Austin Rental Market Update for 2008

The rental market for single family homes in Austin continues its march upward. Rent prices increased about 6% in 2008 over 2007. Remember though that the 2008 average rent amount of $1,424 per month in Austin is still less than the year 2000 average rent of $1,497/mo. and the year 2001 peak of $1,524/mo. The graph below shows the historic average and median rent values for Austin from 1999 through 2008. The big dip you see in the chart is a result of the tech bust, 9/11 and the resulting job losses, weak economy and over-supply of rental homes that resulted in all the failed sales efforts from 2002 through 2004. You can see that our rental market bottomed out in 2005 and turned upward in 2006 and has continued that trend for three years now. But most rental homes in Austin still rent for less than they did in 2000 and 2001, so renters have had a good run.

2008-ytd-rental-graph

Will the Austin rental market continue its upward climb in 2009? It’s hard to know for sure, but I think it might level off a bit for 2009. Demand for rental homes will increase due to the non-buyers who are choosing to not buy a home and instead becoming or remaining renters. But that is offset by the slower job market, and the increased rental supply provided by sales listings converted to rentals after not selling, as those sellers refuse to lower the price further and instead decide to simply hold off on selling for a year or two until the sales market rebounds. Also, although the rental stats look really good for landlords, those of us in the business of renting properties know that we are not always able to increase rents and not all homes rent as quickly as the stats suggest.

Finally, apartments are over-built again in Austin and there will be a large number of just completed new apartment units coming online in Austin in 2009, as well as new condos converted to rentals due to slow sales. The move-in deals and concessions offered by apartments tend to siphon away at least some of our home renters who ordinarily might not consider an apartment but can be swayed by economic incentives such as three month’s free rent, $99 deposits and free washer and dryer. So, while demand will increase, supply will be increasing by even more.

I just mailed lease renewal notices out for 4 rental properties I manage, and we did not raise rent on any of those particular properties. It’s much cheaper and more prudent to retain a tenant at the current rental rate than to cause them to think about moving because of a $50 or $100/mo rent increase.

December rental stats, Year to date rental stats, and a breakdown comparing 2008 to 2007 by MLS area are all posted below.

Austin Real Estate Rental Market Update Dec 2008
Homes only (condos, duplexes, etc. not included) compiled from Austin MLS data

Nov 2008 Dec 2008 Dec 2007 Yr % Change
# Rented 564 589 493 19.47%
Avg List $1,394 $1,420 $1,381 2.82%
Med List $1,200 $1,250 $1,250 0.00%
Avg Rent $1,370 $1,402 $1,365 2.71%
Med Rent $1,200 $1,245 $1,250 -0.40%
Rent/List % 98.28% 98.73% 98.84% -0.11%
Avg SQFT 1942 1985 1927 3.01%
Med SQFT 1834 1822 1821 0.05%
Avg $ SQFT $0.71 $0.71 $0.71 -0.29%
Avg DOM 41 48 42 14.29%
Median DOM 33 39 30 30.00%
# Expired 51 156 160 -2.50%
# Withdrawn 164 157 62 153.23%
Not Rented 215 313 222 40.99%
Not Rented % 27.60% 34.70% 31.05% 11.76%

 

 

You’ll note that in December rentral rates are less than the average for the year, and the increase over the prior year is smaller. In general, landlords can fetch higher rental rates during the Spring/Summer months than in the Fall/Winter months. I ran a comparison several years ago and determioned that, on average, homes leased bewteen Mar and August rent for about $50 more and about 10 days faster than the same type of homes rented from September through February. This is why, for the properties we own and/or manage, we generally attempt to keep the lease ending dates timed for the Spring/Summer cycle. That isn’t always possible, but it’s something we attempt nonetheless. 

Below is the year to date totals for all of 2008 compared to 2007.

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Austin Rental Market YTD Update – Dec 2008
Homes only (no condos, duplexes, etc) – Data from Austin MLS

Jan-Dec 08 Jan-Dec 07 Yr % Change
# Rented 8015 7799 2.77%
Avg List $1,436 $1,352 6.21%
Med List $1,275 $1,200 6.25%
Avg Rented $1,424 $1,342 6.11%
Med Rented $1,250 $1,200 4.17%
Leased/List % 99.16% 99.26% -0.10%
Avg SQFT 1934 1887 2.49%
Med SQFT 1802 1786 0.90%
Avg $ SQFT $0.74 $0.71 3.53%
Avg DOM 34 36 -5.56%
Median DOM 24 24 0.00%
# Expired 816 641 27.30%
# Withdrawn 1282 966 32.71%
Not Sold 2098 1607 30.55%
Not Sold % 21% 17% 21.43%

 

Some are suprised to know that there are actually failed rental efforts, as well as failed sales efforts. You all know the terms Expired and Withdrawn as related to sales listings, but the bottom of the chart below shows that the same thing happens in the rental market. Usually, the reasons are exactly the same for the rental market as in the sales market. The house is over priced and/or in poor condition. Often, an uneducated owner encounters an inexperienced Realtor, and together they put a home up for rent at the owner’s “must have” price, which is usually incorrectly determined by the owner’s mortgage payment. The problem is, the rental market is ignorant of and unconcerned with your mortgage payment. It is a 100% irrelevant number that is completely useless in determining a rental value for a home. Most rental homes in Austin that were purchased with 20% or less downpayment in the last 3 to 5 years will produce a $300-$600 per month negative cash flow after management fees, leasing expenses, repairs and maintenance, and vacancy loss are all factored in. 

We do see above that the number of failed rental efforts increased in 2008, just as in the sales market, so although I would characterize the rental market in Austin as “strong”, the market still punishes those landlords who do not know how to price, prepare and properly market a home.

Below is the Austin rental market breakdown comparison for 2007/2008 by MLS area. It’s important when reviewing and interpreting stats like these to understand that we are informed by a combination of metrics, and not simple average rental price. For example, the first area below is Central Austin MLS Area 1B. You’ll note that the average rent is up 7.58%, the median rent is up 10%. Does that mean that a typical average size home of 1983 square feet should rent for $200 more this coming summer than it did last summer? No, it doesn’t. If you look at the average sqft size for homes in area 1B, you’ll see that the size increased in 2008 by 0.5%, and that the average rented price per square foot actually decrease by 1.75% from $1,27 psf last in 2007 to $1.25 in 2008.

These stats are usefull to observe macro trends, variances in market behavior across different areas in Austin, and to gain a general since of what is happening in Austin, but each individual home is still unique and different and so it’s a mistake to draw conclusions about specific homes from the general data.

I cover this because I recently encountered a landlord who wrongly thought that her home should lease for the “average square foot” lease price in the neighborhood. Well, her home was almost twice the size of the average home in the neighborhood, so the “average square foot price” did not apply to that specific home. 

An MLS map is below the chart if you aer not familiar with Austin’s MLS areas. As usual, questions, comments and thoughts are welcome.

MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
All Areas 2008 8015 $1,436 $1,275 1,934 $0.74 34 24

2007 7799 $1,352 $1,200 1,887 $0.72 36 24

Change 2.77% 6.21% 6.25% 2.49% 3.63% -5.56% 0.00%









MLS Area YTD-Apr # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
1A 2008 44 $2,491 $2,500 2,643 $0.94 38 28

2007 37 $2,387 $2,395 2,566 $0.93 45 28

Change 18.92% 4.36% 4.38% 3.00% 1.32% -15.56% 0.00%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
1B 2008 131 $2,483 $2,200 1,983 $1.25 38 25

2007 101 $2,308 $2,000 1,811 $1.27 31 20

Change 29.70% 7.58% 10.00% 9.50% -1.75% 22.58% 25.00%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
1N 2008 204 $1,483 $1,350 1,843 $0.80 36 27

2007 167 $1,499 $1,300 1,907 $0.79 31 21

Change 22.16% -1.07% 3.85% -3.36% 2.37% 16.13% 28.57%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
2 2008 159 $1,370 $1,300 1,318 $1.04 25 18

2007 127 $1,252 $1,200 1,203 $1.04 22 16

Change 25.20% 9.42% 8.33% 9.56% -0.12% 13.64% 12.50%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
2N 2008 125 $1,118 $1,100 1,402 $0.80 32 23

2007 136 $1,080 $1,061 1,402 $0.77 33 23

Change -8.09% 3.52% 3.68% 0.00% 3.52% -3.03% 0.00%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
3 2008 175 $1,282 $1,200 1,398 $0.92 41 30

2007 151 $1,145 $1,095 1,293 $0.89 34 25

Change 15.89% 11.97% 9.59% 8.12% 3.56% 20.59% 20.00%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
3E 2008 51 $1,089 $1,050 1,401 $0.78 35 24

2007 65 $1,044 $1,050 1,377 $0.76 55 37

Change -21.54% 4.31% 0.00% 1.74% 2.52% -36.36% -35.14%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
4 2008 223 $1,704 $1,500 1,532 $1.11 37 26

2007 202 $1,597 $1,495 1,397 $1.14 34 20

Change 10.40% 6.70% 0.33% 9.66% -2.70% 8.82% 30.00%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
5 2008 134 $1,203 $1,150 1,334 $0.90 33 23

2007 121 $1,075 $1,050 1,238 $0.87 36 23

Change 10.74% 11.91% 9.52% 7.75% 3.85% -8.33% 0.00%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
5E 2008 62 $1,046 $1,050 1,657 $0.63 46 37

2007 51 $1,024 $1,000 1,650 $0.62 36 23

Change 21.57% 2.15% 5.00% 0.42% 1.72% 27.78% 60.87%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
6 2008 117 $1,830 $1,700 1,420 $1.29 34 25

2007 88 $1,656 $1,595 1,450 $1.14 26 15

Change 32.95% 10.51% 6.58% -2.07% 12.84% 30.77% 66.67%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
7 2008 21 $1,725 $1,595 1,452 $1.19 24 15

2007 23 $1,712 $1,725 1,504 $1.14 21 12

Change -8.70% 0.76% -7.54% -3.46% 4.37% 14.29% 25%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
8E 2008 68 $2,796 $2,400 2,549 $1.10 37 31

2007 51 $2,742 $2,399 2,475 $1.11 35 23

Change 33.33% 1.97% 0.04% 2.99% -0.99% 5.71% 35%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
8W 2008 66 $2,510 $2,425 2,596 $0.97 50 33

2007 57 $2,388 $2,100 2,455 $0.97 49 30

Change 15.79% 5.11% 15.48% 5.74% -0.60% 2.04% 10%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
9 2008 34 $1,261 $1,275 1,594 $0.79 35 29

2007 35 $1,247 $1,195 1,575 $0.79 51 46

Change -2.86% 1.12% 6.69% 1.21% -0.08% -31.37% -37%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
10N 2008 151 $1,205 $1,195 1,338 $0.90 24 18

2007 150 $1,178 $1,150 1,359 $0.87 25 16

Change 0.67% 2.29% 3.91% -1.55% 3.90% -4.00% 13%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
10S 2008 317 $1,252 $1,250 1,571 $0.80 24 15

2007 325 $1,215 $1,200 1,594 $0.76 26 18

Change -2.46% 3.05% 4.17% -1.44% 4.55% -7.69% -17%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
11 2008 107 $1,093 $1,050 1,490 $0.73 27 19

2007 110 $1,060 $1,025 1,474 $0.72 30 20

Change -2.73% 3.11% 2.44% 1.09% 2.01% -10.00% -5%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
CLN 2008 506 $1,178 $1,150 1,892 $0.62 28 21

2007 534 $1,150 $1,100 1,897 $0.61 35 23

Change -5.24% 2.43% 4.55% -0.26% 2.71% -20.00% -9%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
CLS 2008 344 $1,465 $1,395 2,142 $0.68 28 21

2007 386 $1,406 $1,395 2,109 $0.67 37 23

Change -10.88% 4.20% 0.00% 1.56% 2.59% -24.32% -9%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
EL 2008 54 $1,015 $998 1,754 $0.58 53 43

2007 52 $1,030 $995 1,888 $0.55 53 38

Change 3.85% -1.46% 0.30% -7.10% 6.07% 0.00% 13%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
GTE 2008 99 $1,110 $1,110 1,662 $0.67 37 24

2007 89 $1,089 $1,095 1,738 $0.63 30 20

Change 11.24% 1.93% 1.37% -4.37% 6.59% 23.33% 20%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
GTW 2008 107 $1,419 $1,300 2,048 $0.69 49 35

2007 68 $1,370 $1,298 1,984 $0.69 41 31

Change 57.35% 3.58% 0.15% 3.23% 0.34% 19.51% 13%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
HD 2008 97 $1,895 $1,850 2,513 $0.75 41 31

2007 68 $1,780 $1,795 2,308 $0.77 49 40

Change 42.65% 6.46% 3.06% 8.88% -2.22% -16.33% -23%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
HH 2008 459 $1,184 $1,150 1,847 $0.64 29 21

2007 453 $1,140 $1,100 1,869 $0.61 35 21

Change 1.32% 3.86% 4.55% -1.18% 5.10% -17.14% 0%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
HU 2008 278 $1,109 $1,095 1,890 $0.59 33 23

2007 306 $1,073 $1,050 1,889 $0.57 45 30

Change -9.15% 3.36% 4.29% 0.05% 3.30% -26.67% -23%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
LN 2008 51 $1,191 $1,200 1,660 $0.72 70 38

2007 46 $1,159 $1,100 1,609 $0.72 45 27

Change 10.87% 2.76% 9.09% 3.17% -0.40% 55.56% 41%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
LS 2008 337 $2,108 $1,900 2,560 $0.82 54 38

2007 284 $1,959 $1,725 2,338 $0.84 50 41

Change 18.66% 7.61% 10.14% 9.50% -1.73% 8.00% -7%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
MA 2008 137 $1,120 $1,078 1,857 $0.60 46 40

2007 128 $1,105 $1,013 1,832 $0.60 46 35

Change 7.03% 1.36% 6.42% 1.36% -0.01% 0.00% 14%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
N 2008 166 $1,306 $1,275 1,757 $0.74 28 21

2007 159 $1,248 $1,200 1,777 $0.70 34 26

Change 4.40% 4.65% 6.25% -1.13% 5.84% -17.65% -19%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
NE 2008 170 $1,190 $1,200 1,861 $0.64 40 29

2007 194 $1,189 $1,195 1,864 $0.64 42 32

Change -12.37% 0.08% 0.42% -0.16% 0.25% -4.76% -9%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
NW 2008 247 $1,407 $1,295 2,010 $0.70 36 26

2007 225 $1,360 $1,250 1,955 $0.70 32 24

Change 9.78% 3.46% 3.60% 2.81% 0.62% 12.50% 8%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
PF 2008 593 $1,252 $1,200 2,002 $0.63 30 21

2007 576 $1,207 $1,195 1,963 $0.61 36 26

Change 2.95% 3.73% 0.42% 1.99% 1.71% -16.67% -19%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
RN 2008 130 $2,374 $2,200 2,989 $0.79 37 28

2007 144 $2,217 $2,000 2,735 $0.81 53 41

Change -9.72% 7.08% 10.00% 9.29% -2.02% -30.19% -32%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
RRE 2008 735 $1,260 $1,200 2,058 $0.61 30 22

2007 829 $1,211 $1,175 2,021 $0.60 35 24

Change -11.34% 4.05% 2.13% 1.83% 2.18% -14.29% -8%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
RRW 2008 370 $1,435 $1,395 2,241 $0.64 32 22

2007 382 $1,377 $1,300 2,167 $0.64 37 25

Change -3.14% 4.21% 7.31% 3.41% 0.77% -13.51% -12%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
SC 2008 67 $1,282 $1,250 2,137 $0.60 32 23

2007 50 $1,192 $1,178 1,945 $0.61 29 22

Change 34.00% 7.55% 6.11% 9.87% -2.11% 10.34% 5%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
SE 2008 46 $1,123 $1,125 1,893 $0.59 41 37

2007 55 $1,051 $1,075 1,795 $0.59 50 34

Change -16.36% 6.85% 4.65% 5.46% 1.32% -18.00% 9%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
SWE 2008 284 $1,466 $1,395 2,031 $0.72 32 27

2007 266 $1,374 $1,350 1,910 $0.72 27 19

Change 6.77% 6.70% 3.33% 6.34% 0.34% 18.52% 42%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
SWW 2008 212 $1,754 $1,695 2,318 $0.76 29 21

2007 193 $1,730 $1,650 2,342 $0.74 28 18

Change 9.84% 1.39% 2.73% -1.02% 2.44% 3.57% 17%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
UT 2008 45 $1,873 $1,750 1,588 $1.18 36 23

2007 38 $1,893 $1,600 1,608 $1.18 31 22

Change 18.42% -1.06% 9.38% -1.24% 0.19% 16.13% 5%









MLS Area Year # Rented Avg Rent Med Rent Avg SQFT Avg PSF Avg Days Med Days
W 2008 74 $2,237 $2,188 2,698 $0.83 43 36

2007 73 $1,972 $1,895 2,303 $0.86 41 31

Change 1.37% 13.44% 15.46% 17.15% -3.17% 4.88% 16%

 

 

Austin TX MLS Map

Austin TX MLS Map

Posted by Steve
7 years ago
Steve

Steve is a Real Estate Blogger, Husband and Dad, UT Austin Grad, Runner, Real Estate Broker and owner of Crossland Team and Crossland Real Estate in Austin TX.

Click Here to Leave a Comment Below

Tony Tovar - 7 years ago

Hey Steve,

Did you hear about the stipend that is given to folks who buy a home before July the first of this year? That the government will give you a tax credit of up to 7500 dollars or 10 percent of the total mortgage? Its suppose to entice new home owners to buy.

Respectfully,
Tony

Reply
Ed - 7 years ago

Steve,

Any word on changes to the Fannie Mae / Freddie Mac 4 home max policy?

Thanks again for this blog and the statistics as it provides me a great level of comfort to be so informed of the trends in the greater Austin community.

Cheers,
Ed

Reply
Leon Fu - 7 years ago

Steve,

Texas Workforce came out with these statistics last Friday.

http://www.twc.state.tx.us/news/press/2009/012309epress.pdf

Unemployment in Texas hit 6% vs. 7.2% nationally. 25,000 seasonally adjusted. The good news is Texas added 153,000 jobs in the past 12 months compared with 2.6 million job losses across the country. We somehow managed to keep adding jobs (but not fast enough to keep the unemployment rate down) over the past year while the rest of the country was losing jobs. But lets not mince words. December was horrible.

Think about what’s going to happen to the homes of those 25,000 people in Texas who own homes that just lost their jobs. That’s new foreclosures in the pipeline that coming in the next 3 to 6 months since most Americans live paycheck to paycheck or do not have more than 3 months of savings.

It’s not getting any better either. Just yesterday, Home Depot, Pfizer, Sprint, Caterpillar, and Texas Instruments announced a combined 50,000 layoffs in 1 day. That’s all brand new foreclosure inventory coming within 6 months if unemployment doesn’t turn around.

A speck of good news that sales were actually UP 6% in December, so the homes are being bought has the prices plummet. So that’s a start. We need to move these homes to the hands of people who are financially stronger, which is in the process of happening, but this will take time.

Texas and Austin has weathered this better than just about any other state, but we are just starting to rollover with the rest of the country.

Why would you advocate anyone, but perhaps the most savvy real estate professionals to be buying right now? Sure there are great deals now. But the better deals are coming 6 months from now when the millions people that lost their jobs will be forced to sell.

Leon

Reply
Steve - 7 years ago

Tony: Yes, but at present it’s still not something that is causing buyers to jump. It’s really a no interest loan for $7,500 that has to be paid back in subsequent tax returns.

Ed: Nothing has changed. The 4-loan limit is still keeping a lot of the most experienced investors out of the market, which is rediculous.

Leon: I advocate buying now because 1) It’s a buyer’s market and , 2) I don’t believe in trying to time a market. The bast “time” to buy is when someone is ready and able.

Steve

Reply
Leon Fu - 7 years ago

Steve,

This isn’t market timing. It’s fundemental analysis. Heck, another 7,500 job cuts were announced just YESTERDAY from Corning, Avery, Target, Cooper Industries. This is on top of the 50,000 job cuts announced on Monday! These are all jobs that are going to be eliminated in the FUTURE. These are all homes that are going to be hitting the market in the next few months.

If the facts tell you that the fundementals continuing to deteroriate (and it doesn’t seem you disagree with that) are you saying you are going to buy just because you can? Even if you saw we were entering a Great Depression type scenerio, you are saying you would buy just because its a “buyers” market???? And your justification is that because you don’t believe in “market timing”? That sounds completly absurd and false. Looking at the facts and fundementals of the economy and the market and making a judgement isn’t market timing.

Reply
Aaron - 7 years ago

Steve,

I appreciate your honesty, but I have to disagree with your opposition to the 4 loan limit rule.

Here is my justification, based on my understanding (correct me if I’m wrong), which hopefully seems reasonable:
1. The 4 loan limit only applies to the amount of money that will be backed by Freddie Mac/Fannie Mae (typically $417,000). You could, in theory, still get loans, just at a much higher interest rate.
2. Those organization (FMs) were set up for the sole purpose of enabling families to become homeowners.
3. Since they have the implicit (perhaps now explicit) backing of the US government, they are effectively subsidized by the American people.

So, while I can appreciate your frustration at the loan limits, it seems that you are effectively asking for additional subsidies for your investment activities. In this day and age, when the banks are getting handouts and everyone else is being subsidized, that is not unusual, but it works against individual home buyers (especially first time) who would be better helped by a continued decline in housing prices. Enabling more investors (such as you) with additional subsidies would prevent this decline, thus working against the FMs primary purpose.

Just a few thoughts, please correct if I have made any mistakes.

Reply
Steve - 7 years ago

Hi Leon,
> This isn’t market timing. It’s fundemental analysis.

Well, I do appreciate that you challenge what I say, but all I can tell you is that, at the end of the day, we will all either be financially independent or we won’t. I’m blessed to be very near that finish line before I’m 50, and it’s specifically because of real estate investing.

And if someone asks me how or why we’ve done so well investing in real estate, and I listed the top 10 or 20 reasons, “market timing” would not even be on the list. We do what we do in good markets and bad, it doesn’t matter.

You have a different viewpoint on how and when to invest in real estate, and I respect that, but my personal life story and balance sheet informs me otherwise. I play financial offense in life, you are recommending playing financial defense. Where you see potential bad outcomes, I look for opportunity. You can’t score touchdowns sitting on the bench.

Aaron: I don’t know if your facts are right or not, regarding the mission and purpose of Freddie/Fannie, but it doesn’t matter. Bottom line is there excess real estate inventory and the American Public is harmed more by the drying up of real estate demand, and falling values, than it would be by raising the loan limit back up to 10 where it was before, and then only providing loans to qualified buyers as should have been the case all along.

Steve

Reply
Leon Fu - 7 years ago

Steve,

Actually, yes for most people, it is a time to play defensive. You don’t need to make back money you don’t lose. However, if you want to play offense, I can do that too. I think a better play is to short (bet against) any of the commercial real estate stocks. Simon Property Group (SPG) is the largest one and I think a good place to go short is above 50 if it gets there. It’s trading around 47-48 right now.

With 170,000 job losses already announced in January alone and the credit situation, I believe these companies are going to be in a huge amount of trouble this year. Retailers are closing stores left and right. Just yesterday, Starbucks announced 6,700 layoffs and the closing of 600 stores.

The investment thesis is simple. Millions of jobs destroyed this year(already happening). Consumers cut back because they don’t have jobs, savings, or credit. Retail sales collapse. Companies close stories in response to that. Commercial property operators either can’t make their payments or can’t roll over debt because banks can’t/won’t lend. So the result is either bankruptcy or massive dilution of their stock.

Take a look at this article in the WSJ for an idea of what’s going on:

http://online.wsj.com/article/SB123308296078020497.html?mod=yahoo_hs&ru=yahoo

Can you tell me who is the winner in this transaction? Buyer or seller? Definitely not the seller, but what about the buyer? They are getting a ridiculously low price, but are they the winner in this transaction? Not necessarily. Time will tell. If the economy turns around, then yes. They will be huge winners. But it’s very possible that they lose money also if the situation deteriorates from here. Everyone can lose in this transaction; the seller, buyer, and the bank that made the loan. So it’s a myth that market that is good for sellers is bad for buyers or vice versa. The reality is the market usually good for everyone or bad for everyone.

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Ed - 7 years ago

Leon,

I believe you are correct in the short term. But usually real estate invenstments aren’t targeted for short term returns. They are to be held, return cash flow and help for the long term allowing reasonable appreciation. You are looking for a huge returns “betting” on securities and busineses. Very different strategies. Not a bad one at all mind you, but if you have the dough. It may be in your best interest to diversify a bit and buy a few rentals for a 10 yr or 15 yr investment in the Austin market. wink wink

Aaron – Freddie Mac and Fannie Mae should require down payments, sufficient income and other economic factors to determine who gets a loan vs an arbitrary 4, 10 or 20… limit. Freddie Mac and Fannie Mae are private companies that are not subsatidizing by the tax payers until a few months ago. If that is the standard, then BofA, Wells Fargo, Chase etc… are tax subsidized also. They need to use logic, not political pressure to set policy. I have 12 sing family homes with 35% equity, decent monthly cash flow and their business decision is NO REFI FOR YOU! I am not a higher risk borrower than a first time home buyer. The law will change. I am just frustrated with it because rates are so low, properties are well priced, and I am on the sidelines.

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Aaron - 7 years ago

At the risk of reviving a dead thread, I’ll respond to Ed’s comments.

The Federal National Mortgage Association (Fannie Mae) was a federal entity until it was converted to a GSE in the 1960s. Thus, it is now a stockholder based organization, but it has always carried an implicit guaranty from the federal government. With the recent intervention, that guaranty has essentially been made explicit. This kind of guaranty effectively acts as a subsidy since the government is insuring (which costs money) against the risk of defaults.

The question then becomes not “is the government subsidizing mortgages” but “who should the government subsidize”? Steve, and apparently Ed, are arguing that it makes economic sense to subsidize real estate investors, since that will shore up the entire market, prevent additional price decline. I see that argument, and it may well prove to be true, but I would argue against key components.

Specifically, by subsidizing real estate investors, the government is driving up and maintaining artificially high price levels. This action actually keeps the lower and middle class out of home ownership, which is exactly the mandate the FMs were started for.

A secondary argument could be made that even smart, responsible real estate investors may fall prey to continued price declines. Unlike a typical home owner, when an investor becomes unable to meet their obligations, multiple loans will be at risk. By limiting the number of conforming loans, the FMs (and the American taxpayer, by proxy) are just limiting their risk in a questionable market, which is not an unreasonable behavior. Based on my understanding the FMs are not set up to support commercial real estate ventures, which is a line that begins to get blurry when talking about 10 or 20 loans per individual.

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Leon - 7 years ago

Ed,

I certainly hope that I am right only in the short term. But the problem with buying now is that we don’t know how long and how deep this recession will be. Why not wait for some sign of a turn? The argument of it will be “too late” just doesn’t hold water. If the turn is real, it will last.

Just today, 600K jobs lost in this month alone. 7.6% unemployment. That’s up from 7.2% just last month. We are going to 10% by this summer at this rate. If 40% to 60% of those people own homes, that’s all new foreclosure inventory that’s now in the pipeline. The “great deals” are going to get even better by the summer. It would be wise for any buyer to wait for all this inventory to hit the market and see what happens…

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Ed - 7 years ago

Aaron,

I believe a business, any private business, should make the best decision it can based upon risk and return. If an investor is going to use a mortgage to purchase a single family home, the approval should be based upon down payment, credit worthiness, investors assets etc… not an arbitrary limit. By eliminating the individual investor will not put downward pressure on the prices long term, it will just allow larger firms to dominate that market. Don’t squish the little guy! If I have 30% down payment, a portfolio of single family homes with signifigant debt to income ratio, why wouldn’t you provide me a loan if you were a bank. Simply put, banks like BofA, Wells etc… follow Freddie Mae and won’t even evaluate it if the investor doesn’t fit the parameters they set. I am not looking for a government hand out, I am trying to avoid it as Social Security won’t be there by the time I retire.

As far as the government subsidy or insurance, this is what I found on web regarding Freddie Mac, and Fannie Mae:

Guarantees and subsidies
Speculation that the U.S. government would bail out an insolvent Fannie Mae is a hypothesis that had never been tested until recently, when the subprime mortgage crisis hit the U.S.

On July 11, 2008, the New York Times reported that U.S. government officials were considering a plan for the U.S. government to take over Fannie Mae and/or Freddie Mac should their financial situations worsen due to the U.S. housing crisis.[6] The government officials also stated that the government had also considered calling for explicit government guarantee through legislation of $5 trillion on debt owned or guaranteed by the two companies.

Shares in U.S. mortgage finance firms Fannie Mae and Freddie Mac plunged on Friday, July 11, 2008, and market speculation mounted that the government was set to take them over to resolve their funding problems.

Shares continued to plummet[19] as investors became unsure about the adequacy of the capital held by FNMA. U.S. Treasury Secretary Henry M. Paulson as well as the White House went on the air to defend the financial soundness of Fannie Mae.

Fannie Mae and smaller Freddie Mac own or guarantee almost half of all home loans in the United States. They face billions of dollars in potential losses, and may need to raise additional, potentially substantial, amounts of new capital as the current downturn in the U.S. housing market continues.

Markets assume that the taxpayer will if necessary take on the burden of all their mortgages because they underpin the whole U.S. mortgage market. If they were to collapse, mortgages would be harder to obtain and much more expensive. U.S. Treasury Secretary Henry Paulson has said the government’s primary focus is in supporting Fannie Mae and Freddie Mac in their current form.[20]

[edit] No actual guarantees
Fannie Mae receives no direct government funding or backing; Fannie Mae securities carry no government guarantee of being repaid. This is explicitly stated in the law that authorizes GSEs, on the securities themselves, and in many public communications issued by Fannie Mae.

Neither the certificates nor payments of principal and interest on the certificates are guaranteed by the United States government. The certificates do not constitute a debt or obligation of the United States or any of its agencies or instrumentalities other than Fannie Mae.

The perception of government guarantees has allowed Fannie Mae and Freddie Mac to save billions in borrowing costs. Estimates by the Congressional Budget Office and the Treasury Department put the figure at about $2 billion per year.[21]

[edit] Assumed guarantees
There is a wide belief that FNMA securities are backed by some sort of implied federal guarantee, and a majority of investors believe that the government would prevent a disastrous default. Vernon L. Smith, 2002 Nobel Laureate in economics, has called FHLMC and FNMA “implicitly taxpayer-backed agencies.”[22] The Economist has referred to “[t]he implicit government guarantee”[23] of FHLMC and FNMA. In testimony before the House and Senate Banking Committee in 2004, Alan Greenspan expressed the belief that Fannie Mae’s (weak) financial position was the result of markets believing that the U.S. Government would never allow Fannie Mae (or Freddie Mac) to fail.[24]

[edit] Federal subsidies
The FNMA receives no direct federal government aid. However, the corporation and the securities it issues are widely believed to be implicitly backed by the U.S. government. In 1996, the Congressional Budget Office wrote “there have been no federal appropriations for cash payments or guarantee subsidies. But in the place of federal funds the government provides considerable unpriced benefits to the enterprises… Government-sponsored enterprises are costly to the government and taxpayers… the benefit is currently worth $6.5 billion annually.”.[25] Fannie Mae and Freddie Mac are allowed to hold less capital than normal financial institutions: e.g., it is allowed to sell mortgage-backed securities with only half as much capital backing them up as would be required of other financial institutions. Specifically, regulations exist through the FDIC Bank Holding Company Act that govern the solvency of financial institutions. The regulations require normal financial institutions to maintain a capital/asset ratio greater than or equal to 3%.[26] The GSEs, Fannie Mae and Freddie Mac, are exempt from this capital/asset ratio requirement and can, and often do, maintain a capital/asset ratio less than 3%. The additional leverage allows for greater returns in good times, but put the companies at greater risk in bad times, such as during the current subprime mortgage crisis. FNMA is also exempt from state and local taxes. In addition, FNMA and FHLMC are exempt from SEC filing requirements; however, both GSEs voluntarily file their SEC 10-K and 10-Q.

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