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.
You're way out of date. That's the way it was before the new bankruptcy laws. but it's a new game in town now and that playbook won't work anymore.
A mortgage holder's recourse in the event of default is the repossession of his collateral. You don't need protection from your creditors if you fully intend to allow them to exercise their legal rights to their collateral. You just give the bank the house and walk away. That is all they can get for the mortgage. If the price has fallen 20%, their problem, they eat the loss.
"You just give the bank the house and walk away. That is all they can get for the mortgage. If the price has fallen 20%, their problem, they eat the loss."
I'm sure I'll be corrected if wrong, but I am under the impression that, come October 17, mortgagors will be enabled to pursue mortgagees for the difference, between the price of the foreclosure sale and the balance of the note. No more walking away with just a trashed credit score... you're on the hook for the full amount.
I don't care where you live in California. Prices are overvalued and anyone with an ounce of investing sense knows now is not the time to buy real estate there. Potential homebuyers in California will be much better off renting a house at considerable savings until the bubble bursts.
Capitalism is amoral and is not at its best unless the players bring morality into the marketplace.
You are assuming people are stupid and lazy.
I agree with the second statement. And the first may or may not be true, depending on the individual and circumstance. However, to hold that capitalism cannot be abused it just plain denial. Therefore it requires morality on the part of the participants, just as a free republic requires morality on the part of its citizens. It's the right system for people created to be free but demands self government.
"You are assuming people are stupid and lazy."
Not all people. Too many, though.
That is my understanding as well.
I live about forty miles south of Louisville and work in a home improvement center, and I have never seen this many houses going up. Contractors are purchasing small farms out here in the country, turning them into subdivisions full of $120,000-200,000 homes, and selling them to folks from Louisville who are tired of being stuck in a small apartment.
I was speaking with an electrical contractor last week and he told me that he has quadrupled the number of people working for him in the past three years and he still has to turn down job offers.
One of the main reasons that so many houses are going up here is that the contractors and realtors have realized what a good thing they have and aren't getting too greedy. While there is some price gouging, the prices are still fairly reasonable and business continues to boom.
Deficiency judgments are legally possible in many states, e.g. MA, SC - but are daunting in practice. Deed in lieu of sale or voluntary foreclosure workouts are encouraged but the lender has to agree to them. To pursue a deficiency judgment, on the other hand, is a messy legal proceeding that takes 4-6 months minimum. (In SC for example, it can involve a jury trial before foreclosure, long advertising periods before sale, independent appraisals after sale, appeals of appraisals, etc).
Given the offer of no contest control of the deed immediately without the expense, and the expense and delay of the above, practically nobody is going to pursue a deficiency judgment on a primary residence. (They are more common for commercial property deals, to be sure). Even in the states where they are legally possible. Deficiency judgments are typically used only when the debtor fights tooth and nail to keep the house, in an attempt to recover some of the legal costs involved in getting it seized and sold anyway.
You can say I sit and criticize if you like but I attempt to discuss facts about the current housing bubble in CA and many other parts of the country. Through multiple threads on the real estate bubble issue the past several weeks you have answered serious posts that disagreed with your current view point with insults and lies. What I do not understand is what changed for you in the past year ? Just one year ago you were agreeing that CA real estate was overvalued. If I were to venture a guess; you ignored your own analysis and took a risk that now frightens you.
Porterville Post #1 - 7/21/2004: It is so ridiculous that new houses selling for 450,000 dollars are renting for 1,250 dollars which means they have a net loss on mortgage and expenses of nearly 3,000 bucks per month.
Porterville Post #2 - 8/21/2004: Here's the deal with California; People are paying a lot more than what the houses and land are worth- all over California, from Bakersfield to Mt. Shasta... land is not worth what people are paying- I grew up on a large bit of land and know the area well.... there is prettier land, cleaner air, and better jobs away from the Sierra Nevada foot hills.. And yet they are buying..... it is not worth it, that is the point, the land is not worth 1/2 of what they are paying.
Porterville Post #3 - 8/21/2004: But, of course if you had a clue, you would know what I am speaking about in CA; everyone, even with the best of investments, knows that there is something not in balance with the real estate out here.
Porterville Post #4 - 8/22/2004: I'm uncomfortable because it feels like this is an abnormal market, not just some cyclical boom.
My numbers were wrong. I based them on a 10% 15 year.... bad math. After redoing the numbers I found that I was wrong.
In the Central Valley there is a bubble. Especially South of Modesto to Bakersfield. But near the ocean- no bubble in SLO county and N. SB county.
FROM BEST PLACES TO LIVE- today 8-22-2005
3. San Luis Obispo-Atascadero-Paso Robles, CA
This quiet group of towns on the central California coast could easily qualify as paradise. The climate is among the country's most pleasant, with 285 mostly sunny days per year and temperatures rarely above 90 degrees or below freezing. The presence of academic heavyweight Cal Poly helps anchor the local economy—the unemployment rate is well below the national average. It's fortunate that local jobs are plentiful, since it's too far to commute to Los Angeles or the Bay Area.
Considering further its low crime and unemployment rates, the San Luis Obispo area seems to have it all. But home prices here have risen steadily in the last few years, so that the median is now $536,300. While this isn't unreasonable by California standards, it can be out of reach for many of us thinking of moving from other parts of the country.
4. Santa Barbara-Santa Maria-Lompoc, CA
A few miles north of Los Angeles, Santa Barbara has long been a #1 relocation choice for those who can afford it. This area is famous for lavish estates that carry a price tag in the millions of dollars. Indeed, the median home price for the county is $590,000, while the median in the city itself is over $1.2 million.
No matter how appealing, the Santa Barbara area's cost of living and home prices will prove prohibitive for many Americans. In addition, recent job growth has dipped lately, so it might not be the best place to look for a new job. Nevertheless, for those that are retired or financially secure, the Santa Barbara area remains one of unmatched beauty and comfort.
"If you wait for everyone to go bankrupt you may as well buy in Mojave"
Yeah, that's *exactly* my plan...wait until EVERYONE is bankrupt, that or wait until everyone is dead and then I'll just walk over and claim the property.
/sarcasm off/
Houses in many markets - the 'desireable markets' - are overpriced. They may not be making any more land, but they're making more houses. Soon - sometime within the next four years - the bubble is going to burst, the new bankrupcy laws will kick in, and bargains will be had.
Does any of that not make sense?
"the new bankrupcy laws will kick in"
I am still uncertain, and have been unable to find anything about it, regarding "pulling the note" on an "underperforming" mortgage, as opposed to one that is nonperforming or past due. How is this addressed under bankruptcy reform going into effect in October? JasonC, earlier in this same thread, has stated that many states prevent mortgage companies from going after mortgage holders for amount owed above and beyond foreclosure sale price, and that it is quite difficult to do so even in states that do not forbid the practice. What has changed, if anything?
Markets where you can build forever in every directions should not have such high prices. Those with limited product should.
"Those with limited product should."
Even a limited supply is dependent upon continued high demand, in order to maintain a price that is "high" relative to markets with no supply constraints. Residential real estate in such relatively unfettered markets tend to appreciate at a level that tracks fairly closely with the rate of inflation.
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