further as unemployment skyrockets. A house that makes money today may start losing money in a few months, as tenants lose their jobs. Plus, the depression may cause housing prices to overshoot on the downside, meaning today's investors could find themselves bleeding cash each month to hang onto an asset that's also falling in value. This, too, will prompt another rush to the exits, and produce a double dip.
Scott,
Glad you referenced the Bloomberg article. It's good background information for homeowners to recognize that communities with large numbers of foreclosures will face a second round of sales competition from investors - once markets begin to find stability. It's a challenge convincing private sellers that there are investors and developers out there who can almost always offer a better deal.
The attack of the bean counters - Investors are worried that the repeated negative comments by economists will prevent the housing market from recovering. Economists Shiller and Stiglitz are creating fear in the market place by inventing a " shadow inventory theory" that appears to be self serving and a possible excuse when their predictions fail.
Real estate investors are encouraged to contact their elected representatives to pass legislation preventing the fabrication of false theories for personnal gain. The penalties should be substantial and require imprisonment .
these "investors" are merely the next round of falling knife catchers...
RE maven: Real estate investors are encouraged to contact their elected representatives to pass legislation preventing the fabrication of false theories for personnal gain. The penalties should be substantial and require imprisonment .
Yea! Shiller should be manacled and have his tongue cut out for making predictions like this one in 2005: "The home-price bubble feels like the stock-market mania in the fall of 1999, just before the stock bubble burst in early 2000, with all the hype, herd investing and absolute confidence in the inevitability of continuing price appreciation."
If it wasn't for a few selfish people making bearish remarks, RE prices would have continued their steady upward climb forever! RE maven is right -- We need to lock up anyone that's not a RE bull!
Schiller's argument is weak here. Let's look at the alternative - what if these people were not buying? There would be fewer purchases now and prices would fall faster. There would be no shadow inventory, a more rapid/deep fall, and the rebound would only be upward. The current path will be a slightly slower nosedive, and a bumpier ride on the way back up (as investors sell at different points as prices creep back up). The net result = 10-15 years from now the market ends up in the same place either way. The only difference is that one recover is V shaped, and one is U shaped...with a bumpy bottom.
Home prices are still falling, so even if speculators are accounting for a high percentage of sales, it is doing nothing to stop the fall in prices. Are there really enough speculators/investors out there to buy up the millions of homes which sit empty across the country? If I remember correctly, speculators/investors accounted for roughly 25% of all sales during the bubble. Unless there is going to be a tripling of speculators/investors from the bubble days, I see them as having minimal impact. I suspect many of these speculator/investors are walking in to one giant Bear Trap and will get burned.
RE Maven, that's like blaming the thermometer for the temperature.
Has anyone actually seen properties for sale that have a real cap rate at non-optimistic rents? I haven't yet.
Where did you find a place with a 53% cap rate RE Maven? I still can't get past that - 2 years and the rent pays off everything. Wow.
Wow. RE investors have become outright unhinged. Better calm down now, it's going to get a lot worse. Leveraged investors who can't deal with the minor haircuts so far sure won't be able to deal with upcoming insolvency, bankruptcy, and the inevitable transition from affluent to working class, or poor, or worse. How will they handle that?
The Housing picture looking brighter: Reports from local real estate agents say now is the time to buy a new home. New loan programs, now available from the government, pay the homeowners’ mortgages for the next 30 years. To qualify, local residents only need to show that they have no jobs, incomes or assets. With inflation caused by legislative handouts, the average $180,000 home should cost $15.8 billion by the year 2038.
as an RE investor, i now see plenty of attractive, cash-flowing rentals in low-income, blue collar towns, like Lowell. And that hasn't been the case, even up until a year ago. from 02 to 05, investors were buying income properties like crazy (even in Lowell) with a negative cash flow, betting on appreciation. they didn't care if they lost a few hundred bucks each month, so long as they could double their cash (or no cash) investment in a year or two.
it's certainly tempting to get back into the market again (i sold everything in spring of 06), given the positive cash-flow numbers (roughly $150 per unit on 3 (+) families in Lowell), but it just makes more sense to wait, as there's zero sign of RE prices bottoming anytime soon.
Charles - Chicopee - 24 units - all section 8. This type of property was outside my normal parameters but, the cash flow was a equalizer.I could not pass on this cash cow.
The premise that they suppose is absurd, and is not predictable.We'll see what happens.
Buying an investment property that generates positive cash flow is one thing. Anyone buying hoping to flip in a year or two is probably in for a rude surprise. Kind of like people who saw the NASDAQ go from 5000 to 3000 and thought dot.com stocks were fairly valued.
even "cash flowing" properties carry significant risk. First and foremost the rents need to actually be collected, it can also be very expensive and time-consuming to get rid of a bum tenant. Also MA is a very pro-tenant state, and as a landlord you are up against quite a bit. Lastly, rents like real estate don't always go up, I suspect you will see rental rates drop as a consequence of our "little downturn". In a deflationary environment, the price of everything drops...
It seems that some of the RE investor money was from subprime and no-paper loans. Career investors down to Aunt Sally to get in the game. If banks have tightened their lending standards, I'm going to assume that this should at least help a bit. At least keep Aunt Sally out. Additionally, if lending standards are tighter, those who couldn't buy won't be there to help drive prices up.
This is not to say that the Bloomberg article is wrong, but I'm not sure that it is 100% on the mark. Subprime lenders are coming back into the market under new corporations, but it will not be so easy to sell out those securities as it was in the past. It will happen, but too many have been burned to have the same impact.
RE_M - If cash flow is paying off everything in 2 years, that's worth the investment no doubt. Even though being a section 8 landlord in chicopee would turn my hair white, (talk about landlords earning their money) it's still worthwhile.
That's investing to my mind. I think most of what is going on is speculation still, though. Some people still have not gotten the message.
Charles et el - Interesting article at CNN Money today . $1000 homes .
Not to encourage the competition but, there are giveaways out there.You just have to look.
This is probably the dumbest argument I've heard in a long time. Investors buying foreclosed properties so banks can get them off their balance sheet is ALWAYS a positive. ALWAYS.
Trying to find a negative in it is simply navel gazing.
This blogger might want to review your comment before posting it.
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