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.
Followed by lawsuits as they blame the real estate agents and mortgage brokers who "decieved them". Ala the twits who bought dot com stocks with their retirement nesteggs who let greed cloud judgement.
The article is not up to ex-Texan's usual standards. It's basically a panic piece that addresses one problem, speculation.
The real time bombs, such as they are, await in the home equity loans and zany mortgage schemes.
"I think if oil prices stay at $60 dollars a barrel you will eventually see more than just the housing bubble go bang in a few short months."
Care to elaborate?
the investors (around 40% from california) have ruined it for the rest of us trying to become 1st time home buyers. The average housing price in Chandler, Az, which used to be affordable, has gone up 43% in one year, making it darn near immpossible for a mom with 4 kids (dad is having a mid-life crisis and received the home, because the judge "wanted" him to have it), to buy a home. I can't do it, so, I have to stay in the same neighborhood, for the kids or the judge will (I'm a stay at home mom for 18 years), give primary custody to him, the houses have gone from very affordable to outrageous. I will never be able to own my own home again, in this neighborhood (same schools-mandatory for myself and the kids), or even own my own home without moving into a not-nice area, not suitable for children, or way out into another county, which I can not or won't do because of my kids' schools they attend. Even those houses in the counties just outside Phoenix Metro, are now becoming unaffordable. Thank the investor, I hope that the ones, esp, those who don't have a stake in Arizona, lost their shorts, and I AM A CAPITALIST, I JUST DON'T LIKE WHAT THEY HAVE DONE TO THE LITTLE GUY. I have tried to buy in the new (no yard) subdivisions, and the developers have told me, in answer to my question, NO, WE'RE NOT SELLING TO INVESTORS HERE, bull, after the subdivision sold out soooooooo quickly, when the houses started to get built, BINGO, the selling signs come out, and you guessed it, big companies representing investors, or the signs come out renting (houses bought by these big companies that do this in AZ and beyond), who loses out? We who are trying to buy houses. The prices are articficially inflated. What was built and sold for 128,000 4 years ago with 1750 sq ft., two story, double garage, small yard, gated community, is now selling for 250,000+, prior to all this, the appreciation was around 10%, I know this because I am a native of Tempe and have lived in Chandler for 17 years. What was affordable at 150,000 before this onslaught, now costs around 300,000. Can't do this on 3000 a month, with 4 kids and pets.
I walk around quite a bit for exercise. Most of the homes I see for sale by the owner, end up getting turned over to real estate agents. They are then sold within days or a few weeks..
About $1.25MM for the land if he didn't mind living in the 'burbs
And Tokyo's still a mix. From my casual observation of ads, there appear to be some very nice areas that are still seeing declining values.
I'll take your word that it's still declining in some areas, but it's difficult to believe that a decline can last that long.
I know exactly how you feel. You won't get any sympathy from the hard a$$e$ around here. You see, to them, it is your choice to rent, you need to get your act together.
Plus, you have every fool becomimg a realtor or mortgage broker. Remind you of anything???????
I agree with you. Some people on FR are of the same cloth as the RATS in their dogmatism. The reality is that the Wall Street mentality that ruined the nasdaq in the late 90's has now hit the housing market.
Every idiot day trader I knew in late 90's is now in real estate to make his/her fortune.
It is not a good thing when average people cannot afford housing without creative financing etc etc.
This exact scenario played out for both the people who bought my mom's house and for the property I am currently renting. The owners in both cases didn't care about the rental income, as long as they were getting that $10,000/month appreciation. They are about to learn a hard lesson...
The reality is that the Wall Street mentality that ruined the nasdaq in the late 90's has now hit the housing market.
Yes, and the Wall Street mentality also ruined the NYSE. That darned Wall Street mentality has ruined Wall Street!
I'll not sure the Ivana tower will actually get built - it may be a petty slap at Donald, whose previously announced (and shorter) tower has already sold out. But the high-rise trend in Vegas (as opposed to the wild overbuilding in the suburbs) may remain viable for a long time - there is a lot of Asian money flooding into the market as high-rollers are buying permanent bases of operations for their gambling trips.
Well here is not only my poor opinion, but what some of the people I work around think also.
Remember that small tax cut that drove the resurgence of the economy.
Well multipy that tax decrease by about a 6 times increase and that is what high oil prices will eventually do to us.
Oil at above $60.00 dollars a barrel puts pressure on every item sold in stores.
Someone has to absorbe the cost for shipping.
Someone will have to absorbe the added cost for energy to make the product.
Farmers in the field will have a lot of added expense to run their tractors to plow, disc, plant and reap the harvest.
Over at the Circle K the store manager tells me that many people are no longer topping off their tanks as in the past.
They buy just a few gallons, hoping that the price might fall in the near future.
In the past few days I have noticed that Wal-Mart is no longer rolling back prices.
Instead they have steam rolled ahead.
The salesman over at the Chevrolet Dealership says they are not only afraid of not selling the gas guzzlers but jokeingly says he is afraid they may have to pay customers to take them.
Each little item affects the next and soon it all slides downhill, like a gigantic landslide.
I cannot respond intelligently about Los Vegas. I have never been there and have no desire to visit. My Grandfather used to own a casino in Carson City and taught me to count cards when I was only five. I have never been much of a gambler either. I have been to the casinos at Lake Tahoe and seen Asians throw down small fortunes in a few minuets. They are among the worst gamblers in the world. Just what Los Vegas -- Triad Bosses mixing with the bent noses of little Italy and ex-KGB Russkies from Moscow. Ivana Trump should be proud of her contribution to world peace.
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