The single-family housing market looks like it might be doomed all over again. Well, if not doomed, then the Death Star is bearing down on Alderaan.
Why the pessimism? There are two reasons.
First, there appears to be a spike in "Bandit Sign Index." Second, there are many real estate professionals who are trying to become traders.
Both indicate that the housing market is in bad shape.
Let's start with the "BSI." OK There is no actual BSI, but if such an index did exist, it could replace the Case-Shiller Home Price Index as a viable real estate indicator.
Anecdotally speaking, the number of signs that say something to the effect of "Real Estate Investor Seeks Apprentice, $5K to $10K per month" seems to be reaching epic proportions.
It is easy, by the way to calculate a local "BSI" to determine how close to the cliff a city is. Just drive to a high-traffic intersection and count the number of these hastily made plastic signs.
The "BSI" matters because it is direct evidence of under-capitalized amateurs trying to get into the game. When amateurs get into the game, it is generally because the professionals are getting up and walking out of the room.
How do we know that the professionals are leaving the room? Just take a look at the real estate sector in general, as measured by the iShares US Real Estate Exchange-Traded Fund (IYR) - Get iShares U.S. Real Estate ETF Report .
The anatomy of the "BSI" is a common story. A person becomes addicted to watching a show on HGTV such as Flip or Flop and becomes enamored with the capital gains highlighted on the shows.
Fixating on these miraculous gains leads to sleepless nights, which then leads to late-night television. Late-night TV invariably has an abundance of get-rich-quick infomercials, one of which is Make More than You Can Spend Flipping Houses or Die Trying.
This surefire way to elevate one's family to the upper-socioeconomic stratum is offered for the low, low price of $199.99. The back pocket of people's jeans catch fire as they rip out their wallets while dialing the 800 number on the screen.
These people don't take the time to think about whether the package/system/no-lose strategy is actually worth the money. They don't consider whether it is reasonable to think that someone who has a method that would allow others to make more than $1 million a year would sell that expertise for just $200.
The reason the people who buy these packages need bandit signs is because all the easy meat has been gnawed off the bone. They need "apprentices" to search for deals that a year ago could have been found by a savvy broker on the local multiple listing service.
In an uptrending market, it is easy to go on the MLS and find properties in distress that would make good "fix and flips" and allow the investor to go in with an all-cash offer at a price that leaves the buyer with a profit after the rehab and sales commission, close quickly, rehab quickly, price aggressively, take the first decent offer and then close quickly again.
But in a stagnating market, the margin of error is much lower.
It takes longer to find deals that make sense because investors can't count on price appreciation any longer to account for occasional rehab overruns, closing delays, etc. The buyer has to make money on the purchase (well below market), not the sale, at or slightly below market).
This is where the bandit signs come in.
A large portion of the material in the package with all the secrets relates to leveraging time. The bandit signs are used to have "apprentices" bring deals in.
These are deals that the agents haven't yet listed, and the investor is typically looking for distressed sellers.
The more bandit signs there are, the more amateurs are trying to get in at the last minute and the closer we are to the top of the market. For those who don't believe that, I have some tulip bulbs and Beanie Babies I can sell you, cheap.
Meanwhile, another troubling sign is that many real estate professionals want to get into trading.
I talk to many people from all sectors of the economy on a monthly basis, including those who own real estate brokerage firms, those who fix and flip houses (or their spouses do), mortgage brokers, and loan officers at banks. All told, I have spoken to probably 30 to 40 people in the real estate industry or related businesses across the country.
What I have seen over the past four to six months is that in real estate in general, flipping and the mortgage market are no longer places where easy money is made.
People want out, and trading is just one avenue they are exploring -- for good reason.
Here are some of my takeaways from talking to them:
1. The folks with whom I have been speaking aren't rank amateurs but generally have multiple years of successful flips under their belts. They are trying to get out of real estate and into something more liquid, and they are liquid in three to four months.
2. The time required to find good deals has essentially doubled, meaning that they either do half the deals they did two years ago or they sacrifice time in supervising the rehab and asset disposition.
3. Holding periods for flips have more than doubled. Flippers used to be able to budget 60 days from acquisition to sale. This was generally three weeks for rehab, a week on the market and a 30-day close on the first good offer. They now budget a month or more for rehab, 30 days on the market, count on at least one offer falling through, and plan on a 45-to-60-day close.
4. Some mortgage brokers and loan officers in select markets are saying that at least half their borrowers are being denied in underwriting. This includes reported "hard" denials and unreported "soft" denials. These people aren't just bemoaning the nostalgia of the go-go 2000s. Their income has been cut by as much as two-thirds, their workload has increased and they are seeking any way possible to leave their industry.
5. Hard-money lenders are not only running credit checks and have been for several years but are becoming increasingly tight with their own standards. When the next step up from a loan shark is instituting stringent risk controls, maybe it is time to rethink those deals.
6. Concurrent to the "BSI" spiking, the "Open House Index" seems to be spiking as well. Contrary to popular belief, real estate agents hold open houses to find buyers in general, just not buyers for a particular house. The chance of a house being sold as the result of an open house is low. Get a few drinks in an agent, and he or she will tell the truth. Two years ago, open house signs were rare as buyers were already going to agents. Now, there is an increase in open houses because the agents are actively hunting for buyers.
7. The question among the flippers with whom I have spoken is no longer how much profit they are going to make on a deal but whether they will get out without a loss.
The unease of real estate professionals and the "BSI" would seem to be harbingers of another collapse.
Maybe the bandit signs are magic beans leading to a golden goose. Only time will tell for sure.
More likely, however, is that the signs are expensive eye candy signalling doom for the housing market.
This article is commentary by an independent contributor. At the time of publication, the author held short positions via options in the components of the ETF mentioned.