This Is What's Behind The Severe Housing...

Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.

As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...

From Dennis Fassett, Cash Flow Mercenary...

NAR reported recently that the supply of homes for sale is now at the lowest level since they began tracking housing inventory 18 years ago.

I read a piece the other day that talked about a couple of reasons why.

First, the problem is not on the buy side.

Far from it. There are plenty of potential buyers out shopping, but they simply can't afford what they find.

That echoes what an analyst at one of the real estate big data companies said. He stated that “activity continues to be constrained by both the decline in affordability and the relatively thin inventory of homes for sale.”

He went on to say that in Southern California, home sales in February were 14% lower than the average for the month going back 30 years.

Second, it’s about housing starts.

Even though you are probably seeing a ton of building going on in your market, housing starts are still only about 75% of their historical average.

And what’s compounding the problem is that builders are putting up homes in the pricier, move-up category.

That’s leaving a huge gap in the first-time homebuyer market, because builders say they just can’t make money on them right now due to the cost for land, labor and materials.

A Zillow economist chimed in and said that:

"It's hard to understate how important it will be for builders to continue adding new
inventory to the market, especially in the low- and mid-priced segments where so
much of the current home buyer demand lies."

Conceptually they’re correct, but as usual the big data company forgot to look at the data, which I just said shows that builders are completely ignoring those segments.

That’s borne out by just driving around. In my market, I don’t think I’ve seen a single new build going up that was under 2,500 square feet.

The Zillow economist went on to say that:

"A few months of good progress won't meaningfully change the dynamics of this
year's home shopping season — inventory is tight, competition will be fierce,
and buyers need to be prepared to weather some frustration and show a lot of patience."

She’s right – it would take many months of progress – of builders putting up entry-level homes – to even make a dent in the supply problem. And with the lead time required to put up a home, we’ve already lost this buying season even if a building boom in that segment started tomorrow.

Third, investors are part of the problem.

The article stated that during the housing crash, investors purchased about 4 million distressed properties, the vast majority of which were in the starter home segment.

inventory Forecasters predicted that investors would hold the properties as rentals and wait until home prices recovered, and then sell them back out into the market.

But that hasn’t happened, despite home prices exceeding their previous peak in some markets.

The forecasters are shocked. But I’m not.

Those of us buying during the crash were buying to HOLD. Not to hold and then sell. What we saw was probably a once-in-a-lifetime opportunity to buy spectacular homes in the best school districts for 50% or less of what they used to sell for. And, in neighborhoods that previously had few, if any rentals.

NAR actually for once hit the nail on the head. They said:

"Investors came in to get that cash flow, and the cash flow remains very positive,
and price appreciation is just extra gravy that they're witnessing, and they're saying
they're going to ride out this price increase."

Fourth, price appreciation is having an impact.

Trulia says that price appreciation may also be adding to the lack of supply of homes for sale. They say that, based on their data, the more a local market has recovered, the larger the drop in inventory. Which makes sense.

Their economist stated the problem:

"If you have a lot of equity in your home, that could be great to use to
buy another one, but if that other home you might buy is that much more
expensive than it was last year, you may stay put and you may renovate instead."

Which seems to be exactly what’s happening. Just look at all the contractor trucks and vans all over the place.

Where does that leave us investors?

In a pretty good place, it seems, based on this data. It looks like we’re going to have a very strong market for our first-time buyer flips for the foreseeable future.