Robert, what area do you think of when you think of investment property?
Investment property:
1. Unrecognized value.
2. -Potential- for appreciation.
3. Proximity for personal oversight.
4. Stable community.
5. SFR/Townhouse/4plex. A personal preference.
6. Pool of renters.
7. Rational land-use regulation. Some would call this a personal foible but I call it putting my money where my big mouth is and voting with my feet.
8. Nowhere near transit.
9. No HOA.
10. No Mello-Roos.
11. No pending plans for rezoning, a freeway, etc.
12. Defects are okay but no unkowns.
13. There’s about a hundred “second tier” factors as well.
So, with all that in mind an casting out from my location the conclusion is obvious. I cannot find a property in the US that I personally consider a worthy investment property at this time. Spring ‘08and I’ll bee looking at maybe San Luis Obispo, Santa Clarita, Simi Valley, North San Diego, Big Bear.
Places I don’t consider; core urban areas, large metro conurbations, high end (Santa Barbara, Orange County), bad weather communities (Bakersfield, Ontario).
Places I wish would open up; Coastal California, Cape Cod, low density Gulf Florida pennisula, the next Sedona.
Do I paint a picture?
39 comments:
I'm on your side, Robert. There will be enough opportunities that you can indulge your personal tastes and still make it pencil out. I don't know if CA is where we'll be trying our luck, but there is still a lot of opportunity here.
I would not mind finding the next Sedona for myself and a nearby investment to watch over. There are still lots of undiscovered gems, let alone currently out-of-favor and soon to be out-of-favor places.
All of this inventory coming on the market is a great opportunity to preview construction in any neighborhood you might like. Plus, HELOC money was poured into upgrades that few future landlords could justify financially.
Happy hunting.
I'm curious as to why you would not consider dense urban regions that is not high end (say north OC as opposed to south OC) or SFV, prices should not hold up as well and the rental pool tend to be large.
Sorry Robert, I wanted to email you but I can't seem to find a link. On Ben Jones' blog you made this comment:
“Primary residence.” Ahhhh yes. My secret weapon. I never lied on this but there are soooo many that did. I’ll buy a first mortgage and discover that the terms are for primary residence and the note becomes due on demand. Remember I’m only screwing liars who don’t live in these homes."
I'm interested in a fuller explanation of this. Maybe you could post a topic on this. Are you saying you're buying the mortgage from the bank? I didn't know you could do that. Is this common? Do you see this as a way to essentially buy a future/pending foreclosure? I'm a married future 1st time buyer waiting it out like the rest of the 'bust bloggers'. Thx.
High end is a minor negative, not fatal condition as it just cuts into the returns and expenses. High end property renters are too fickle and demanding for my tastes. The rewards are greater but I don't like the demands, fix the garage door on a Sunday? Can it wait 'til Monday? No? Okay, I'll get right over. Compare that to;"The faucet in the laundry was dripping so I got a washer but that didn't work so I ended up buying a new fixture for $18.90 and putting that in myself is that okay? Can you reimburse me?"
Dense is another story entirely. It is IMHO a fatal flaw for investing. This is long and complicated but you deserve an answer, thanks for your long history of quality posts wherever we intersect. I also know many people will disagree with me and that's okay too. High density costs more to operate, both private and public expenditures rise geometrically with "degree of urbanization and density." That legal sounding phrase is lifted from the FBI Uniform Crime Reports preface and also appears in every socio/eco/demographic study of the issue. That's because there are no useful examples of dense rural and the studies' conclusions appear to hold these results for low density urban areas that were once dense but still retain an urban character (Detroit). Hey, Iwarned you this was complex, subtle and long. Ayway, I'd rent to HIV positive, crack addict realtors on probation if it made sense but now look at those things I just mentioned and remove the emotional tags. You want stable, healthy (financially, lifestyle), reliable and independent renters. I gets easier to find them when your product isn't near crime, congestion, and requires a car and job to live there. I'm just picking my clients.
What's you take on a place like Austin, Texas? Low price appreciation over the last five years, good secular growth and employment trends, and a large population of rental customers (students at UT-Austin).
InfidelSix,
techscan -at- adelphia dawt net
I'll work up a generic post here as well.
Anon 12:248
Funny you should ask. My sister wants to buy the most expensive house in Helotes a suburb of San Antonio. I'm trying real hard to get smarter fast. I've been a few times on business but never poked around. The culture and sophistication seem first class but the housing market remains mysterious to my biased eyes. The house she wants in my neighborhood woulld have a bidding war starting at $5m but they are asking $850k. People think TX missed the bubble but it won't be possible to know until after the effects reveal themselves. Could very well be that the bubble masked a fundamental local price decline.
As to rentals, that seems purely economy driven as the low end seems almost fairly priced. The problem is that thee housing bubble appears to be about to take the national general economy down and Austin and San Antonio can't escape that. UT-Austin seems like a good school but again I'm still way down on the steep part of the learning curve.
(This is the previous anon poster).
I'm from Austin, reason I am asking. Bought an old 2/1 SFH house walking distance to the university and about two miles from the Capitol. It's on a kinda busy two-lane street, which hurts the value a bit--but in 2003 it was 189K for 1000 ft2 on a decent lot. Not a whole lot of price appreciation since then; might fetch 195K today.
I expect I could rent it without much problem for $1,400 to $1,500 a month, as modest 1/1 apartments in the area are $700 or more.
Economy in Austin is boosted by university as well as the state government. Major tech as well, but that will obviously be more sensitive to changes in the economy. In fact, a run up in Austin real estate stopped cold in 2001 after the dot com bubble burst.
San Antonio is a very different, much poorer place. Frankly, I could not imagine paying $850K for any house in that area that did not also have significant land attached to it.
N.B. anon comments are welcome but as a courtesy to your slow on the uptake host use the "other" button and pick something; idahospud, sillyrabbit, loathesthebus, etc. to keep the actors unique.
Anon 2:28,
Thanks for the San An/Austin distinctions.
$1400/mo rent for an assumed mort of $175k and taxes of $3500 seems like a good deal. One more rule; money makes problems disappear. If you have low costs and or high income you can put up with a lot of negatives.
Problem with Texas is carrying costs. No Prop 13. I have to keep reminding myself of that. But if your sister is buying the top of the market, at least she has an idea of what the upper limit of her tax liability will be.
Comparing Helotes to Austin is like, I dunno, comparing Lancaster to West L.A.
Austin is the most expensive city in TX because it is the only one trendy, educated people would live in. Although it is expensive for Texas, it is cheap compared to anywhere in California, and it is a better place to live than many places in California. The market is doing very well right now--rising sales, rising prices, falling inventories, falling days on market--and you'd have no idea a national real estate collapse is underway by looking at Austin. I think the market is mostly moving on fundamentals, as ordinary people are not used to the idea of getting rich off their primary residence in TX.
Austin is benefitting from some secular trends as more people and employers on the east and west coasts decide they can live in a social environment they are accustomed to at one-third the price. Having said that, high property taxes (no TX state income tax) keep a lid on prices in TX. Also, of course, significantly higher interest rates could quash the market. However, more people continue to move here from much more expensive places, so I think it will be quite a while before the coastal bust hurts the Austin market.
robert, as a high end renter, I completely concur. you need to replace that window? give us at least a 24 hour notice. what? you are having a problem paying for your property but you rented to me anyway? there's a lawsuit waiting for you.
as for the high density. I agree partially. I do have an affinity to college towns as you can selectively advertise and get educated grad students. The problem of course is most college areas are completely overpriced and even with the downturn I don't see much of a significant drop. except maybe Riverside. But your point in regard to density is well taken, in general, the denser the area, the more shadiness the rental pool, and generally the higher cost of the property itself as well.
austinite,
but reason why Austin is booming is because all of the flippers that got out early in CA/NV/AZ fled to Austin. this is a rolling boom and a rolling bust. the locust of flippers are just using Austin as a stop over on their 1031 exchange parade in an elaborate effort to avoid taxes. these guys will get burned because when the loose credit start tightening up, it'll affect the entire country.
the way I look at things? sometimes it is ok to just get the money out and pay the tax.
ocrenter,
I enjoy your blog immensely, but I don't think you know the Austin market.
It is an oversimplification and inaccurate to say that Austin market is driven by 1031 clowns from CA. Not that there aren't any of those idiots here, but they hardly define the market. It is much broader than that. Speculators are cyclical and are now on a severe down cycle, so that their overall effect on markets will be negative. That is no different in Austin than elsewhere.
But there are also secular changes underway providing support to the Austin market, and I think that support is likely to continue for some time.
A very important characteristic of the TX markets in general, compared to CA, is high property taxes. Because property taxes are so high here, it is very difficult from a c/f perspective for anybody to run rental properties with leverage. Because of this, there are fewer HIGHLY leveraged speculators than one finds in other markets. The high taxes also keep a lid on primary residence properties. People don't like the taxes, but I think they are good because of their negative pressure on house prices.
"It is an oversimplification and inaccurate to say that Austin market is driven by 1031 clowns from CA."
I personally know a handful of 'clowns from CA' who moved to Austin in the last 12-18 months. All of them cashed out big $$$ and bought $600K+ homes.
All of them cashed out big $$$ and bought $600K+ homes.
$600K home is not a rental home in Austin--it is a low-end luxury home. Those are not 1031 buyers, those are primary residence buyers.
600K home will run you $12-15,000/yr in property tax.
A few blanket statements.
Everyplace is different. You can plop down bindfolded any one of my frequent readers in any major city in the US and have thee city called correctly before the blindfold comes off. You can just tell Worcester from Springfield or Oxnard from Ventura or Tuscon from Phoenix. The good ones can tell you in what part of town they've been dumped.
Yeah Austin [insert town name here] has unique advantages. It is urbane [insert attractive characteristic here] and both govt and education [insert strong job(s) segment here] provide for a stable economy.
Get it? Everyplace is special. That doesn't mean theey are going to escape an economic event of worldwide scope.
Sure, if we make blanket statements we can say whatever and it will mean...whatever.
My point is there are still regional markets. There will be places that buck the trend. Just look at Fort McMurray. (That's in Canada, so you'll know where to Google.)
Austinite,
What are the names of the banks in your area? Any WaMUs or BofAs? When you check mortgage rates do you prohibit the inclusion of Countrywide or Option One?
The Housing Pustule is the -result- of an excess of credit puss. Just because Austin does exhibit the ssymptoms doesn't mean it won't follow the greater trends. If this were isolated like SoCal early 90s Austin would be fine. This ain't like 1990.
Sorry, maybe I copied the wrong comment you made. How about this one:
"I think the market is mostly moving on fundamentals, as ordinary people are not used to the idea of getting rich off their primary residence in TX."
Apply my previous comment to this statement of yours.
WaMu and BofA have a big presence here. Regionals like Frost are important players as well.
I don't think we'll see real estate value growth here...but without the run-up it's difficult for me to see that we will suffer the massive correction that the coasts are in for. To the extent those declines are important I think it will have much more to do with the recession they are likely to trigger rather than a direct decline in non-coast reali estate.
BlueEyesAustin said...
I don't think we'll see real estate value growth here...but without the run-up it's difficult for me to see that we will suffer the massive correction...
What about places like Buffalo? Homes selling (not selling) for $11/sf. Since they fell in the "run up" will they rise in the crash? Okay, what's to say the reasonable rises we've seen in Austin isn't a credit pustule masking a general underlying decline?
Well, Buffalo and that whole region have a declining population. Austin has had a huge population growth over the last five years (200K additional people in the MSA in five years, a 16 percent increase). In addition, median income in the city has grown nicely. In 2005, the Austin median home was $161,300 and the median income was $67,300. That's a 2.4 ratio compared to the 3.6 national ratio.
I mean, I understand you're pretty wedded to a systemic, national analysis of the housing market...but fundamentals make a difference as well. Positing Bufallo as a counterexample just isn't credible
BlueEyesAustin,
We all get it now. Austin is special. Sorry for the confusion.
Sigh. That's not it and you know it. I suggest, strongly, that you evaluate your underlying assumption that as the California real estate market goes, so goes the nation.
This is no longer a productive dialog.
Hint:
This stopped being a productive dialog when you said: "it's difficult for me to see that we will suffer the massive correction that the coasts are in for."
The dialog degraded further when you chose to describe the host as "wedded to a systemic, national analysis of the housing market."
Truth is that "it's different here" is the #3 real estate pablum being pushed by RE cheerleaders. Right behind "real estate never goes down" and "this time it's different." Newsflash, it's different every time and every place. Austin has some advantages and some disadvantages. There's just no way to honestly say those advantages will provide protection. And one of those advantages; lower prices doesn't mean asmuch when property taxes are double or triple those of California for instance.
Whatever. If you think that a market that was flat for five years is going to correct at the same level as a market that grew at a bubble rate for those same five years than your analytical framework is fatally flawed.
If you think I am being a RE cheerleader, you are mistaken. I think we will see flat-to-modest declines in the RE market in Austin and in many other areas that were only mildly infected by the coastal RE bubble. I've provided data (e.g., median income to median house price ratios) that support this position by showing the RE market here is not divergent from historical norms.
In an earlier post you stated regarding the TX RE market: "I'm trying real hard to get smarter fast."
So, I and Austinite try to provide you with some data and insights. Your response, however, indicates that you would prefer to simply apply your CA insights. That's not the same as saying "it's special here." It saying that a sensitive analysis takes into account the facts of a particular case.
BlueEyesAustin said...
Whatever.
No, around here we either care or keep quiet. You wanna "whatever" there's a lot of other excellent blogs.
If you think that a market that was flat for five years is going to correct at the same level as a market that grew at a bubble rate for those same five years than your analytical framework is fatally flawed.
Severely flawed at leeast. The Austin market hasn't beeen "flat" for five years just rising slowly. See:
http://recenter.tamu.edu/data/hs/hs140b.htm
If you think I am being a RE cheerleader, you are mistaken
I only observed that you were repeating#3 on the cheer list.
I think we will see flat-to-modest declines in the RE market in Austin and in many other areas that were only mildly infected by the coastal RE bubble.
THAT makes you a cheerleader. This is almost exactly what David Lireah said 2 days ago.
I've provided data (e.g., median income to median house price ratios) that support this position by showing the RE market here is not divergent from historical norms.
Yes, you've provided supporting info. That's why your comments are recieving respectful attention. Prices appear to be only moderately diverging from past norms but this in an environment of historically extremely low interest rates.
In an earlier post you stated regarding the TX RE market: "I'm trying real hard to get smarter fast."
Indeed, and you've helped. I didn't realize the extent of the cultural differences twixt Austin and San Antonio for one and the extremely unusual 2002-2003 house price trend. Tech bubble fallout?
So, I and Austinite try to provide you with some data and insights. Your response, however, indicates that you would prefer to simply apply your CA insights. That's not the same as saying "it's special here." It saying that a sensitive analysis takes into account the facts of a particular case.
How did I "know" there was a strong WaMu and BoA prescence if my model is so very flawed? I'm not applying the same analysis as Ido California. I'm comparing and contrasting to tease out thee truth. Looking at the 2001 data your local exposure to the tech bubble was obvious. Early 90s SoCal was equally vunerable to an aerospace downturn. Austin would have said the strong tech sector was a good thing. SoCal would have said the same about aerospace. Now we have a situation where SoCal is saying low interest rates and an expectation of safe investment are a justifying our current prices. Austin, do you have low interest rates and an expectation of safe real estate investment?
Curious as to what you mean by the term "open up" & why Cape Cod. I know the area well & I just don't see investment potential.
Places I wish would open up; Coastal California, Cape Cod, low density Gulf Florida pennisula, the next Sedona.
Those places have been ruined by a combination of greed, neglect, "progress," and mostly their own success.
By "open up" I'm hoping for a combination of rational pricing and renewed community commitment to restoring those aspects that made them desireable. Cape Cod is overpriced and congested. Gulf Florida is overpopulated. Don't even get me started on the failings of Central Coast California.
Could you please rank & describe your preferences on types of residences (SFR/TH/4P/etc.)?
Within the SFR/Duplex/4plex I don't care much. I don't like to stand out such as a 4plex in a bunch of SFRs or vice versa. Also in keeping with my other guides a lot of 4 plexes gets too urban for my tastes.
For SFRs; low crime, low taxes, low key. Easy to rent, 3br/1.5ba+. I'm not real concerned about schools beyond what you'll find if the place is safe anyway. Apliances are the cheapest things to provide and widen the customer base and also keep theem longer. If moving involves buying a W/D Refrig/Oven you hesitate. For the same reason utils are not included. Makes the rent look cheaper and makes it easier to keep rents low.
I think Austin truly is a nice city. It has lots going for it. It's a capital city (along with 50 others), it has a major university (like some 60 other cities/neighborhoods), and it has a lot of high tech (like about a dozen other metropolitan areas). I agree with Robert on the "it's different" red flag going up.
I have a fairly mobile skill set, and I am actively researching other parts of the country as candidate work/live possibilities. One thing I do know is that there are a lot of nice places inside our national borders. I prefer them to the rest of the world. Austin is on my watch list now (along with 9 others), thanks to the sincere recommendations from the Austinites.
I agree Buffalo is a dirty trick, and it should only be reserved for places like the SF Bay Area and San Diego, which are currently experiencing job loss/talent flight due to their uneconomic conditions for business.
On the other hand, Fort McMurray is just as much of a red herring. Ever been to Viginia City, NV? Read about what happens to boom towns in the middle of nowhere. The stock exchange in Virginia City had greater "worth" than the NYSE. There are lots of examples, easy to find: Aurora, CA... I mean NV, is a fun one. How is Midland, TX doing these days? Heck, some speculators are thinking about Grand Junction, CO as a Uranium mining play in this energy burp.
BlueEyesAustin said...If you think that a market that was flat for five years is going to correct at the same level as a market that grew at a bubble rate for those same five years than your analytical framework is fatally flawed.
You're assuming that a previously flat market was therefore unaffected by the bubble. Consider whether or not prices would have already declined if not for a strong economy, fueled in part by the bubble. What appears to be flat may still be a rise from what would have otherwise occurred.
You're assuming that a previously flat market was therefore unaffected by the bubble.
Exactly! While many factors that go into housing prices are and always will be local the causes of the Housing Pustule are international in scope and have provided a strong and otherwise unsustainable positive price bias. The proverbial rising tide if you will.
Like "incessant" I too think Austin will be among the least impacted this time but that may mean "only" 20% declines in price on 40% declines in volume. "Lucky" Austin. At least it won't be compared to Sacramento.
Please don't come to Austin.
We have enough California transplants.
Sincerely
Austin, TX
While I can empathize with the desire to pull up the drawbridge I believe Californicators are a symptom not a disease.
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