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.
Ug buy ulgy houses. Ug bite off more than he can chew! Poor Ug.
I'm about to make 100,000 dollars... how about you?
Do it quick and don't dump it back into real estate.
If you do not plan on living in a house for more than 5 years, why buy a 30 year fixed?
If you buy a 30 year fixed on a 300,000 dollar loan for 6% you would pay 1800 per month. The same house would fetch a rent for 1400 per month. For 400 dollars more you can own your own home.... what makes sense?????
Of course we've been over this time and again. There are localized bubbles. Buy smart, location location location.
A 3,200 sq ft apartment is about $5 mil in today's market, though it could be more with the right location.
Bah, buy near the ocean, buy in good markets, buy where inventory is limited, find good mortgage product, know your limits, have a strategy, have an emergency plan..
Buy or miss the window.
Dang, I may place an ad. LOL
Portervile needs to be encouraged to speculate even more wildly in my opinion. Jump in with both feet and make a big splash is what I would tell him.
Ug do fine. Ug not a chump. Ug buy houses below market from desperate dwellers facing foreclosure (call em Ug-lies).
Here you go, NYC's most well-dressed mental ward...
http://www.corcoran.com/
speculate? Hmm... 6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,6%,
My new house that I've made improvements on has already gained 80 in equity in the past 4 months.... Yawn. Business man, it nothing personell. Our combined incomes cover the whole deal and other real estate fills our engine.
You have to take risks or do nothing.
We're all adults here, I hope. People get to do what they want, believe what they want, and fail and/or succeed as they want.
Even at today's prices, I could buy 7.
But this isn't the upper East Side in NYC, either.
Yes, but I know secretaries --oops, admin assistances -- earning $75,000 in NYC.
I suspect NYC is one of those places where there will always be a good market, because people always want to move out of the dump they are in to something better, and folks in a worse dump want the vacated dump.
Still that's about 2 to 4 times the price of NEW 3 bedroom homes with garage and a lawn in most Red States.
However, I also think the article is written with a high-density high-expense area in mind (left and right coasts, on the water, hoity-toity areas, etc.)
I'm not sure of the amount of housing speculation going on in Bug Tussle, Mississippi or Boise Idaho, or the great plains - Including Texas.
And if a bunch of speculators, who server only to drive the price up, get squeezed till they pop, that's OK with me. Perhaps housing will be affordable again when we flush out these blood suckers who add nothing but price.
Despite what people believe, the price of NYC real estate does go down -- sometimes dramatically -- from time to time. Real estate is like any other commodity, it goes up and it goes down. The problem we're facing now is how much people have dumped into it.
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