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.
"No, Houston housing is cheap. No one moves to a place like Houston voluntarily. Coastal California real estate can become overheated and overpriced, as it is now, but the underlying demand will always be there. Barring a major aerospace resurgence, there is nothing in Houston likely to create demand, so those cheap houses are going to stay cheap. And even at their currently low prices, they have more potential downside than upside, and will likely lose value in the event of a real estate downturn."
Sorry. Most all who move here do so voluntarily because of the energy markets, Hi-tech, etc. Houston is fine once you figure out how to live with the weather, which is not difficult.
I live about 60 miles from work ( 1 hour drive time) and will be raising horses on my ranch, for a reasonable amount of real estate investment ( a little above average house investment). Houston is the greatest place I've lived.
And yes, your commment reflects a "flyover mentality".
thank you, that quote is inspirational, in case my boat capsizes, I do know how to swim!
I wish that my husband would think in this manner.
Let me repeat part of a previous post:
California people tend to assume that the whole country suffers the madness of housing speculation. Most of the country does not.
How can I make this any clearer?
And just for y'all in California who can't figure out where we're going put all the people, drive through Texas, or New Mexico, Kansas, Oklahoma. There is nobody around. Those states are basically empty.
I had to take whatever I could grab, in the same sq mile for the schools(all different) that my 4 kids attend. If I didn't, the judge could and probably would award primary physical custody because she gave him the house that we lived in for 17 years.
I got a house almost 1/2 the size of our marital home, took the family room (no living or dining room, only 1200 sq ft. for 5 people) and made 1/2 of the family room into another room for my youngest child.
Can't get too much smaller than that. Have to have 2 bathrooms, I have 2 girls and 2 teenage boys to get ready for school. Thanks for the concern.
From what little I get in child support, and spousal, it would make better financial sense to be able to buy a house. The rent I'm paying is only 40 dollars less than the mortagage. What deductions do I get out of that? By the way, this payment is about 40% of the child support/spousal. It is immpossible to save any money on that. It has to, needs to, go to my 4 kids.
Good luck on your land rush.
Oh, THAT should bump up the value right there!
save for later
"Capitalism does not have a built in "get out of speculative debt free" clause."
The S & L bailout does tend to mitigate your statement, true though it should be.
save for later
BTTT and bookmark
What did the S$L bailout have to do with Capitalism?
Except to subvert it.
Never bought it for any land rush. Just transfering property closer to where I live.
"What did the S$L bailout have to do with Capitalism?"
It provided something of a "get out of speculative debt free clause," legally, to those in a position to benefit.
I doubt that the sell-off will impact the uninflated property markets that I am interested in.
I'm still trying to make a killing in the stock market!
I live by the ocean... and there is no humidity or oil on the beach. You have that in Waxahachie or Witchita Falls?
"However, you have to be willing to take the risk and claw your way through."
But, way, WAY too many people seem to have bought the Carlton Sheets no-money-down course, lol. And, they really seem to have no idea of the kind of risks they have taken on. Complete novices. And, what do novices do, when they lose a little money? Head for the exits and exacerbate the loss.
I'm no housing pessimist by any stretch, but in some parts of the country, this effect could have a fairly large impact, one that will take years to surmount. It's a very large, and likely very skittish herd.
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