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.
Please shut you F---ing mouth, it is really ugly when I have to actually see/read this.
????????
Whatever. Move to Canada then I guess. That way you can depise and resent all the EEEEEEEEEEEEVIL American captialists all the more.
Please tone down the language.
"Speculation is capitalisms ugly dark side"
Speculation - the risking of capital in the hope of a profit - is capitalism. Without it we just have wage labor working for...who? Since there are no speculators in this utopia I guess they all work for the govt or for themselves on small holdings that never, god forbid, engage in speculation.
Bubbles are part of any market, and, if you don't get caught up in greed or fear, fairly easy to read and profit from.
Now that is an interesting post! Thank you. I just have one question -- do banks have that option without gov't approval/intervention?
The statistic that only 20% of Californians can afford a house with a fixed-rate mortage is misleading because a high percentage of higher-priced houses in California are sold to affluent buyers from other states. I know because I lived in San Diego county for 25 years and many of the home buyers moving in to San Diego county are affluent people from the midwest, the northwest, and the eastern US who are looking for warmer weather and more of an outdoor lifestyle. A lot of real estate in Southern California is sold to affluent retirees from out of state who want a warm climate in their "golden years." The Palm Springs area is full of retired snowbirds from the midwest.
The author makes another odd statement where he says: "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." Right in mid-sentence the author switches from the term "investor properties" to "speculative buying." Well which is it? Is he trying to say that all real estate investment is speculation. It's not all speculative. It depends where you buy and how much you pay for the properties. As we've seen repeatedly in the last fifty years, people are going to get burned if they buy properties in poor locations and pay too much for them. But I'm not expecting any kind of a slaughter. Our economy depends so much on housing that the Fed cannot raise interest rates more than about another 1 point without causing a recession. So you're not going to see major interest rate increases that will cause a slaughter among housing investors.
What I referred to were things like the Kelo decision, ominous zoning laws that only developers and big business can navigate,
and corporate bailouts and giveaways that prop up businesses who should otherwise fail and go away.
All depends on how you define rural. In most cases a true rural real estate market is almost totally unlinked from an urban market. The buyers in urbania don't want to live next to a farm that produces real farm smells.
For example. My area is about 90-120 miles form the nearest big city (Indianapolis). When Indy prices for real estate go up the realtors here don't even take notice. Totally different markets. We have no bedroom communities for Indy down here. The Indy people don't want to live here and we don't want to live there.
Now if you're looking for a commuter distance to NY, Boston or ? then it's an entirely different story. But then you're also not looking to a true rural area either. The human pollution of the city spills over to the suburbs
(I look at homes in Indy or other big cities that cost 3 to 4 or more times what my bigger home cost and I see insane buyers)
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.
If you want to live in the country then it's always a good move to buy acreage. Do not look at it as an investment as the odds are great that it will not appreciate considerably in a normal investment time frame. IMHO the land most worth living on is poor farm land anyway so agricultural gains won't be seen by that land. And the countryside is driven by agricultural markets. Buy the land to walk it, hunt it, and keep the neighbors a goodly distance away. Or to split among your children when they are old enough to build their homes.
We're in agreement here for sure. The above is simply government mandated welfare, central planning and a tyrannical abuse of power.
Houston, KC and Memphis are not rural areas. They are still big city urban. If you want rural areas look at towns less that 10,000 people (preferably less than 2000) and at least 90 minutes from any city.
Very rarely in the world of real estate will you find properties selling for even 40-50% more than they're really worth, let alone 14 times what they're worth. Some people who pay too much for real estate will get burned by speculation. But their losses will be much less than the massive losses taken by stock speculators in the tech bubble.
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
Depends where Sharon PA is. If it's in the central part of the state away from the cities then the price will stay about the same since that is a fair price for that house. If it is near the cities (within commuting distance) the price will go up as losers in the city look for houses they can afford.
(BTW I paid that price for my house. Who says you have to spend hundreds of thousands to get something nice. After spending a few years and a few grand on the house it's now worth 150K or so and is incredibly beautiful (inside) and comfortable)
My wife and kids are my life. May God strike me dead before I have such a "mid-life" crisis. I'm ashamed of my sex and very sorry for you guys.
"Depends where Sharon PA is. If it's in the central part of the state away from the cities then the price will stay about the same since that is a fair price for that house. If it is near the cities (within commuting distance) the price will go up as losers in the city look for houses they can afford."
It is in rural W. Pa. You can find similiar homes in the greater Pittsburgh area for the same or less. House prices have appreciated very slowly in Western Pa because there is a net loss of population. There is no housing bubble there.
Online Bettors Find a New Love: Real Estate
http://www.nytimes.com/2005/08/22/technology/22consuming.html
Don't know if it's already been posted, but it fits in this thread as another sign of 'end times'.
Don't forget the gold chain medallions.
Now don't go getting all wussie on us. Just because a couple (few) men are A$$h013s doesn't make all men bad. Most of us are pretty good.
The above is simply government mandated welfare, central planning and a tyrannical abuse of power THAT HURT AVERAGE TAXPAYING CITIZENS IN MANY WAYS.
" Is there an expected move of capital from those frothy regions to the rural areas, kicking up those prices?"
I'm in northwestern NC, residential RE has "lagged" (3 - 5% appreciation) for years due to textile and furniture offshoring, the former primary industries here. We've had some positive news of late, Dell facility, FedEx hub coming in 2008, tremendous road projects, so it's not looking too bad for the near future.
I've been planning to build on land I purchased over two years ago, and have finally begun construction, so I'm very interested in keeping track of what's going on in residential construction locally. I've made a habit of doing a little "tour" of all the new construction in my area on Sunday mornings, weather permitting. Over the last several months, starting really about June, I've noticed that over half the traffic in the better new subdivisions (3,000+ sq ft, clubhouse, lakes, walking trails, etc. priced out at $350 - $800K), is out-of-state, tags from MD, NJ, PA, NY primarily, with the occasional CA tag (no idea why someone would drive that far, but apparently they do).
Average days on market, for both new and existing combined, is declining here, from 102 last year to 72 currently. There isn't a great deal of spec construction; most homes being built are sold prior to breaking ground in these "better" subdivisions. There are some spec homes that have taken up to a year to sell, but they're invariably at the upper end of the price range, or otherwise ill-considered (location, unpopular style or design elements, overpriced for sq ft and such).
So, I'd say that the "capital" is going to flow into more "reasonably" priced areas of the country before the whole party comes back to earth. Whether that's a good or a bad thing, well, I'm building now as I mentioned, so I view it as providing me with more of a cushion if price actually does take a hit at some point in the future. But, we've got a long way to go, before prices become as out of hand as they are in these former "hot" markets. There are very few properties over $200 sq ft. The few that are, are lakefront or historic mansions in the most desireable, old country club settings in town.
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