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.
"Buy now or miss the window"
Do you really think house prices will continue to outstrip wages and rents? Some places will move to a permanently high plateau and become the new Malibus or...whatever the super-high rent places are in NYork. For most people living in regular neighborhoods prices will not keep rising at this rate.
When people look at house prices they tend to forget: insurance, interest, taxes, repairs and inflation. Only the last one hits rentors, and rents are not keeping up with prices.
Rent now and save for the coming bankruptcy sales. Lots of bargains will be had.
They used to say that Tokyo was at a "permanntly high plateau." When real estate tanked in Japan, prices declined for 14 -- count'em 14 -- years before leveling off.
But Malibus (Malibu?) had Location going for it. A lot (most I would wager) of the areas where prices "may" drop have little or nothing to offer. Those places will have some good deals if the bubble does pop.
Some one is going to take a bath, and it might as well be the speculators as opposed to someone the government would feel obligated to step in and bail out (again).
Another thing to be aware of is the old saying "Persistent rumors of a popping bubbles tend to lead to popping bubbles even in the absence of any other stimuli."
Greenspan is worried. He says he's worried. Presto-Chango he's proven right.
Agree with both your posts. The US isn't Hong Kong. Outside of Manhatten most places are not that built-up. Althis talk about 'they're not making any more land'...well, they don't need to. We have plenty.
What they are making more of is houses.
It's raise time!
The only way i can afford a home in the Bay Area is to sign onto the absolute insanity of an interest only loan, because the prices are so high, I cannot afford or qualify for a traditional mortgage. I refuse to take the bet that rates will continue to rise like they have been, nor do I believe there's a "window" of opportunity, where myself and others in my income bracket will be forever locked out of buying a home. Those that say there will be nothing but increases are whistling past the graveyard of past downturns - one of which I lived through in Northern California in the 80's.
This is all being driven by a national fad, an obsession to own a home, just like the national obsession with IPOs and .com stocks in the 90's. That was driven by the same greed here, and that greed will destroy the Golden Goose, just like it did last time. The more I read up on it, the more stories I see of the insanity going on in real estate right now, the more I get deja vu for the 90's here in the Bay Area, where everyone was so sure the party would never end, we'd all retire at 40 with millions, anyone could invest 1000 and make millions, every kid graduating from college with a degree in web design would make $150,000 a year...and more and more the hair stands on the back of my neck, because it all sounds so familiar.
Me, I'm betting a 20% reduction in prices in two years. I refuse to buy into this market. Period. I'll keep my rental, where I'm paying less than 30% of my take home each month, sock away the rest, and buy your property in two years -at a cheaper price. That's the bet I'm taking, not yours of buying at the top of a market, at insane prices, under insane mortgage terms.
I hate to have that attitude, as I don't want to see our country suffer, but there's nothing supporting this house of cards but greed and shaky financing.
We'll see about "windows" in two years, shall we? I'm betting heavy into the Bubble scenario - and I'm set up financially to survive it, I rent, have no debt, and I have decent savings, with a solid plan to build that even bigger over the next few years.
Greenspan uttered his famous "irrational exuberance" regarding the stock market in 1996, IRC, and he couldn't manage to kill the market until 4 years later.
Hopefully he retires before he manages the kill the housing market.
Greenspan didn't kill the market.
Or do you think those dotcoms and daytraders were really onto something?
There was a bubble when he spoke, but people with get-rich dreams, the same dreams that are firing up the housing market now, all felt that things were different this time... In economics things are never different, just the same cycles of greed / fear, boom / bust.
The more anyone tries to explain why this is different the more I know it's the same. That's not because I'm smart, just dumb enough to believe my eyes.
This is reason # 8 why Illegals are allowed to pour in here,
Most in the housing sector benefit.
Naked self-interest/greed is changing America,and putting her at risk.
It's a kind of insansity. It's the aftermath I worry about. There are going to be a lot of very annoyed people.
"There are going to be a lot of very annoyed people."
Never mind annoyed, with the new bankruptcy laws there's going to be some very broken people in the wreckage.
The long, colorful and entertaining history of speculative bubbles ought to be taught in high schools.
But when markets crash there's always bargains to be had. Frankly I'll be glad to see our latest breed of investment geniuses and their perpetual motion theories come back down to earth. What amazes me is it's only 4 or 5 years after the last bubble and all the same rhetoric is being rehashed. Well, I was a fool not to ride high and low with a bunch of tech stocks, and I'm a fool now to stick my with currencies and funds.
As I've said before on these threads, the gov't will step in. Never mind the rhetoric spewed by others about gov't's job and small gov't and no hand outs...that'll all be conveniently forgotten when folks start losing their homes.
However, the really bad part will be how many jobs will be lost. I'm not talking about just the construction trades, but also real estate brokers, mortgage brokers, guys that work at Home Depot, people who work making stuff for homes, truckers, etc. etc.
And then there are the assorted losses through stocks, like Home Depot and the Reits, etc.
This could be a bad one. A lot worse then just opening the 401k statement to see how much you lost.
Good for you. The oldest sucker play in the books is the old "when these few are gone there will never be any more" story. Its bull. Don't fall for it.
And also don't fall for the Idea you have to live in that Blue State city. There are lots of places where you can buy nice houses around this country.
while there are good points here, to say that speculators are responsible for ALL new housing starts is ridiculous
If the govt steps in with more help than low interest rates then that would be dangerous. It'd create a moral hazard and set up the conditions for the next bubble. Most people won't have to give up their homes, just their dreams of a fast buck. In the late 80s the UK went through a period of widespread 'negative equity' - a term that will soon be tripping off the tongues of many Americans - but its economy still held up.
And for those posters who'll no doubt hate me for waiting smugly for the crash...I don't see that what I'm doing is any worse than hoping for continued house price inflation that will price our children / grandchildren out of the market.
This is not a once in a liftetime opportunity, and there's no window about to close. In 10, 20, 40 years from now there'll still be 20-something couples buying first homes at reasonable multiples of their annual incomes, not living in mobile homes or taking out 60-year mortgages. To expect otherwise is to be asking to be slapped by the market.
The homes that are going to be lost (if you've read the article) are the second and third homes and the speculative homes. The government is not going to bail out the speculators. Even if they wanted to, (and they don't) class envy would never allow it to happen. Where did this talk about people LOSING homes come from? Certainly not from the article.
However, the really bad part will be how many jobs will be lost. I'm not talking about just the construction trades, but also real estate brokers, mortgage brokers, guys that work at Home Depot, people who work making stuff for homes, truckers, etc. etc.
Look, there is a houseing GLUT now, and when (and if) the speculators take a bath there will be a bigger glut. People take advantage of that to trade up. Real Estate brokers jobs are safe (disappointing really, they rank right behind lawyers in my book). People who buy homes like to fix them up, people wanting to sell homes like to fix them up. People have figured out they can do this work themselves. Home Depot is safe, and untill the Railroads get way more efficient and customer friendly, truckers are safe.
Calm down, get back on your meds.
The idea that real estate will crash and nothing will change, except real estate prices come down, is a false one. A lot of people are gonna be wiped out. Many will be left looking for someone to blame. A lot will be bitter that they've been screwed (yet)again. And the economic, political and social impact will be enormous. Expect to see many news shows that feature folks crying on their sofas.
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