After the housing bubble bursts you will be able to pick this one up for 10 tin cans, 6 rubber band and a canadian nickel
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.
Those people have zero influence in Vegas, and haven't for decades. The corporate interests are in control - MGM and Harrah's are more powerful than the mob ever was. Kirk Kerkorian is the big gangster in town, now. ;)
Pinging you brother
Like to tap the collective FR brain...Assuming there is a bubble in the areas most frequently said to be bubble markets (NYC, BOS, SFO), and that it will go into decline, what do people think will happen to the more rural areas in the event of those markets declining? Is there an expected move of capital from those frothy regions to the rural areas, kicking up those prices? Or will the rural areas decline in price as well, as the urban bubbles deflate and become more affordable?
I'm interested in leaving my urban rental and buying into a rural area, perhaps an acreage. Not looking to 'speculate' as I actually want to live there, but also want it to be a good investment. Trying to figure out if thats a bad move at this time.
I don't want to sound overly negative, but, the only thing driving the unbelievable run up in housing costs is purely and simply speculative greed. Kinda akin to the 1998-2000 market run up which was followed by the 2001-2002 steep slide as our country went into recession.
It is indeed, partically unique. Demand is huge, inventory is still low, and Wall St cash and a strong Euro have kept things very spicy indeed. Some people would like to live in Reno or Austin. But many people simply MUST live in Manhattan. Hard to say that about any other American city, with the exception of Miami, which is also red hot.
Personally, I suggest finding a piece of property you like at a price you can afford, and forgetting about the "investment" end of it. Buy it and live happily ever after, so that the only time you have to worry about what it's worth is when property taxes come due. Anything else is just asking for trouble ;)
Don't say that around here. You will get attacked as unAmerican and being a commie.
WAH! WAH! WAH!
And some people other people on FR make the most out of any given situation, take advantage of any given financial situation, because they are free to do so. Thats called capitalism. Capitalism+whining is not capitalism. Everything in life is a choice. Nobody owes you anything.
Every idiot day trader I knew in late 90's is now in real estate to make his/her fortune.
What a bunch of horseshit. That's nothing but envy and jealousy. I suppose I should lump you into the "rich should pay more taxes" crowd too.
It is not a good thing when average people cannot afford housing without creative financing etc etc.
Define average? Oddly enough...alot of "average" folks I know can afford it. I mean really, what the hell do you want people to do? Should I feel guilty about making money in real estate over the past 3 years? My father taught me a valuable lesson as a youth...he said, "The amount of time and mental energy you spend whining and bitching about (X) could be better spent actually working to fix (X).
If anyone here "are of the same cloth as the RATS in their dogmatism" it is you and your "working class" mantra. It's despicable to see that on FR.
European and Asian money will keep the high-demand city markets afloat for a surprisingly long time. Even if the prices stop going up and the ultra high-end properties take a nosedive, there isn't going to be much of a decrease in New York or San Francisco.
But look out in the areas where those Europeans and Asians don't want to live...paradoxically, places like Houston, Kansas City, and Memphis are going to take a much harder hit than anyone realizes, even if prices haven't gone up as much as they have in the high-demand areas.
For an investor, just hold cash for a while and wait until the high-demand markets cool off a bit and offer better opportunites. Rural real estate is a lousy investment, but OK if you just want a place to live.
Can't argue with the philosophy, and timing a market can be asking for trouble. Though if it turns out that waiting a few more years meant I paid X instead of 3X, and I was able to use that 2X to travel the planet, retire early, park a sailboat on my dock, I'd be happier:)
Thanks for the thoughtful reply.
I hadn't really factored in gas prices to this story. I guess there might be storms ahead.
Yeah, then the used car market will be flooded with Lincoln Towncars and pawn shops with imitation Rolexes ;-)
Go ahead and speculate but shut your F---ing mouth. When the bottom drops out I won't be rubbing it in. Well maybe not....
And not in the way you might think. When Bank of New England went under the government did step in. They called all the 'under performing loans' and thousands of people lost their property.
What is an 'under performing loan' you might ask? When the value of your property goes below the amount of the loan. You don't even have to be one day late on any mortgage payment and they can call your mortgage. They took thousands of homes and had a big yard sale. Some people did very very well! Some people never recovered.
Speculation is a relative term in real estate. One man's shack is another mans castle; and selling prices for real estate are based on percieved values anyway. One sells real estate for the price that people are willing to pay. You make it seem like this is a new things. Been going on ions. I say, either play the game and participate in the market or "shut your F---ing mouth."
When the bottom drops out I won't be rubbing it in. Well maybe not....
Don't worry...I'm protected when the bottom drops...its called planning ahead and staying within your means...simple concept really...saves alot of future heartache, and bitching and whining.
Now I am a commie too, right.
There is nothing wrong with capitilism, other than the fact that our society is not true capitilism. We are closer to economic fascism more than anything else.
Its amazing to me, those with latin handles on FR are almost always the most demeaning lot of anyone.
I never said that...nor implied it.
There is nothing wrong with capitilism, other than the fact that our society is not true capitilism. We are closer to economic fascism more than anything else.
Please explain how this is so. I would equate "economic fascism" as a group of a few wealthy (depending on your concept of wealth) people basically being able to control the economy. I submit that nothing close to this is in existance in this country right now. Moreover, I would equate your term "economic fascism" as an environment where the middle and lower tiers socioeconomically, are unable to control their economic destiny. I submit that we are nowhere close to this either.
Its amazing to me, those with latin handles on FR are almost always the most demeaning lot of anyone.
OK...its Monday...maybe I am a little grumpy, but I don't intend to demean anyone.
Speculation is capitalisms ugly dark side. Listening to speculators is like listening to a prostitute brag about how much money she sucked out of her latest John. Well maybe not, at least she provided a service. Speculators do not.
Please shut you F---ing mouth, it is really ugly when I have to actually see/read this.
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