In this special Expert Series edition of Self Directed Investor Talk, Daren Blomquist, Vice President of the respected data firm RealtyTrac gives his insights on the suitability of today’s market for house flipping, along with his predictions for what 2017 holds for America’s real estate markets.  I’m Bryan Ellis, your host and I’d like to welcome you to a very special edition of Self Directed Investor Talk.  Please send your questions and comments to us by email at feedback at sditalk.com or on Facebook or Twitter at SDITalk.  With that…

Bryan Ellis:                       Mr. Blomquist, how are you today, sir?

Daren Blomquist:            I'm doing very well. How are you?

Bryan Ellis:                       Very well. Thanks for joining us. Look, I've always or have long been a fan of Realtytrac and what is now ATTOM Data Solutions, and particularly your quarterly home flipping report, because that's one of the businesses that we're in. I had a look at the Q3 2016 report, and it's interesting because it looks like overall, the information's positive, 45,000 flips last quarter with a pretty substantial gross ROI. Some of the other data, such as slowing volume of flips compared to both last quarter and compared to a year ago. At least a significantly the declining percentage of flipped funded with cash. Those things raise my eyebrows as someone who looks at this market. What do you make of those things?

Daren Blomquist:            Yeah, I think the decline in flips is ... Right now, I would consider that more of an aberration that's interrupting a long-term trend upward home flipping, and the market is very favorable to home flippers right now. Now it's becoming tougher because prices are getting so high and flippers are jumping into the market, it's becoming more competitive.

Bryan Ellis:                       Right.

Daren Blomquist:            Still, you have low inventory that's very favorable to flippers. They're providing inventory that the new home builders are not.

Bryan Ellis:                       Right.

Daren Blomquist:            Then you have rising home prices, which is a double-edged sword. It's tough, it makes it tougher for flippers to find discounts on the front end, but it makes it a lot easier for them to sell. It gives them a cushion to some on the back end. All that to say, I think actually we saw a decrease in overall sales in the third quarter, and I think it's partially a reaction to uncertainty around the election.

Bryan Ellis:                       Sure.

Daren Blomquist:            I think we'll see that aberration pick back up in terms of the number of home flips. Now I think we'll see it shift, which we're already starting to see to the flippers are shifting to different markets where they can actually find, still find discounts on properties on the front end, or there's more availability of discounts. A lot of times in the form of foreclosures.

Bryan Ellis:                       Right.

Daren Blomquist:            In terms of the cash piece of it, there's fewer. It's still 68% of flippers are using cash to buy, which compared to the last housing boom, we were seeing about 35% of flippers using cash to buy.

Bryan Ellis:                       Wow.

Daren Blomquist:            Much more of them were using lending. We are seeing that number at an eight-year low, which means there is more availability of funding for flippers rather than having to use their own money in terms of crowdfunding. In terms of other alternative financing sources. That actually is one of the reasons I think we'll see flipping continue is that's going to enable more flippers to jump in. That may not always be a good thing, but it is going to push the market higher I think in 2017.

Bryan Ellis:                       In your analysis or if you guys track this, who buys those flipper properties? Owner occupants or other investors?

Daren Blomquist:            I don't have the exact percentage on that, but the majority is owner occupants. When we look at that ... We look at who's buying basically as a proxy, who's buying the flip, not the flipper buying with cash, but if the person they're, or entity they're selling to, is buying with cash, and we do see a fairly substantial number selling to other cash buyers, which for us is a good proxy likely for investors.

Bryan Ellis:                       Right.

Daren Blomquist:            The majority is owner occupants, but I think you look at markets like Memphis and Cleveland, and places like that where we're seeing quite a bit of home flipping, and a lot of-

Bryan Ellis:                       There's a lot of investor to investor stuff there.

Daren Blomquist:            Those are going to other investors who then are taking those properties and turning them into rentals. They don't want to deal with the rehab portion of it.

Bryan Ellis:                       Yeah. I have wondered if there are any homeowners left in Memphis at all.

Daren Blomquist:            Yeah, it's the top market for flipping and it's also one of the top markets when we look at single family rentals for purchasing those.

Bryan Ellis:                       Right. You recently had an article called "Blue State Buyers Swing to Red State Rentals," which I thought was interesting. It was a discussion of the whole turnkey rental property phenomenon that's going on, which really reflects exactly what's going on with the clients of the Self Directed Investor Society, namely that California investors, and in our case, particularly those in the Bay Area, are finding it really interesting to buy real estate in the Southeast. What's your take on that? Why is that happening?

Daren Blomquist:            Yeah. I think that investors realize that real estate is one of the best places to still get a return in this low interest rate environment. The stock market is good, it has been good, but they want to diversify and they say real estate is a great way to do that.

Bryan Ellis:                       Yeah.

Daren Blomquist:            Investing in their backyard is really a non-starter when you're ... You just can't cash flow property.

Bryan Ellis:                       Right.

Daren Blomquist:            Flipping a ... These are the type of investors who probably don't want to get into flipping. They're professionals, they have a day job. They're going to those markets where you can't cash flow and there's still a lot of lower priced properties available that can be purchased and cash flow very well. I would just mention we're not just seeing it in the South. Southeast is a big center of it, but we actually broke it down for Orange ... I know you look a lot at the Bay Area, but we looked at Orange County, California, which is where we are, and where the top counties were, Orange County buyers are purchasing rental properties basically. Not surprisingly, the first few counties were right in the immediate vicinity, but in the Inland Empire where prices are cheaper. Then after that, you have of course Las Vegas, Phoenix are near the top. Then you have places like Memphis. Memphis was in the top 10.

Bryan Ellis:                       Yeah.

Daren Blomquist:            Shelby County there. Of places that Orange County buyers are purchasing rental properties, you had Wayne County, Michigan [inaudible 00:06:14], which is not really Southeast. That's Detroit. Was one, was in the top 10 for places that Orange County buyers are purchasing rental property. That was-

Bryan Ellis:                       That's interesting.

Daren Blomquist:            That was an eye opener and certainly we see ... Anecdotally, we hear a lot about that as well.

Bryan Ellis:                       Yeah. Daren, in February or so this year, you had an article out that had some housing predictions, some forecast for 2016. I wanted to take a minute to hold your feet to the fire, so to speak. See how things actually worked out in practice. Let's look at the predictions here.

Daren Blomquist:            Great.

Bryan Ellis:                       I'm not sure if these are your predictions or the predictions of the other experts that were cited in the article, but the key ideas here were, number one, the prediction for growing rental rights and moderate home price growth, which should force more people, or motivate more people to look to buy in 2016. The second-

Daren Blomquist:            We did. Yeah. I'll just stop you.

Bryan Ellis:                       Yeah.

Daren Blomquist:            We did see that pretty much play out. The home price growth was stronger than I expected. It's about five percent for the year.

Bryan Ellis:                       Okay.

Daren Blomquist:            It was actually a little bit stronger, but it is moderate and we were at double digit price growth. Now we've come down. Rental rates continue to be strong.

Bryan Ellis:                       Right. That was a definite check mark. The second prediction was mortgage rates will rise, which should help boost the number of buyers out there. It looks like that one was a little less accurate I guess. Started to rise at the end of the year.

Daren Blomquist:            Right, yeah. Get that right if you count to the last couple months of the year, but it really didn't rise ... A year ago ... It feels like Groundhog Day. A year ago, the fed was raising rates in December and predicting that they would raise rates throughout 2016 and it didn't happen. Now they're doing the same thing again. We'll see if that happens in 2017. I do. Really we're off the mark there, but I think more ... The fed has limited control really over mortgage rates.

Bryan Ellis:                       Yeah.

Daren Blomquist:            I think what we saw following the election is more going to be a driver of rising interest rates than the fed necessarily, but I do expect to see that going into 2017.

Bryan Ellis:                       Yeah, I think we're all surprised that rates didn't go higher than they did. Then that third prediction was inventory's expected to remain a problem in 2016. That certainly looks to continue to be true.

Daren Blomquist:            Yeah. It's a major theme, and I think most people view it as a challenge in this housing market, but it's really ... It's a good problem to have because it's keeping ... It's a safety net for this market, even if we are seeing some bubbles forming, overheated markets. Those markets typically do not have an oversupply of inventory, which means even if you see demand fall, there's a safety net of low inventory.

Bryan Ellis:                       Yeah.

Daren Blomquist:            To keep those markets chugging along.

Bryan Ellis:                       Yeah, exactly. Now this leads me to the predictable final question. You did pretty well in predicting 2016. You definitely got two right and the one was flat. What does 2017 look like for you? What do you expect to happen?

Daren Blomquist:            I'll go out on a limb and do, as I mentioned, we will see interest rates rise, and I think we're seeing that already at the end of this year.

Bryan Ellis:                       Yeah.

Daren Blomquist:            I think we'll see more substantive rising of rates in 2017 that will, and then that in turn is an important factor that will start to slow down some of these overheated markets in terms of home sales and home prices particularly. Again, we're at about five percent appreciation this year. I think we'll see it go down to two to three percent appreciation. This is a nationwide number of course.

Bryan Ellis:                       Yeah, sure.

Daren Blomquist:            There's a lot of variance from market to market, but I think in general, we'll see cooling appreciation. We will see I think a surge in home sales early in the year. We already saw it a little bit in November as people try to beat out the higher interest rates. That's going to be an overriding factor.

Bryan Ellis:                       Sure.

Daren Blomquist:            Another prediction that's a little more localized in nature is I think ... I'm very bullish on the Rust Belt.

Bryan Ellis:                       Are you?

Daren Blomquist:            They were a big part of the election, and in determining the election, and there's been a lot of talk by now president-elect Trump to invest in infrastructure, and there seems to be a lot of bipartisan support for that. The cities that need the most infrastructure improvement tend to be in the Ruse Belt.

Bryan Ellis:                       Yeah. They're going to feel the love.

Daren Blomquist:            Places like Flint, Michigan, that have aging water systems and what not. We see that investment happening, that's going to really help housing in those markets and improve the overall value of the housing market.

Bryan Ellis:                       Awesome. Daren, thank you so much for your time. I am very grateful to you, and hopefully we'll get to have you back on and maybe dig a little bit deeper into the single family rental market, because I know that's an area of expertise for you and ATTOM Data Solutions. Thank you so much for being here.

Daren Blomquist:            Yes. I'm glad to be here and happy to come back at some point in the future.

Bryan Ellis:         Awesome. Thank you, sir.

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