Follow the big money has been an adage on Wall Street for many decades. If that philosophy holds true for real estate as well, big money investors are signaling something regarding California real estate. Big investors have entered the single family housing market in a way that is unparalleled in history. We truly are in uncharted waters here. It is clear that the investors pulled the market up from the graveyard and gave it a substantial boost. It is no surprise then, as investors exit the California housing market that sales have waned and inventory has slowly started to pick up. A good way of seeing big money demand is to look at purchases made under LLCs or LPs since these are your big money Wall Street and hedge fund players. They are interested in deploying large sums of money versus your crap shack aspiring flipper or buyer. What is clear is that large buyers have pulled back in a dramatic fashion.

Big money pulling away from California

Wall Street is obsessed with profitability and examines things like price-to-earnings ratios. For rentals, your earnings come from rents and your price is the market value of a home. Simple enough. The fact that housing values inflated very fast has put the question of valuation to the forefront of these big investors that scour the numbers carefully. The results? Purchases from LLCs and LPs are down by over 80 percent from their peak in 2012.

The drop in big money purchases is rather clear:

This is interesting data. Back in 2007, you will notice that hardly any purchases were made via LLCs and LPs given that Wall Street and hedge funds had little interest in being feudal landlords. That obviously changed starting in 2008. This trend has had a good six year run – from 2008 to 2014. Now, valuations simply do not make sense and you see this reflected in the number of purchases by big buyers.

What is also telling is that even though volume has plunged, big money is still a large part of all total trustee and third party sales. This makes sense. This is the only group with the pockets deep enough to make all cash offers in large numbers for distressed properties.

Most of the large investors are interested in deals via foreclosure resales. There is now limited distressed inventory and good deals are hard to find. Because of this, large investors still wanting to buy and compete are now being pushed to pay market rates for properties and with current prices, it just doesn’t make sense.

Take a look at cash sales volume:

While cash sales are down 40 percent from their peak a few years ago, cash sales still make up a sizable portion of all current sales. Regular buyers in California are largely priced out. We have 2.3 million adults living with parents because they simply don’t have the money to buy. Investors are largely exiting because of perceived values. With the stock market outperforming real estate by leaps and bounds, hedge funds and Wall Street would rather deploy more of their money in sectors that have a higher potential of returns.

For mom and pop investors looking to start now, the numbers flat out don’t make sense. This is why you see most individual investors today going for flips because of the potential of making a quick profit. The buy and hold buyers are out because the numbers absolutely make no sense in most of California.

Some seem to think that big money and the Fed are all powerful and can do whatever they like. Sure, for their gains but what about you? Keep in mind this is the Fed that was unable to stop the tech bubble from popping or even more recently, the simultaneous implosion of the stock market and real estate bubble. We are talking about the same Fed here and this was only a few years ago. Ultimately, trends can reverse quickly. People have an uncanny ability to forget financial history even if it happened only a few short years ago. So let us use the logic that big money is all powerful. Does the fact that most of the big money pulling out of California now signifies that people should do the same? Those that try to talk about 2009 and 2010 as perfect entry points conveniently forget that the economy was crashing and burning at that time. Many in the public were trying to hold onto their jobs let alone become savvy investors that somehow, had access to special treatment during this timeframe.

With that said, many big investors realize that prices may be a bit frothy right now. All you need to do is look at the tiny old homes that you can buy for inflated price tags to ground you a bit. Or maybe, you are much savvier than those hedge funds now pulling away from the California housing market. Time to open that checkbook and make your offer on that dollhouse for $700,000.

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