If demand exists over the next few years, it’s in the multi-family market

Investors beat out first-time homebuyers for low-tier homes

California’s inventory of low-tier homes has shrunk by more than 40% across the state in 2012, according to Zillow. Low-tier homesare those which sell for less than $313,200. This is a higher margin than the three tier Case-Shiller index, which lists low-tier homes as those under $269,406.

Homes listed for less than $313,200 decreased in 2012 by:

  • 60% in Fresno;
  • 55% in Sacramento;
  • 53% in San Francisco;
  • 45% in Los Angeles; and
  • 44% in Riverside.

In comparison, Zillow estimates low-tier homes have decreased nationwide by 15.3%.

This inventory drop is mostly experienced in the low-tier since speculators are most interested in these properties. Speculators are able to buy up large quantities of these low-priced homes, churning out flips or rentals production-line style.

In turn, speculator offers are more attractive to sellers than offers submitted by buyer-occupants. Speculators nearly always pay cash, allowing sellers to avoid dropouts (due to buyer change of heart or appraisal interference) and close more quickly. Further, Wall Street groups (read: syndicators) are supposedly buying up bundles of foreclosed homes en masse in California (though first tuesday has not been able to find evidence of this activity on a large scale).

Between investors – big and small – potential first-time homebuyers don’t have a chance. Their only option is to overbid, a price that will inevitably be denied upon the lender’s appraisal.

first tuesday insight

Although low-tier homes have technically experienced a dramatic inventory decrease, this report presents only one piece of the puzzle.

There are two types of speculators: the buy-and-hold type and the more common buy-and-flip speculator. The latter resells the home as soon as an upward price movement will yield a profit. Flippers throw on a coat of paint and do necessary code enforcement repairs before listing the home for a significantly higher price
However, end user demand for low-tier homes is lacking in comparison with speculator appetites.

The biggest culprit for the sudden slump in low-tier inventories is the flipper. If the speculators were removed from the market in 2012, we would have had a 6 to 8 month supply of homes in the MLS most of the time. Remember, all those homes bought by speculators will return to be sold with a vengeance in a couple of years.

Further, many of these homes are first purchased from the low-tier before being repaired and re-priced in the mid-tier price range. This takes a couple months at most.

However, this creates the illusion of disappearing low-tier inventory available to buyers. Buyer occupants of these patched up homes end up acquiring largely the same home, but paying the mid-tier price. The greatly reduced interest rates provide the additional purchase-assist funds needed to buy a home priced 20% to 30% higher than a couple of years ago.

Keep in mind that this inventory report only looks at the MLS. This pays no mind to the thousands of low-tier California homes with delinquent mortgages and anxious sellers lurking in the shadows. Add to this all the investor held properties soon to be returned back to the market. We’ve said it before, but it bears repeating: supply is not the issue!

To all those builders out there considering these numbers, don’t be fooled. If you’re going to build, look at multi-family housing in urban city centers. If demand exists over the next few years, it’s in the multi-family market.

Credit given to the first tuesday Journal Online — P.O. Box 5707, Riverside, CA 92517.

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