Supply and Demand

Are Investors ruining the market?

by John Rice

Are real estate investors who buy single family homes ruining the market for other buyers and driving up rent?

Unpopular opinion, but I say no.

Sure, many of these investors might make terrible landlords. None of us like the robocalls we get asking to sell our houses to them…..but they are not ruining the market and driving up rent. I am by no means defending them or their actions. I am just saying that they are not the root of the problem.

I spent a couple weeks in Florida recently where I read an article saying how large scale investors were ruining the market. They were outbidding other buyers. They were reducing the number of homes available for owner-occupant buyers. They were raising the rent and making housing unaffordable.

This type of logic drives me crazy. Let me pick apart a few things here:

For every house for sale, that means there is both a Buyer and a Seller. If one Buyer is outbidding another, that means there are not enough houses for sale. This is a Supply and Demand issue. Also, the never mentioned seller who is about to become a buyer is happy with the terms they got.

Are they reducing the number of homes for sale? Yes, but isn’t the same true for anybody who buys an available home? Again, the issue is the imbalance between Supply and Demand.

Are they raising rent and making housing unaffordable? This one always amazes me. We have all just survived a crazy period of inflation where the cost of everything went up. Somehow most people single out housing, as if that shouldn’t have also been affected by inflation. Like we are shocked and appalled that housing costs, whether renting or buying, went crazy at the same time when everything else did too?

What this article seems to forget is the tenants. Where would they be if all the sudden there were no properties to rent? It isn’t like investors are buying these houses and keeping them empty. There is just as much demand for single family rental homes as there are for people wanting to buy them and live in them. If rent exceeds market demand, houses will sit vacant and investors will have to lower the rent to get a tenant. Again, Supply and Demand.

Are you seeing a theme here? Supply and Demand. There is a short supply of houses for sale for investors and owner-occupants. There is a short supply of houses for rent for those who cannot afford to buy or choose not to. Having more demand than supply is the problem here.

Some say that the issue is sellers just aren’t selling these days. Okay, true. But let’s think this through. We have far more people wanting to buy AND to rent houses. If all the sudden everybody decided to move, we would still have more people than houses because everybody living in their current house would also need another house. What’s that? Supply and Demand.

Building more homes is the only real solution to this. It is what the writers of the article I read should be encouraging if they honestly feel like everyone should be able to afford to buy or rent a home. The demand is there. The supply is the issue. Until there is a better balance, prices for buyers and tenants will not change.

Real estate predictions for 2029

by John Rice

Just gonna jump right into this:

Gen Z will have a harder time getting a house than the Millennials did.    They are the biggest generation ever.  They will be entering the real estate market at about the time Millennials are selling their starter homes.  Great news if you own a 1300 square foot house in Masterson.  Times will be tough for them, but they will keep the market going strong.  Every seller of a starter home needs a first time buyer so they can move up.  That first time buyer is the oil that lubricates the whole market.

The Millennials will be moving up to their 4 bedroom houses on a cul de sac in a good school district because that is just a natural progression once you start a family.  This is great news for Gen X sellers who will be downsizing to medium sized houses in upscale neighborhoods.

What makes me think all this?  It’s not really crystal ball as much as it is history.  Everything I just described happens with every generation.  You buy a smaller house you eventually outgrow, you move up at least once to the house you raise your family in, then you downsize.

So what does all this look like for Lexington?  More gentrification as it becomes expensive to live anywhere in Fayette County.  I know it sounds unheard of, but the neighborhoods that nobody wants to live in like Cardinal Valley and Winburn may become the budget choice as similar neighborhoods with better locations become too expensive.  I know it sounds crazy, but when I was in high school, people didn’t want to live in Kenwick and now those houses equal Chevy Chase for price per square foot……yesterday’s bad neighborhood can easily become a tomorrow’s good location.  Plus, it isn’t like we are ever going to see brand new starter homes ever again.  All that can be done is update/remodel existing houses.  The people that flip houses need some margin to do this so they will buy distressed houses in whatever neighborhoods are affordable, just like they are doing now in downtown, Melrose, The Meadows and all those streets that begin with D around Pasta Garage.

Before long, I don’t think there will be any new construction in Lexington.  We are already filling in every spot big enough to stick a short row of townhouses.   This means that being in Fayette County will be even more expensive, and people will go to surrounding towns like Nicholasville and Georgetown even more.  One day, people will discover that Winchester is only 15 minutes from Hamburg and the interstate passes right through it.  I’ve never understood why more people don’t move to Winchester?

Remodeling will be hot too.  With not much new construction, people will start remodeling existing houses more and more.

Sort of some majorly huge economic melt down, I think housing is going to be strong for quite some time.

 

Something I wish sellers understood

by John Rice

It happens a lot with sellers.

They have a house that isn’t getting much attention from buyers.  It could be due to price, an odd feature of the house, the time of year, competition from new construction, or anything really.  They get a lot of showings and all of the feedback is the same, resulting in no offers.

Then all of the sudden they start getting more and more showings.  Buyers seem more interested in the house than they have been, but still no offers.

The seller finds this time exciting.  They are thinking “Wow, with all these new showings and better feedback, surely my house is about to sell!!!!!

Sellers assume this will last forever but it is a temporary thing.  It lasts until other sellers with better houses put their homes on the market.

And here is the lesson to be learned:  The market changes every time a house sells and every time there is a new listing.  Once the best house in it’s price range sells, it makes every other house look just a little bit better.  That is why your house that hasn’t been that interesting to buyers is all the sudden on their radar.  Once a new listing hits the market, it has to fit into the hierarchy of all the houses available.   If you have one of the better houses for sale, then a house better than your house hits the market, it makes buyers less interested in your house.

When you find the market has it’s eye on your house and you still haven’t gotten any offers, the best thing to do is reduce the price while you have the attention.  If you wait, most likely what is going to happen is the market will move on to other houses and you will be right back where you were.

How to pick your first rental house

by John Rice

The first thing to know is that you want an exit plan.  You want to buy something that will be fairly easy to sell when that time comes.  That is why I usually suggest a single family home in a decent neighborhood.  When you sell it, your buyer pool will be owner-occupant buyers who will happily pay a full retail price.

The second thing to know is that you pick your tenants through them picking your house.  You have a crappy worn out rental, guess what type of tenant is going to be willing to live there?  You make your house one of the nicest ones in it’s price range and you will attract the best qualified tenants out there.  Also, if you have one of the best houses they could ever afford, why would they move?

Here are some things that I think make a house a good pick:

1.  A ranch house.  Who doesn’t like one?  They are suitable for buyers/tenants in all stages of life.  They are easier to paint by yourself since there is no staircase.  You can clean out gutters with a step ladder.  They are just easier to work on period.

2.  A house on a slab.  When the wax ring around the toilet fails and when water gets splashed out of the tub, there is no wood to rot.  Also there is no water to collect under the house and grow mold.

3.  A smaller house.  Fewer people can live in a smaller house.  That means less wear and tear.  While a 2 bedroom house has a little more limited market when you sell, tenants usually don’t care if a house is 2 or 3 bedrooms.

4.  A simple roof line with not much of a pitch.   The fewer ridges and valleys the better.  Not only are they cheaper to replace, there are fewer places to get a leak.

Here are some things I try to avoid:

  1.  Basements.  They all have the potential to leak.
  2.  Sheds.  They are just one more thing to maintain and tenants usually leave you stuff they don’t want when they move out.
  3. Huge yards.  When they get out of control, it takes a lot of time to bring them back.
  4. Big garages.  I’m talking more than a regular two car garage.  Usually tenants who are attracted to a huge garage have a lot of stuff to store or hobbies that need the space.  Either one means you might need a dumpster when they move out.
  5. Fireplaces.  Do you really want somebody starting a fire in your house?

Now a lot of this is based on paying retail.  If you get a great deal on a house with a huge lot or a basement, take it.  A good deal can make up for potential future headaches.

My ideal house would be a smaller ranch on a slab built after 1960.  It would be 2-3 bedroom and have 1-2 baths.  A normal sized, flatter yard for good drainage.  On the lower end, no garage is okay.  If the house is worth more than about $150k, I would want a garage more for resale than to make a tenant happy.

 

 

The real reason why sales are down

by John Rice

I’m seeing a lot of news articles with accurate data.  My issue is that I think most are drawing the wrong conclusions.

Most seem to want to make you think the sky is falling in real estate because sales are down.

You know who needs to care about the number of sales?  Appraisers, realtors, mortgage people.  Those of us who make money on each transaction.

As a buyer and/or seller, the number of sales isn’t really important to you.  What you care about is supply and demand-the ratio of buyers to sellers in the market.  If there are 3 buyers in the market and only 2 listings, then we have a seller’s market.

I am seeing a lot of articles stating that sales were down in November of 2018 versus November of 2017.  Of course they were.  It happens every election year.  The market pauses until we see which set of morons we will be stuck with.

The ones that really bug me are the ones that say the affordability crisis will hold the market back.  I think they have it backwards.

Sure, we have an affordability issue.  Many people can’t afford to buy a house with rising prices and interest rates.  All I know is that every house under $200k in this town seems to go very quickly, which allows that seller to buy up to their next house and that seller to buy up to their next house and so on.

Back when the market was terrible, I said that it was like a baseball game where the bases are loaded.  The seller on first base needed a buyer without a contingency to buy their house so they could buy the 2nd base seller’s house, who could buy the 3rd base seller’s house.  The first time buyer needed to hit a home run and push all those sales through.

Back then a buyer had a ton of choices for their next home.  The issue was selling their old one.

Today, no buyer really has a huge selection of houses.

For that reason, I think our current market is the opposite.  There are a ton of first time buyers eager to hit a home run and push all those deals through, but what is happening is that the person on 3rd base doesn’t like home plate and has decided to just stand there until they feel like running.

The buyers with the most selection are the people buying their pinnacle home.  The one they stay in forever until they begin to downsize.  These are mostly Gen Xers.  They are in their 3rd base home, which is probably a fairly large home in the $250-350k range.  They want to move up to the $400-600k range, where there are plenty of houses for sale.

Their only problem is that most are just tarted up versions of their current house.  These buyers aren’t getting a better house, a bigger house, or a bigger yard.  They are just getting prettier finishes.  They find the houses in this price range, well, boring.  And we have a TON of them for sale.

So what do these Gen X buyers do?  They wait for the right house to hit the market.  Since they already have a nice house, they are in no hurry.  Because they aren’t in a hurry, that means the people looking to buy their house are in the same position….all the way down to that first time buyer eager to bid their heart out on their first home.

And, that is where we are today.  Sellers wanting to sell but not finding anything they want to buy.