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Comment by danjoc | Hacker News Reader

That's not really what happened in the last crash though. The people who bought, held. The only people who got hurt were home owners who go underwater and then lose a job. They can't afford to wait it out, they can't afford to make the payment, so they end up in foreclosure. Then the bank holds and it ends up as a zombie home.[1] The zombie falls to pieces, so the bank gets a bail out, the home is written off, and the market is just as tight as it ever was. All the flippers are going to do is rent the places out while they hold on for the next run up. At least, that's what I witnessed in the last crash.

https://newyork.cbslocal.com/2014/07/25/zombie-homes-without...

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Flippers are like canaries in the mine. They are usually leveraged like crazy on short term loans, not flipping the house quickly can be fatal to them. Rental won’t let them pay off there loans when they come due in a couple of months.

Cant rental (ie, passive) income be used to secure additional funding?

I know that was the case when I considered buying property to rent back before the 2008 crash (I ended up not doing that, luckily).

Conventional financing isn't available to heavily leveraged flippers as the loans aren't profitable. They usually use non-conventional loans with higher interest rates.

Now, they could re-finance the property into a conventional rental property but none of them can afford to do it for all of their properties. Flippers tend to do 4-5 at a time, not just one.

Yes, 75% of rent can be used. It is called "market rent", according to Fannie Mae. Remaining 25% is used for Vacancies, etc.

In California markets, rental properties are not profitable, when you consider 20% downpayment, 75% rent, etc.

There are 4 kinds of buyers in this market:

1. First home buyers: renters becoming buyers. 2. Second home buyers: thanks to the appreciation of their primary residence, people have bought second homes for "retirement nest egg", "return on equity", etc. Borrow 80% at 4.5%, expect 15% return. 3. Moving Up: same like (2), but they sell primary residences. 4. Flippers

It is kind of hard of flippers to get conventional loans; they have to use portfolio banks, banks that keep loans on their books. A bank I know of, offers 6% fixed first year, variable rate for the next five years. Flippers get these deals, after putting 20 to 30% down.

Right, flippers aren’t taking conventional housing loans on the properties they are flipping. They are getting short term lines of credit instead because they don’t expect to have the house for more than a few months.

I'm not sure what kind of flippers you are referring, but usually there are no loans. Cash purchases - 100% for the entire value of the property. Source: my parents are prof. flippers.

Aggressive flippers. If you have enough cash to fund N home flips, someone will lend you money and you can do N + X flips in the same time (if all goes well....)

How many properties at a time can you flip with just cash? You also need to consider the cost of renovating the property, even professional builders need financing for those kinds of things. I guess you could do it out of pocket if the scale was small enough.

This is pretty unusual for anyone doing it seriously. I've "flipped" (not exactly -- mostly major additions and teardowns that we hold for 6-12 months) the past 5 years and haven't met anyone who exclusively uses their own cash. We use some of our own cash, but you have to look at the opportunity cost.

The interesting part has been the interest rates. We started out borrowing hard money at 14% and are down to 7-8% now depending on the lender. Lots of cash out there chasing returns.

No disrespect to your parents but if you leverage you can flip more homes. Higher risk, higher return. If you have the credit rating for it, interest only loans are how folks do that around the Bay area. I personally stay way away from that sort of risk.

Things I learned from Donald Trump:

In most markets, rental properties are not profitable. Almost all of the profit comes when you sell the building, from appreciation. If you're breaking even on a rental, you're actually ahead of the game.

Heck, it doesn't really even have to appreciate... If the rental is done right you are having someone paying off the mortgage. It's just deferred income. I'm stuck with a rental where I used to live. I am under by $70 / month with the rent I'm giving but that parlays into $550 being paid a month on my principal by the renter. $550 for $70 isn't bad return. I'm not selling it because it's 3 years from paid off and it's in a slow mover location (would be on the market for 6-8 months). So I'm just waiting until I'm making $550 a month instead of the bank. Or I could sell it and get the sale price out of it once it's paid off. Which would be 18 years to make $120k on 15k.

I probbably should have sold it long ago but $70/month is like internet.

Notwithstanding what others have said here - I think it depends on the market and the lender. When I looked to add a second property, the lender refused to consider the rent being earned from the first property, saying "Your tenant could move out at any moment, so we don't include that as part of a borrower's income in making our decision."

What I suspect happens is that once you reach some number of properties, you become a commercial borrower, and different rules apply. A former coworker owned most of a street of duplexes at one time, and he had no problems getting loans.

It’s depressing to see no one talk about mortgage backed securities. The Great Recession happened after large swaths of wealth were held in MBSes backed by ARM mortgages. As the ARMs came due people could no longer afford their homes. Normally the underwriting bank would default the loan and resell the property. But the initiating bank sold the mortgage off soon after minting the deal. The values of the MBSes and related goods and services were priced using a Gaussian copala (sp) function fitted to ever increasing property values from the 80s S&L boom. Ie their model had no conception of normal, average price growth. Society had calculated something like 72$ trillion in MBS capitalization and “realized” a much smaller fraction of that wealth.

Article: https://www.wired.com/2009/02/wp-quant/

All true, I was thinking about the 'home price recessions' that happen periodically as opposed to the mortgage crisis which was precipitated in part by synthetic CDOs masking poor lending processes.

Ah, understood. I remember shopping for houses after the crash, and it seemed everything was either a trash heap, or in foreclosure. The bank wouldn't take an offer, preferring to cash auction to investors at the starting price of the highest offer they had. No cash, no house, no matter how good the credit rating. The cheap house thing was basically a myth from my vantage point.

I bought in Feb 2009. Almost everything we looked at was bank owned; some of them were pretty terrible, most were ok, the one we made an offer on was accepted the day after, but the bank did run our credit to confirm we were financiable.

I purchased a new home out of the area recently, it's a lot different looking at homes that aren't vacant, and dealing with the previous owner not getting all their stuff out on time.

> Ah, understood. I remember shopping for houses after the crash, and it seemed everything was either a trash heap, or in foreclosure. The bank wouldn't take an offer, preferring to cash auction to investors at the starting price of the highest offer they had. No cash, no house, no matter how good the credit rating. The cheap house thing was basically a myth from my vantage point.

Yeah, the sort of unspoken ethos after 2008 was that people had to be saved from all the underwater mortgages. But the only way to do that is to not pop the bubble. So we got a slew of policies from the banks and the government designed to shore up housing prices, and now they've rebounded to above the pre-crash prices.

But those prices are bubble prices. We didn't pop the bubble which means we're still in it. All we did was kick the can down the road. The prices are still unsustainable and have to come down.

The best thing they did in the interim was to print a bunch of money. If you can't lower nominal housing costs because people can't have underwater mortgages then lower real housing costs by keeping nominal housing costs the same and causing sustained moderate inflation of everything else. Also very effective for devaluing other existing debt (student loans, credit cards, public debt). It's possible that we're now at the point of needing more of that.

> The only people who got hurt were home owners who go underwater and then lose a job.

Or those with Adjustable Rate Mortgages that popped and then got priced out of their homes.

> Or those with Adjustable Rate Mortgages that popped and then got priced out of their homes.

Or those with interest-only periods, same effect.

> Then the bank holds... gets a bail out, the home is written off, and the market is just as tight as it ever was.

This! I've been talking to people about this for years. Most don't believe me when I say it. In fact, I've only had one person, a banking official, acknowledge that this was standard practice, but he assured me that it was coming to an end (two years ago).

But yes, what you've written is totally the case. In fact, I just checked on a house that I know to have been abandoned by its "owners" in early 2011, but is still recorded as in their possession. Those folks sent the bank jingle mail, which the bank kindly sent back! (LOL)

[edit 1: I also don't think that many of the low- & no-money down portfolio sales that Fannie and Freddie did to clear their books helped matters.]

It's almost like Japan (from the little that I've read) was a blueprint for the U.S. etc., and the U.S., I suspect, will be an further example for other markets.

[edit 2: Book recommendation Chain of Title by David Dayen]

What exactly is the problem w/this post?

As someone already mentioned, "zombie houses," which as far as I'm concerned qualify as shadow inventory, have existed for some time.

The portfolio sales did not help the average person buy a house. They did provide the GSEs an out with respect to clearing their books. The terms of sale that I've seen for a few of those transactions were incredibly generous; basically "pay us if, and when, you can."

Please do correct me where I'm wrong.

In my area, the home prices dropped 50% from the peak in a matter of months.

Where is that?

50% is A LOT.

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