Posted on 08/21/2005 11:40:06 PM PDT by ex-Texan
These days, "Get Rich Quick" has been the mantra for too many people trying to cash in while buying real estate speculatively. With so much "free" money still flowing from the Federal Reserve, it has become a real estate speculator's dream world.
These so called speculators have purchased over 3 million residences, practically with their eyes closed, with the sole intention of flipping them like pancakes to the next guy, marked up 25 percent or more. However, signs are beginning to appear that indicate this game of getting rich quick may soon be over.
Less than 20 percent of Californians can now afford a home with a fixed rate mortgage. The Federal Reserve is still raising variable interest rates. In 2004, when the housing bubble was really gathering steam, the National Association of Realtors calculated that 23 percent of homes purchased were for investment, and 13 percent were for second homes. With housing prices in some markets rising 20 to 40 percent in the past year - and 50 to 100 percent or more since 2000 - buying a house on spec looked like a sure thing to make a quick profit.
But this housing deck of cards, in an already over-heated market, could have a domino affect. Why?
Home sales run about 9 million a year (this includes housing starts of 2 million and existing home sales of 7 million). If over 20 percent of homes purchased are investor properties, it appears that practically all new housing starts in America are accounted for by speculative buying. If second home buyers are added into the equation, speculative and investment buying of real estate (not owning to live in) actually exceeds total housing starts!
There are problems associated with owning second homes and investor properties. Unless these properties are rented out, they yield no cash income and become cash vampires, sucking the owner dry because of escalating taxes, maintenance, the Alternative Minimum Tax, and higher floating-rate mortgage payments.
Let's look at the economics of a "poster property" in San Diego called Park Place. The New York Times reported recently that a one bedroom condo is being offered for $719,000. A prospective buyer would expect to pay about $3,775 a month for a mortgage, plus maintenance fees, taxes and insurance. These additional costs can bring the monthly out-of -pocket total to well over $5,000 a month, or $60,000 a year. However, a renter, who would benefit from the same granite countertops, hardwood floors and fantastic views, can rent a nearly identical unit for only $2,400 a month, or $28,800 a year. At these price levels, the speculator who bought in could run an annual negative cash flow of close to $31,000 if they were forced to rent because no buyers could be found.
Today's inexperienced housing investors may not realize that the hard costs (tax, insurance and maintenance) along with the soft costs (revenue lost due to vacancy, and property management services so you don't have to become the landlord) can easily eat up over 30 percent of rental income before even making the mortgage payment.
In looking at some cities with major price appreciation (New York, Boston, San Diego, Miami, to name a few), in today's world it just doesn't seem possible to buy a house or condo and expect to make an economic return renting it out! Nationwide, there are over 3.8 million vacant units available for rent. In some communities, the over-supply of rental units on the market has pushed the average rent down as much as 20 percent. There remains a surplus of rental units.
First quarter 2005 statistics indicate, nationwide, there are 440,000 new homes for sale and 2,400,000 used homes for sale. By recent historical standards, these numbers account for a 4-month supply and do not look worrisome.
However, given what is really going on, this is about as safe as saying "if you see ice on a pond, it must be safe to walk on".
The latest HUD statistics show that of the 107,775,000 occupied housing units, 74,488,000 - or over 69 percent - are owned (not rented). This level of home ownership is at an all time record high. In achieving this record home ownership, the following has occurred: Sub-prime buyers now account for more than 10 percent; Another 10 percent can only buy with a "negative amortization mortgage" (very popular in California where 40 percent of mortgages are negative amortization); Up to two-thirds of mortgages are Interest Only ("IO") or Adjustable Rate ("ARM"); Second homes now account for 8 percent of mortgages; and, 38 percent of homes this year have been purchased with less than 5 percent down (if this doesn't reflect scrapping the bottom of the barrel for homeowners, nothing ever would). Yet, household earnings haven't kept up!
If housing speculators stop buying, who's left to buy? The average American with a job has already bought. America has been creating new homes faster than new jobs, and it has been the home speculator, and second home investor, holding up the market for at least the past year. (The latest reports show that the time it takes to sell a home has increased, and price rises have been trailing off.)
One of the biggest problems I see for our housing speculator is the forward supply of new homes they have already been locked into. Certainly, on the east and west coasts and in Las Vegas - and other frothy vacation and major markets - high rise after high rise are coming out of the ground. Ivana Trump (long divorced from "the Donald") is marketing the Trump luxury brand name for a high-rise building going up with her name in Las Vegas where units will begin at $550,000 and top out at $35 million for the penthouse. (In South Florida alone, my wife and I recently drove south from Fort Lauderdale to South Beach and we counted over 50 new developments in various stages of construction on the coast road). There are twelve high-rises going up in West Palm Beach, and another twenty four jumbo projects in downtown Miami. Every single one of these projects is priced out of range for the middle class buyer.
There is another "dark side" to speculating in real estate. Hundreds of thousands of units that have been sold in advance by developers to speculators. This method is used by developers so they can get the construction finance they need. The speculator is responsible for the purchase but he won't actually "buy" the unit until the project is complete and the unit has a Certificate of Occupancy. Therefore, the sale will not be counted as a sale until the date of closing! (Moreover, the developer has gotten the speculator to sign an agreement preventing him from reselling the unit for at least a year - after the speculator has taken occupancy - so the developer won't be selling against himself. This leaves the speculator holding the bag, but they seem willing to take the risk.
It could get interesting over the next six months as interest rates continue to go up and thousands of high-priced housing units come on the market that have been artificially snapped up by the get rich quick crowd. It may pay to simply sit back and watch the slaughter from a distance and stay short some home builders and sub-prime mortgage companies.
Macho, may I suggest going into a smaller home or moving? Believe me, I have a similar situation out here in Seattle (no divorce no kids, but lots of debt largely related to graduate school). It will be awhile before I buy something.
There are thousands of house rentals in Phoenix.
>>>I have some friends who just rented a house in Phoenix, AZ and they said there were not that many vacant rentals with 30 miles of Phoenix.
Beware of Freepers with Latin names. In particular, however, beware of those with Latin names who quote scripture in Latin.
Hey, back in the day, that "Mr. Sensitive" bit worked like a charm. Wussie or cad? You make the call ;)
It never worked. The feminists might have given "Mr. Sensistive" a smug nod of approval, thinking they had won the debate, but real women avoided him like the plague. ;)
Recent sale of new construction in Houston:
220 sqft: 136,000
There is no bubble in Houston. The values here are as good any in the nation and better than most, particularly for a large metro area.
California writers like to pretend that their particular madness is endemic to the nation. We don't live in California, partly for the reasons cited in the article and for others. Houston housing is a great buy and will stay that way for some time.
Som of these California real estate goobers are hard to take seriously.
That would be 2200 sqft. Sheesh...
You got a source for that, or is that anecdotal?
The friends I was talking to in Phoenix were not looking for a run-down low rent house. There are probably quite a few of those for rent in central Phoenix. So I guess they were not counting anything that rents for less than $900 per month.
I don't get it, many of them are outright mean.
OK, is this a treatise, a commentary, or a freaking poem.
waiting? I am counting on it!
BWAHAHAHAHHAHAHAHAHAHA (evil capitalist laugh)
My son is buying rental houses in the midwest. He rents them out for more than his total monthly costs. He makes a profit immediately.
On the other hand, here in Seattle it is getting pretty stupid. I owned for a long time, but rental prices are dropping like a brick and it is more practical for me to rent and invest elsewhere. Renting offers unbelieveable freedom.
My brother (securities licensed) was talking in the early 1990's about all the money that was going to change hands when the baby boomers parents started kicking off, and the fact that the boomers will apply the money differently than how their parents did.
He said we would have an incredible boom until about 2008 aproximately). I asked him what would happen then. He said it would prabably get pretty "ugly."
But hey, it was almost 20 years away! Why worry!
Things are pretty stupid almost in every major city.
However, I sense things are chamigng. Can't put my finger on it, but the climate seems to be that people do not see the potential for appreciation that they did say a year or two ago.
Its gotten way out of control. You literally have Boys on the Hood houses in CA going for 400K and up.
Additionally, in my neck of the woods, NYC, you can't even touch the Bronx anymore!
Now that I think about it a little more, there probably are a few thousand vacant rental houses within 30 miles of Phoenix. IIRC, those folks were looking to rent a single family house in the Tempe/Chandler area that didn't cost too much and they ruled out townhouses and condos. So they were looking in a small sector of the Phoenix market and that's probably why they didn't find too many vacant houses that interested them. They did find a place after a few weeks.
I saw those stats. Giant transfer of 1950s/1960s wealth.
I am not trying to be a smart alec...I was in the area in May, and my buddy's new subdivision had about 30% of it empty with rental signs on it. He has a coworker that just rented a year old 5 bedroom house with a pool for $800/mo in the West Valley.
If you go to realtor.com, and search Phoenix, add the surrounding communities, even selecting rents over $500 and sq foot over 1000 you get 2389+ listings
a better indicator is craigslist, which are person to person ads that probably arent even included on the realtor.com listings
http://phoenix.craigslist.org/apa/
Well 2000+ vacancies sounds reasonable for Phoenix. That's a huge area now with a population of 4 million. I think there's been a lot of building out in that western area around Avondale, so I'm not surprised that people are finding great rental prices out there.
"Additionally, in my neck of the woods, NYC, you can't even touch the Bronx anymore!"
Apparently SOMEBODY can! 8^>
I keep wondering who all those somebodies are...
I will say this: one thing that could save the day (and I use that phrase VERY loosely) would be for gas price induced inflation to catch up with house prices. After all, a 400,000 house is peanuts when your average worker at McDonalds makes $35 an hour.
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