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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...
Why is it that when deals are easy to find, they’re hard to sell? And when they’re hard to find, they’re easy to sell?
Well it’s basic Econ 101 at work – simple supply and demand.
I don’t think that anyone who’s active in this business would argue that we’re not in a hard-to-find/easy-to-sell market, and that we have been for some time now.
So what I’m going to do today is go a little deeper into what’s driving the market and why it’s so difficult to find deals. And maybe why the tide may be turning just a bit...
The Supply and Demand Effect
I read a piece recently that did a good job of explaining what’s going on. To start with, pending home sales basically remained in a holding pattern in June and increased only slightly.
The author correctly noted that a constrained supply of houses, coupled with decreasing affordability as prices increase, prevents a larger boost in home sales - even with mortgage rates still hovering around their all-time lows.
Affordability is decreasing nationally, and he quoted one popularly used index as stating that national home prices increased at a 5% annual rate in May.
Good for sellers. To a point, that is. Not good for buyers.
The author also stated that new home sales were up once again in June and reached an 8-year high.
He quoted an NAR economist, also known as Captain Obvious, who offered the opinion that:
“Until inventory conditions markedly improve, far too many prospective buyers are likely to run into situations of either being priced out of the market or outbid on the very few properties available for sale.”
Duh.
The Index Says…
The author then took a look at the Pending Home Sales Index (PHSI), a forward-looking indicator based on contract signings. An index of 100 is equal to the average level of contract activity during 2001.
He wrote that the PHSI was up a fraction to 111 in June, and that it’s now 1% higher than June 2015. And even though it only increased slightly in June, the index is now at its second-highest reading over the past 12 months, but is noticeably down from this year’s peak level in April.
The NAR economist also had an opinion on this. He wrote:
“With only the Northeast region having an adequate supply of homes for sale, the recurring dilemma of strained supply causing a run-up in home prices continues to play out in several markets, leading to the last two months reflecting a slight, early summer cool down after a very active spring.”
I know we saw that play out in my market.
The economist also stated that:
“Unfortunately for prospective buyers trying to take advantage of exceptionally low mortgage rates, housing inventory at the end of last month was down almost 6% from a year ago, and home prices are showing little evidence of slowing to a healthier pace that more closely mirrors wage and income growth.”
Meaning that every month, more and more prospective homebuyers are getting priced out of the market. That’s not good from where I sit.
To drive home the point that we’re all feeling… the author again quoted the NAR economist as saying that, in his opinion:
“…one noteworthy and positive development occurring in the housing market during the first half of the year is that sales to investors have subsided from a high of 18% in February to a low of 11% in June, which is the smallest share since July 2009.”
Another way to say it is that home sales to investors have fallen almost 40% since 2009.
The reason?
2 factors: the diminished number of distressed properties coming onto the market, and the increase in home prices, which have now risen for 52 consecutive months.
The author states that the good news is that despite the slowdown from April’s peak, existing home sales are still expected to come in at 5.44 million this year, an increase of 3.6% from 2015, the highest annual pace since 2006.
My takeaway from all this is that maybe a little cooling off in the housing market may not be such a bad thing.
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Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.