King County overvalued by 20% to 30%
Recently registered on SeattleBubble, but I am an experienced real estate investor. But my experience is mostly in North Carolina, so I am new to the King County market. I recently relocated to the east side of King County for a Microsoft position. With that disclosure, here is my impression of the local market. I decided to rent for the first year because nothing makes sense in this region. I only offer this post as the perspective of someone new to the area. I am not seeking to insult anyone who happens to have a different POV.
I have been searching for sensible investment properties to find around here. Guess what.... THERE ARE NONE!!! After 6 weeks of looking, I cannot find a single investable local property that makes any financial sense to purchase.
Based on current lack of credit, even for otherwise qualified homeowners or investors, IMO prices will fall until the purchase prices meets the rental revenue potenial. That market price for real estate will be determined in part by the direction of interest rates. The higher the rates goes, the more real estate has to fall.
With the current credit crunch, there is not much available credit for investors. So only the cash buyers can really afford to look for good deals. But there really are no good deals in King County, so I think the cash is staying on the sidelines.
I made one offer on a bank owned (Countrywide/BofA) property. I spoke with a few residents in the parking lot to get an idea of the rental rates. I did the math on the property taxes, assoc fees, insurance, current interest rates, etc. Then I priced my offer to make the deal cash flow neutral. The 1 br, 1 ba condo smells bad and needs new carpet plus updating kitchen and bath merely to be rentable. So I am budgeting some money for fixing it.
The bank is still 15% too high even with their counter offer. And so far this is the closest deal I have even thought it was worth attempting. I offered a cash deal at 20% below what the bank was listing. And the bank was only listing it about 10% below another similar condo in the same complex.
In summary, I think this market is overpriced by 30% based on the expectations of regular sellers. It is overpriced by 20% with the bank owned properties. Only once the prices get serious will you see the cash come off of the sidelines.
This is just my opinion. I will keep making my offers calculated on it making financial sense. When the banks capitulate and unload their inventory to investors with cash, that is when the floor will arrive.
The days of buying a cash flow negative property, and praying for appreciation, are over.
I have been searching for sensible investment properties to find around here. Guess what.... THERE ARE NONE!!! After 6 weeks of looking, I cannot find a single investable local property that makes any financial sense to purchase.
Based on current lack of credit, even for otherwise qualified homeowners or investors, IMO prices will fall until the purchase prices meets the rental revenue potenial. That market price for real estate will be determined in part by the direction of interest rates. The higher the rates goes, the more real estate has to fall.
With the current credit crunch, there is not much available credit for investors. So only the cash buyers can really afford to look for good deals. But there really are no good deals in King County, so I think the cash is staying on the sidelines.
I made one offer on a bank owned (Countrywide/BofA) property. I spoke with a few residents in the parking lot to get an idea of the rental rates. I did the math on the property taxes, assoc fees, insurance, current interest rates, etc. Then I priced my offer to make the deal cash flow neutral. The 1 br, 1 ba condo smells bad and needs new carpet plus updating kitchen and bath merely to be rentable. So I am budgeting some money for fixing it.
The bank is still 15% too high even with their counter offer. And so far this is the closest deal I have even thought it was worth attempting. I offered a cash deal at 20% below what the bank was listing. And the bank was only listing it about 10% below another similar condo in the same complex.
In summary, I think this market is overpriced by 30% based on the expectations of regular sellers. It is overpriced by 20% with the bank owned properties. Only once the prices get serious will you see the cash come off of the sidelines.
This is just my opinion. I will keep making my offers calculated on it making financial sense. When the banks capitulate and unload their inventory to investors with cash, that is when the floor will arrive.
The days of buying a cash flow negative property, and praying for appreciation, are over.
Comments
I think King County real estate is going to fall 20% to 30% just like everywhere else. Then once we get investors off of the sidelines, prices will stabalize and banks can lend based on reasonable expectations.
I am in the process of selling a house in Island county and am looking for a home in East King country....(Researching to be ready to move once my home sells) In the last month I have seen more and more price reductions and believe we are just at the beginning of the deflation of the bubble...
A big jump in Foreclosures is just hitting the market and I expect the Foreclosure list to get bigger and bigger as the lenders realize the cost of keeping these houses in inventory as depreciating assets...
...Sales are falling and the Surplus of homes is growing....Soon the lenders will stop being stupid and hire real estate people to sell their foreclosures without all the crap they currently put a potential buyer through...It seems to me that the 20-30% you have mentioned will begin to come down more rapidly soon....The market is currently being held up only by misleading the public about actual state of the Real Estate market......the real estate industry and the press will not be able to cover the facts for much longer...
A little air is coming out of the bubble slowly now....The bubble explosion is coming ....When? maybe as soon as November....
Investors here are willing to accept a lower rate of return that you are. Will that change? I have no idea.
When capital was cheap (easy money via loans) then investors were willing to accept lower rates of return.
Capital is npw expensive, higher down payments are required and there is not much near term opportunity for appreciation.
We actually have a high risk of declines in value for any investment real estate.
Will investors demand higher rates of return for the additional risk?
If they have any sense they will.
Many investors and homeowners have been driven out of the market because of tight credit markets.
This is just my opinion, but it simply doesn't make sense to buy anything here. Everything is cash flow negative (based on asking prices) and the odds are high that the 20% down payment will be pissed away when values decline 20% over the next 12 months to 24 months.
Me:
Harley Lever:
That is the mentality that you are up against here. There is zero consideration given to opportunity cost. (I actually had another RE bull tell me that he never considered opportunity cost in one of the comments).
Harley seems to think that renters paying for his mortgage is better than a company paying dividends on his investment. Is he right? He certainly has more control over his real estate investments and does not have to worry about Enron-stype executives defrauding him out of his investment. Real estate is an easy investment for most people to understand. Everyone has to live somewhere so everyone understands the value. That attracts more investment competition. More competition means investment return.
Because real estate has gone up so much so quickly here, the people who were investing in real estate have a lot of money to reinvest. They did will in real estate so they think that is the right place to invest. In order for real estate to make sense, either that money is going to have to drain out of the area or the investors have to be convinced that real estate is no longer a good investment.
Will that happen? Maybe. How long will it take? Who knows, but it will probably take years if it does.
I agree with you on that. It will take years to get this all worked out. After most people take a pounding on a bad real estate investment (or lose $100,000 in their home) then they will be more cautious in the future.
I also take a long term approach. I am not looking to flip any houses or condos. I am looking for long term properties. But if they are all cash flow negative, that can cause them to blow up quickly. I just don't see that game working any longer in California or Seattle.
I have a friend in California who has $8 million in mortgages for his properties. I think there were 12 properties or more. He was buying in 2004, 2005 and 2006. All of them had 30 yr fixed mortgages and were rented out. On paper he was doing great. He had over $1 million in paper equity in late 2006. But they were all cash flow negative. His Oracle/Peoplesoft IT consulting company (a few contractors working for him) made him about $300,000 annually enabled him to handle the negative cashflow.
But when he called me in early 2008 to ask for credit advice, he was in trouble. Most of the properties were underwater financially. So his equity was now negative and he was cash flow negative every month.
He let most of the properties foreclose. It just didn't make any sense to keep making payments. There was no hope of the values coming back anytime soon.
This guy will be out of the market for a long time. HIs credit is trashed and he got burned mentally. It will be a long time before investors forget about these experiences.
That is why I think the prices will fall until it makes financial sense again. As always, this is merely my opinion. :-)
1) Would you buy an investment today for $300k that paid back $18k annually if you thought it would sell for $250k in a year?
2) Would the answer to #1 make a difference if the investment was real estate or a stock?
3) Suppose you bought a house for $300k that returned $18k annually. Three years later you can sell the house for $700k but it is still bringing in only $18k. Do you hold on for the long term or do you sell and put your money in a different investment?
Fixed that for you.
And come to think of it, when I sold Commercial RE in the early 80's, the common paradigm was that "of course you're getting less in rent than the debt service, taxes, etc. You're making up for it by the equity buildup over time and slow rising rents. So eventually you'll do well." It does work if you are in a "bottomed out" real-estate market, ready to begin the next slow upward cycle, but sinc we are at an apex, with a LONG way to go down, real estate doesn't seem like a wise investment. When the government is selling houses in lots of ten for pennies on the dollar as they did a few decades ago, I'll be "in".