California real estate

Taxing flippers 25% in California??

March 28, 2022 By Ryan Lundquist 44 Comments

There’s a new bill in California called AB 1771 that proposes a 25% tax on the profit of home flippers. This is worth talking about because laws can affect the housing market. This is NOT a political post, but I want to talk about some of the issues involved and offer perspective based on stats and expertise.

House made of dollar bills along with the statement, "Taxing flippers 25% in California?"

News piece with Fox 40: A few days ago, I shared some thoughts with Fox 40. And yes, I referenced mom jeans. New career high? Enjoy below (or here).

Anyway, let’s talk about this bill.

THIS BILL IS ABOUT FRUSTRATION:

1) Frustrated with home prices: People are frustrated with the skyrocketing price of homes and rents, so something needs to be done.

2) Frustrated with investors: There is no mistaking investor activity has been increasing nationally, and people are frustrated about that because they feel investors are squeezing them out of opportunities.

STATS:

a) John Burns stats: This visual from John Burns Real Estate Consulting shows investors purchased one out of every three homes in the United States in January 2022. This is definitely up from a decade ago, though it’s not clear how much of this represents flippers (not all investors are flippers).

A bar graph to show the percentage of investors in the United States since 2012

b) Redfin: Stats from Redfin show investors purchased 18.2% of the national market during the third quarter of last year. This is a much lower percentage than John Burns, so we’ll have to figure out which stats should be given more weight. Of course, Redfin’s numbers focus on Q3 of 2021 instead of January 2022.

Local: Redfin states 19.4% of buyers in Sacramento are investors, while John Burns says 26% for the same time period. Keep in mind about 15% of sales in the region are cash, which reminds us investors don’t always use cash. Check out investor activity in cities across the country.

A line graph to show the percentage of invetors since the year 2000 (by Redfin)

c) Sensational percentages: AB 1771 states there has been 51% growth in investors in Southern California since last year. I’m not sure where this figure is coming from, but the OC Register had a piece from November 2021 where this stat was mentioned. A couple of things. The bill is about flippers, and it’s doubtful 51% represents flippers alone (key point). Secondly, a focus on percentage growth is making this stat sound super sensational. This is a nerdy point, but it makes all the difference. Look at the Redfin graph above. There was a dip in investor activity one year ago, which means when we compare today with then, the growth stat this year sounds insane. Look, I’m not downplaying the trend, but I am saying we have to be careful with percentages (especially if last year was low).

THE PROBLEM WITH THIS BILL:

1) It’s easy to blame flippers: The real estate market has seen dramatic increases in value – especially during the pandemic. This is extremely frustrating to many consumers, but at the same time, flippers aren’t the big driver of price gains. Crazy low mortgage rates and incredibly anemic housing supply are the big culprit. I know it can sound triggering to hear this, but it’s easy to vilify flippers and pin the trend on them while ignoring bigger issues.

2) Flippers are creating housing supply: This bill targets home flippers, who are actually creating inventory for buyers. It’s true that these homes are going to be more expensive after being remodeled, but keep in mind some of these homes would not have been able to obtain traditional financing due to condition. And most of all, buyers are purchasing these homes, which shows the public wants them (huge point). Flipped units come in all sorts of price ranges, and there are many first-time buyers also buying flips.

3) Institutional investors are getting a pass: In the background, Wall Street investment funds are salivating over residential real estate, and the irony is AB 1771 doesn’t target them at all because they’re buying and holding instead of flipping. We’ve seen lots of articles about corporations like Invitation Homes or BlackRock. Sometimes these stories are blown out of proportion, but there’s no mistaking we’re seeing big entities trying to play Monopoly in real life.

4) This bill doesn’t treat the real issue: The real problem is we need more supply and more affordable housing. This bill will create a fund with tax revenue to benefit some, but it doesn’t help homes become more affordable, and it doesn’t lead to producing more inventory for consumers.

Ideas? All that said, I am not a policy maker, but is there a way to incentivize investors selling to owner occupants? What have we seen work in other countries? Can zoning be amended to help create more opportunities for building homes? Is it possible to lower exorbitant permit fees and/or streamline the building process? Moreover, a bill like this sounds like something born in an up market. Would we want this if prices weren’t rising any longer? Lastly, if you penalize home flippers, will this pave the way for more buying and holding, Airbnb rentals, and institutional investor activity?

Anyway, that’s what’s on my mind.

COMMENTS: I’ll only approve comments that add to the conversation. This topic can quickly become a cesspool, but that’s not the vibe here.

MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.

Thanks for being here.

Questions: What do you think of AB 1771? What did I miss? What are the positives and negatives?

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Mortgage rates are too low (and they need to go up)

April 27, 2021 By Ryan Lundquist 53 Comments

There are certain things that are just true. Spandex bodysuits shouldn’t be worn by most people. Mullets probably shouldn’t come back in style. And mortgage rates right now are just too low.

The truth: Mortgage rates this low have helped create a chaotic housing market and they need to go up. I tweeted this yesterday and while there was some great discussion about housing trends, literally nobody disagreed about rates.

Image above from Freddie Mac.

Downplaying demand: Throughout the pandemic the housing narrative has tended to focus on the supply side of things by saying, “The issue is we don’t have enough listings.” I get it because we definitively need more listings and we’re absolutely feeling the effect of years of lackluster new construction. But often it seems like we’re ignoring the demand side of things because we’re so fixated on supply. The reality is one of the big reasons the market feels as aggressive as it does is because rates have juiced demand since they’ve been hovering around three percent since July 2020. On one hand it’s great to see so many buyers entering the market, but rates this low have been like a steroid to help the market feel like an auction. Having 20% price appreciation year-over-year in Sacramento and California doesn’t seem sustainable for the long haul either. On a national level Altos Research states prices are up 17% from last year.

Up and down: Recently mortgage rates started to increase and we saw a few weeks in a row with fewer purchase applications in the United States. But then rates went down again and we saw purchase applications increase. This tells us what happens with rates DOES matter for the number of buyers and if we want the market to become tamer we simply need rates to increase. This won’t solve all our problems or the housing shortage, but it would at least be a step in the right direction. Check out the Mortgage Bankers Association for weekly updates on purchase and refinance applications.

Closing thoughts: Look, there are many reasons why the market is the way it is today and it’s not all about rates. I’m just saying at some point I think we have to admit it feels pretty unhealthy to have rates this low because it’s making things too chaotic.

Q&A Video: Here’s ten minutes of Q&A I did at the end of a presentation for SAFE Credit Union. Enjoy. Or not.

NOTE: This post was in no way meant to offend anyone who wears spandex bodysuits or has a mullet. Be yourself.

Thanks for being here.

Questions: What do you think of the points above? Anything else to add?

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A second wave of outbreak & the housing market

June 30, 2020 By Ryan Lundquist 23 Comments

What will happen to the housing market if we have a second wave of outbreak? Quite a few states are seeing an uptick in COVID-19 cases right now, so this is an important question to ask. This isn’t about politics or fear, but having conversation.

From V to W? The market has seen a “V” shape so far where we had a decline when the pandemic began and then we rebounded. Today I interview economist Ralph McLaughlin to talk about his concept of a Flying W. It sort of takes the “V” that we’ve already seen and talks about why we might see another “V”.

Market update: Here’s my latest market update where I unpack glowing stats from this past week and some things to keep in mind if we do see another outbreak. Watch below (or here).

Ryan: What is The Flying W?

Ralph: The “Flying W” is generally the shape of the housing market recovery that we’re forecasting at Haus, which essentially is a wavy one. You can think of it as really two “Vs” next to each other, where the initial drop in activity due to the pandemic is sharp and severe, followed by a rebound to near pre-pandemic levels, and then the process repeats itself until we’ve recovered sometime next year. We’re thinking the process will repeat itself for a second time for three reasons. First, we think the initial rebound is simply due to pent-up demand for home buying that would have otherwise occurred in March, April, and May but will simply be pushed to June, July, and August. But after that, we’re not expecting new demand to replace it at comparable levels, which will lead to another drop in activity. Second, and I think we’re seeing this already, is that the virus will make a comeback, which will lead to less demand for homebuying in the fall. Third, there’s a possibility that we’ll see a broader impact on housing demand (including rentals) if the federal unemployment insurance bonus runs out at the end of July.

Ryan: What sort of stats would you recommend following to know if a “W” shape was beginning to happen?

Ralph: The important thing to note here is that some indicators are likely to follow a W, while others might follow an additional path. We’re expecting employment growth, home sales, price growth, and housing starts to follow a “W’ pattern, whereas we’re forecasting refinance activity to be more waterfall shaped. Other indicators are likely to buck the trend. For example, if renters are hit harder than homeowners, then we could actually see an uptick in the homeownership rate.

Ryan: Do you have any advice for buyers and sellers as they consider a possible second wave of coronavirus?

Ralph: Sellers shouldn’t be too worried at this point. It appears in the aggregate, sellers freaked out more than buyers during the pandemic. We saw large decreases in inventory across the country. And though demand certainly fell, it didn’t fall as far as supply. So the result has been a surprisingly robust market in many markets across the country. I recently sold my home in Virginia and was pleasantly surprised to have multiple offers, so buyers shouldn’t be expecting to get massive, if any, discounts like they could 10 years ago.

Ryan: Any tips for the real estate community?

Ralph: Utilize technology. We’ve come a very long way over the past decade in how people search for, tour, finance, and close on homes. Those who can utilize technology will have a competitive advantage during a downturn and thus will be more resilient. Buyers are becoming savvier with narrowing down their search list using online search portals, agents are becoming more savvy with how they use tools to virtually show homes and hold open houses, lenders are findings ways to streamline document sharing and signing, and title companies utilize platforms that make closing more transparent and efficient. The more the real estate community can utilize these technologies, the more resilient it will be.

Ryan: Thanks Ralph. I appreciate your time today.

Closing Thoughts: I’m really careful about discussing the future, but today I wanted to talk with Ralph because I think we need to think through what might happen to the market with a second outbreak and plan ahead. In my mind the two big issues that could influence the market include people’s perception of safety and governmental regulations. If we go on lockdown again, for instance, that could be a huge factor in slowing down the real estate market. Would it be exactly the same thing we saw in late March? Nobody knows. For now though it’s fascinating to consider whether our “V” shape could turn into a “W”. Let’s keep watching…

Manage your mental health: One last note. I realize this is a stressful time for many (including myself), so my hope is that you would have a deep sense of peace no matter what happens. And if you’re getting triggered by so much virus talk, maybe tune out of social media. My sense is having peace is not going to happen by accident so we all need to figure out how to cultivate that. Know what I’m saying?

Thanks for being here.

Questions: How do you think a second outbreak might affect the housing market? Do you think we’re going to go on lockdown again? I’d love to hear your take.

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Are we really back to “bubble” prices?

November 8, 2016 By Ryan Lundquist 24 Comments

We’re back at the peak of the market. Well, that’s what some of the national indexes are saying. So imagine yourself in line at Starbucks and someone remarks, “I heard on CNN we are back to bubble prices.” What would you say? Let’s look at some of the “national” trends below and then kick around a few thoughts. I’d love to hear your take in the comments.

bubble-prices-image-purchased-from-123rf-sacramento-appraisal-blog

Case-Shiller National Index: This index shows the “national” market is about where it was during the peak of the index in 2006 (source).

case-shiller-national-index-by-sacramento-appraisal-blog

Freddie Mac National Price Index: This index shows the “national” market is about where it was during the peak of the index in 2007 (source).

freddie-mac-price-index-united-states-sacramento-appraisal-blog

Freddie Mac California Price Index: The “national” index in gray shows we are back to the peak of the market, but the state index in black shows California is still about 5% below the peak (source).

freddie-mac-price-index-california-sacramento-appraisal-blog

Freddie Mac Sacramento Price Index: The national index in gray shows we are back to the peak, but the local Sacramento index in black shows we are still a ways off (source).

freddie-mac-price-index-sacramento-sacramento-appraisal-blog

Some quick thoughts:

1) I want to buy in the national market: There is no such thing as a national market, which makes “national” indexes only so valuable (or sometimes totally useless). As Jonathan Miller says, real estate is local and we have thousands of local markets instead of one national market. Therefore we ought to be naturally cautious about national metrics (see Barry Ritholtz rip NAR’s affordability index). In short, I watch “national” indexes, but I look to the local market for the real trend.

2) Different Peak: The “national” market peaked around 2007 depending on which index you’re looking at, but Sacramento peaked in 2005. Media outlets often talk about the housing “bubble” bursting in 2007 when in fact that wasn’t true for many markets (including Sac).

3) Current Values: Many Sacramento neighborhoods are still a good 10-15%+ below the peak of the market, though some classic areas are getting very close (while other depressed areas have much further to go). I included some neighborhood graphs below for reference.

4) Condos & Land: Let’s remember not all property types trend the same way. For instance, the condo market has struggled since the housing “bubble” burst. Owner occupancy rates being too low have stalled many complexes from obtaining financing, which has stalled value increases too. Vacant land is also far below where it was at the peak because there is less new construction today and we don’t have land speculators like we did 10+ years ago.

Specific Neighborhoods (Are we there yet?):