The interesting thing to watch for is the flipper sales. Which is to say if a significant chunk of the market in your area is actually being held by people who bought the house just to flip it, then when you get two or three months of flat to downward pressure on house prices they will all yell "Peak!" and run for the exits. Then you'll see a nice flurry of downward movement as these folks try to unwind their position before the market falls into a hole that loses them money. Pro tip, there aren't enough chairs and the music is no longer playing :-).
That could bring some welcome relief for home buyers who have struggled in the 'no contingency cash only' markets like parts of the Bay Area.
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).
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.
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.
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.
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.
I probbably should have sold it long ago but $70/month is like internet.
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.
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.
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.
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.
Or those with Adjustable Rate Mortgages that popped and then got priced out of their homes.
Or those with interest-only periods, same effect.
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]
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.
50% is A LOT.