Thursday, April 28, 2005

Even Those Who Profited May Lose It All

This article at Citizenet has an example of a young family that made some cash from the housing boom and chose to get further into debt. "Three years ago Greg and Jessica Furr paid $230,000 for a single-family home. They recently sold it for $445,000, pocketing a $215,000 profit."

"The Furrs and their two young children moved into a new, four-bedroom, brick-and-vinyl-sided home. The couple bought the place for the pre-construction price of $380,000."

"We plan on selling this in two or three years..They say we'll get $750,000. It's hard to believe. To make 80 or 100 grand on a house is one thing. To double the value is kind of absolutely mind-boggling."

And what do the Furrs do for a living. "Mr. Furr (is) a 34-year-old general superintendent for a City of Fairfax-based concrete company. Mrs. Furr has since returned to work as a loan officer for a mortgage company. The couple also has a place on the Northern Neck, where they spend most weekends." I hope they don't have a mortgage on that weekend cabin.


At 4:14 PM, Anonymous Anonymous said...

Either they have a mortgage on the cabin or they've got a bigger mortgage on their house.

That is the thing: everyone has a bunch of debt, except us renters. We've got cash in the bank.

Nobody owns anything outright anymore. Nobody even tries to own something outright ! When was the last time you attended a mortgage burning party ? I can remember attending one about 10 years ago.

At 4:18 PM, Anonymous Anonymous said...

They are young. And why should they not think that this is a good plan. When one thinks of all the reasons that it makes sense to buy real estate.

1) You get to write off the interest and taxes.
2) The value always goes up.
3) You need a house anyway.
4) Interest is at 40 year lows.
5) And the best one, live in it for 2 years and you get to pocket the gain tax free then put a little of it down on a larger more expensive home, interest only, and buy a couple of foreign made cars.

I mean heck, why actually work. The banks will loan on stated income. All everyone in the US has to do is flip properties and we can all retire early.

At 4:20 PM, Anonymous Anonymous said...

Ben-so what do you think about the article stating the number of jobs in Northern Virginia? Do you think the D.C. metropolitan area is immune to a housing bubble and/or
a recession because of employment?
I live in the out skirts of Northern Virginia and everything just keeps going up and up!!!

At 4:23 PM, Anonymous Anonymous said...

Of course no one wants to own anything anymore. ... Liability Lawyers ...

At 4:27 PM, Anonymous Anonymous said...

"We plan on selling this in two or three years..They say we'll get $750,000.

Who on earth told them that they can sell their $380,000 house for $750,000 in two or three years? The builder? Neighbors? Shoeshine boy?

Talk about mass delusions!

At 4:27 PM, Anonymous Anonymous said...

"pocketing a $215,000 profit", they always fail to tell you what comes off the profit...closing costs, realtor commission on the buy and sell side, capital improvements...yadayada. Bttm line the hurdle can be big just to hit break even; so many fools just go off the purchase/sale price.

At 4:38 PM, Anonymous Anonymous said...

I love the irony of how they make a living: concrete business and mortgage loan officer. As long as the home buying spree continues, they'll do just fine.

Hope they have a savings plan/account, and a contigency plan for if they lose their jobs.

At 4:40 PM, Blogger Ben Jones said...

(Ben-so what do you think about the article stating the number of jobs in Northern Virginia? Do you think the D.C. metropolitan area is immune to a housing bubble and/or a recession because of employment?)

I've thought about that some, actually. My inclination regarding financial/policy issues is counter-intuitive. For instance; look around, does this look like a nation at war? Where are the ration cards? The Victory bonds? The homeland security spending can only continue if you believe the US is on a realistic footing, which I do not.

Unfortunately, the US govt. will lose its financing and the Washington boom will likely bust. Good luck and please let us know what's happening there.

BTW the last mortgage burning I attended was my Dads back in the 70's. And we had cake.

At 4:43 PM, Anonymous Anonymous said...

"Hope they have a savings plan/account, and a contigency plan for if they lose their jobs."

I'll bet $20 that their house is their "piggy bank" !

This couple represents the American Dream these days. Highly, highly leveraged dreaming of big dollars on their RE.


At 4:51 PM, Anonymous Anonymous said...

Ben - Just want to say keep up the good work on the site. It definitely seems like the bubble chatter is picking up, but the so-called 'experts' don't want to wake up. The bubble bust is not a speculation, just a matter of time. The only speculation going on is that house prices keep doubling forever.

At 5:09 PM, Anonymous Anonymous said...

If you read the article the home prices in there area are starting at 579 and up! So they already have made a bundle.It does become hard for people wanting a home for fear of being priced out-because the reality is -they are! The 3 and400k homes could end up being 750-1million,like in California.
My neice but a 4/2 capecod last year for close to 1 million.
I dont think they earn over 175K
combined.Its a tough call to buy or not to buy for alot of people.

At 5:21 PM, Blogger John Law said...

I don't wanna sound like an elitest new yorker(I've got the NY thing down though) when I saw people like this shouldn't make so much on a house. they're just regular people.

should they really have a $750,000 when they're of semi-modest means?

At 5:25 PM, Anonymous Anonymous said...

"If you read the article the home prices in there area are starting at 579 and up! So they already have made a bundle."

All their profits are paper. They won't capture any of their profits unless they sell and rent. It doesn't sound like they will be doing that.

In the coming crash, the price of their property is going to deflate 30 to 50%. Remember that they are highly leveraged. They may get a margin call.

I used to think that houses were "sticky on the downside" and that the correction would be slow. However, I am beginning to change my mind because of a number of things"

a) everyone is so highly leveraged

b) the crash is going to be accompanied by a dollar crash and high interest rates, making things worse.

c) the stock markets will crash as well.

It is kind of like the perfect storm is brewing.

I used to think this sort of thinking was alarmist and extreme. However, after doing a bunch of reading and watching how things are developing, I am expecting this sort of thing to happen.

At 5:34 PM, Anonymous Anonymous said...

Off topic, but the local Dallas NBC affiliate news program just did a story about a "Condo Sale" at some building downtown that was renovated. The story had the developer on and he said that this is the first time this has been done in Dallas and that they are expecting 2000 people to show up for these places.

These places have been finished for over a year and are on their third or forth real estate broker. I just think it is so pathetic that the "news" station is hyping this property as if this is news. The intro to the piece was all upbeat about the big "Sale" and the story lasted probably three or four minutes. The reporter said that these places would make a great investment because of the revitalization of downtown.

Downtown Dallas is a ghost town and has been that way for the last 20 years. They keep talking about it coming back, but the only thing moving in are homeless people. I couldn't find the news story yet, but I've posted the web address for the great "sale" in case anyone wants to hurry and fly in and bid on this garbage.

At 5:37 PM, Anonymous punchbowl said...

Amen, Anonymous. I also used to believe that houses were sticky on the downside, but then I ran across the statistic that 60% of mortgages in San Francisco are IO -- and 85+% are adjustable. This means that you have (at least) 45% of new mortgages in San Francisco that are IO and variable rate. Zero equity plus payment shock equals foreclosure, methinks. So I'm with you: I think this thing will bust pretty hard to the downside initially (20+%), followed by a long (long!) deflationary cycle. Couple that with inflation in commodities due to peak oil, and yes, we have a perfect storm brewing. It's going to be very, very painful for everyone, even those of us who have seen it coming for years -- and it will cast a shadow that will last for a generation. Needless to say, I'm not exactly the life of the party these days...

At 5:49 PM, Anonymous Anonymous said...

Here is a summary of an actual conversation I had with my brother-in-law regarding a property flip in a small town 15 miles south of the I-5/580 junction in the Central Valley.

"We put a pre-construction down-payment on phase 2 for $720,000. We'll sell it in a year for over 800K. This property could be worth a million in no time."
"Based on what"
"Based on the trend. Phase 1 was priced at 620K. It's going up a hundred grand a year."
"Who can afford to pay that?"
"There is a huge demand for California property and people will come up with the financing. The economy is coming back and people can afford it"
"Where are the jobs that pay that much"
"It's a 90 minute commute to Silicon Valley. People will do the commute in order to raise their family in a big house in a safe neighborhood"
"Even with the price of gas going up? Who can afford the commute?"
"Gas price? Come on that's not a factor."
"Don't you worry the housing bubble will burst like the tech bubble?"
"Maybe. There is always risk but that is how you get the big reward. Even tech comes back. You have to stay in the game and wait out the soft patches. Look at Yahoo, Google, Ebay. People still make money with them, but it's really tough to big money in the stock market. We have to take control of our retirement, and real estate is the best way to do that."
"Well, good luck to you.

At 5:51 PM, Anonymous Anonymous said...

The creation of homeland security jobs in DC is the talk of the town. Jobs have been created here for sure. But federal employees do work for the most indebted employer. It would seem that in the long run jobs would have to be cut, and while DC area is fairly stable because of high guv employment rates, there is a cap on how much money people make here. The only thing that is certain is that for now the people who own property are seeing a huge increase in their paper wealth at the expense of those who are willing to take on huge amounts of debt, netting it all out, are we really creating wealth, of just transfering wealth from the future to the present by borrowing?

At 6:00 PM, Anonymous Paul said...

I'm renting and sitting on cash which I got from selling my condo in 2003, but I wouldn't mind making a little money off of what I see to be as a likely bust in housing stocks over the course of this year.

Who is most precariously positioned, that I should be shorting right now? Any recommendations? I'm currently short Toll Brothers.

This is a small side investment account, not my retirement savings. Nor will I gamble with my cash set aside for a future home purchase.

At 6:06 PM, Blogger goleta said...

Here is a summary of an actual conversation I had with my brother-in-law regarding a property flip in a small town 15 miles south of the I-5/580 junction in the Central Valley.

Rents in Silicon Valley are down 40% from the peak 4 or 5 years ago. Lots of office buildings are still like ghost town or full of empty space that no one wants to rent. traffic is still very light compared to what it was 5 years ago. There is some recovery with companies like google and apple, but it's still not clear things are going north instead of south.

At 6:07 PM, Anonymous Anonymous said...

Anon 4:27 PM,

I agree with you... they never do talk about the realtor's commission, transference fee, state tax, etc... also, what about paying a mortgage for 3 years... assuming that his loan was a fixed, the first 2 years are really just interest payments, you never hit the meat of the loan until the 3rd year... anyway... the more interesting and "mind boggling" issue about this story and so many others that i've been reading, is that these people are never satisfied with just taking the money and running... i just don't understand how these people acknowledge the very real possibility of a bubble and then go out and buy a home that costs just as much as the one they just sold... and in some cases, buy one that's even more... why can't they just chill out and rent... and let that 200K collect interest and let the housing market cool down... is it ego?... i mean this guy has 2 children... and this is his once in a lifetime opportunity to really get ahead... and he's blowing it... it's just so amazing to me... the greed of wanting more and more... and the fear of missing out...

At 6:19 PM, Anonymous pb said...

I think it is time to bring back the Bubble Haikus:

Masses want the perfect flip
Silicon Valley
Waits for Mister Bernake

At 6:24 PM, Anonymous Anonymous said...

I've been following this blog for several weeks now. I can't believe Ben honed in on a story that is right up the street from me.

We bought in the low 5's and sold in the upper 6's in our neighborhood. We're going to rent and keep our cash and have money for groceries every month. I stay home with the little kids, too. The only loan we can get is 7.5 percent interest only and adjustable every 6 months after 3 years. How are we supposed to refinance in a year if we can't manage to get a good loan now? What's going to change in a year? (Besides interest rates). Also, the fees are very painful to the pocketbook. Around here you can rent a brand-new luxury single family in a gated community for $2500 or less. One can rent just a decent home for less than that.

What the story isn't saying is that in that particular development, the Reserve at Moorhead, the builder was really slow. Pre-construction pricing was 2 years ago. So yeah, if you could hang onto your prior house until now you made out great. A couple I know sold a year early, though, thinking the builder would be ready.

(Also, if they paid an average 6% commission, that's at least 25K off of their profit).

But I think the first couple in particular did great in this situation. They sold their last house for more than they bought their current one for.

At 6:47 PM, Anonymous Anonymous said...

I think I want to buy a house tomorrow , but I want the Furr to give me their prediction on how much will I get two years from now first.

At 7:29 PM, Blogger Ben Jones said...

6:24 anon,
That's pretty cool that you know the area in the story and even better that you took time to fill us in. Thank You!

At 7:51 PM, Anonymous Anonymous said...


You're welcome. The lady next door to me flips here in Warrenton. She says it's a "gold mine". Actually, she is making a ton of money on one pre-construction house from last year. She's eager to flip another one. She asked me what I was going to do with our profits. I said I was going to short homebuilder stocks. She had no idea what that terminology meant.

We are getting a *lot* of pressure to buy back in. My neighbor cashed out of stocks, savings, everything to buy real estate. (with a no doc loan). Our settlement attorney said real estate was the only way to go. I said something about diversifying and he grinned.

As far as the market around here, houses in the 5's and 6's and over sit for a long while. A good three months or so. Rentals sit forever. It's the houses under 500K that go quickly. Probably because that is the max of what anyone can afford.

At 7:57 PM, Anonymous Anonymous said...

As a DC denizen, I think the market won't tank for another year. But I don't see appreciation more than 10%. The most activity is in the condo market, and that group is showing signs of a larger inventory (March 2005 numbers from the local realtor associations). Single family homes inventory is tighter than last year, but that may be due to the fact that move-up ability has diminished with "better" homes having gotten so much more expensive and out of reach.

As someone else said, people here are well-employed with the government (metro DC has one of the highest median household and family incomes), but the salaries are limited at the top. Carlyle Group notwithstanding, unlike say Silicon Valley or NY, DC doesn't really have a great private sector with people making astounding amounts of money. My bet is entrepreneurship is less than in other places (private employment here means you work for a government contractor). I would venture to guess that government workers tend to be more risk averse than private sector people. So I think the top here cannot hit the strata that NYC and CA have hit even with the so-called homeland security spending. Being more risk averse, people here won't go for it mentally. And monetarily, they just don't make as much at the top. At some point, the notion of paying 600K for some pre-construction condo with $400/month condo fees is going to be too much for the normally risk averse salaried government nob. Well, 600K people may stomach (incredibly), but I doubt 800K. At least, that's what I'd like to think.

At 8:31 PM, Anonymous e- said...

My ARM is like a ship upon the seas
It is easily moved
Hindsight will not help it

At 10:04 PM, Anonymous Anonymous said...

My landlord informed us two weeks ago, he will put he house in market and we will need to move again.
11 months ago, we sold our lovely house and cash in $450K profit which we brought in
Now my wife any kids miss our beautiful home very much, it very hard to convince them that the decision is right at this moment, especially the house prices keep going up since January (even we still get the record price).

Even we can afford to buy a bigger house, but I just can’t make this long term commitment while I believe the house prices is definitely will go down 30% to 50%.

Actually, to me, except school teacher’s salary, almost everything in USA seem overprice (especially CEO, doctor, lawyers). Last summer I went back to HK and visited my friends, most of them make about 1/3 $ of mime. But they work 60hr a week, while engineers usually work only 30 hr a week here, moving the same people to here from HK or India to pay will be triple or ten times more.

At 10:09 PM, Anonymous Anonymous said...

"unlike say Silicon Valley or NY, DC doesn't really have a great private sector with people making astounding amounts of money. "

Keep in mind that Silicon Valley has lost 400K jobs since '99-'00 and most of these jobs never came back (farmed off to India or just vanished entirely in the dot bomb.) Except for a year or so of stagnant home prices, appreciation in the Bay Area barely skipped a beat.

Just goes to show how nicely a shot of adrenaline from the Fed kept the patient alive. At least for a while, anyway...

At 10:45 PM, Anonymous Don said...

I'd like to know what kind of lame ass engineer only works 30 hours a week. I do freaking unpaid overtime constantly.

At 5:02 AM, Anonymous Anonymous said...

Anybody suffering from "missing the boat" feeling? Even though I believe we are in a housing bubble-
As a realestate investor I have
curbed my investments because of my view-only to see thus far I have been wrong!It keeps me awake at night,the amount of money left on the table on previously sold
investments etc( Sellers remorse)
Even though I realize I was being
conservative-after also being caught up in the Nasdaq bust in stocks,it is still very difficult!
Can anybody relate?
Here we have the NAR saying they think we have many more years of strength!

At 6:12 AM, Anonymous Anonymous said...

Yeah i can relate to you. But hang tough its precisely that moment when you make a dumb decision 'to catch up' and then lose it all or worst you put in the top...

At 6:17 AM, Anonymous Anonymous said...

You know you're getting close when the most resolute bears start to say, 'maybe I was wrong.'

At 6:30 AM, Anonymous Anonymous said...

But could we be looking at the glass half empty instead of half
full? It is hard to see people making 100k plus that would normally,literally take a lifetime to save if ever,while sitting with cash in the bank-but not as much had you stayed invested!

At 7:15 AM, Anonymous Anonymous said...

everyone is sooo greedy... just take the money and run... rent for about another year and you'll be able to buy a much better house at a much lower price... just think logically... not emotionally... the real estate industry wants you to think that this time it's different... that real estate does only go up... well, guess what... it doesn't... just like everyone other asset, it's cyclical... and there's always a time to buy and a time to sell... right now, it's a time to sell

At 7:16 AM, Anonymous Anonymous said...

I can relate too. I sold three of four properties two years ago. Left some money on the table I guess, but if I still had them, believing what I believe, I would have been waking up every night in a cold sweat the last couple of years.

At 7:20 AM, Anonymous Anonymous said...

Dude... you sold and made... what 150K in 2-3 years time? that's great... just lock in on your profits and chill out. A profit like that in a normal real estate market takes a life-time. At this moment in time, you're 25 years ahead of the game.

At 7:31 AM, Blogger Travis said...

Learning Annex, Yes!
Donald Trump's seminar will
Make the po' folks rich

At 7:37 AM, Blogger dwr said...

"Here is a summary of an actual conversation I had with my brother-in-law regarding a property flip in a small town 15 miles south of the I-5/580 junction in the Central Valley."

I live in SoCal and a few weeks ago we drove up to see some relatives who live in Fairfield, which is almost in Napa County, probably 60 miles northeast of San Francisco. We hadn't been up that way in over a year. As we were driving up the I-5 we passed that "small" town you mentioned, and the first thing out of my mouth was "Has that town doubled or even tripled in size in the last year?" It is literally in the middle of nowhere, and it seems to be twice the size of any town I can remember from our last trip up. We then go on and visit my wife's relatives in Fairfield and they couldn't stop talking about how their 3 year old (incredibly poorly built) house was worth "at least $800,000". There is vacant land EVERYWHERE around them, they are probably a two hour commute from any decent jobs, and yet houses around them are selling for close to that amount.

I know there is a bubble all over California and that SoCal coastal properties will drop considerably, but after that trip up north I think NorCal prices are going to drop well over 50%.

At 7:48 AM, Anonymous Anonymous said...

In the end...

It is always better to wish you were in then wish you were out!

At 7:58 AM, Anonymous Anonymous said...

Thanks for the comments.Thats what I tell myself too-I would have had more sleepless nights waiting for the other shoe to drop!I thought we would have another terrorist attack by now( As did homeland security). Felt that would have a major impact on the D.C. Metro market.Luckily it hasnt happened yet. Still a risk to.

At 8:00 AM, Anonymous Anonymous said...

Sometimes I just shake my head in disbelief at what is going on. My grandmother bought her house in the mid 70’s (southern California) and when she passed away a year ago, her home was “worth” 400K. She had no real savings other than the equity in her home. It took her over 30 years to get to that point and I’m reading stories of that type of profit now like it’s no big thing. We’re talking about lifetime savings being made within a few years…..not sustainable.

At 9:06 AM, Anonymous Anonymous said...

Unless I didn't read it very carefully, it sounds to me like they traded down in price. If they put that $215,000 in profit (or whatever was net of RE fees etc) back into the new house, plus whatever they had in equity on the old house , they did the right thing by lowering their mortgage amount.

Now if they had bought a MORE expensive house than the one they just sold, I can see why you'd all say they were nuts. Sounds to me like they were being pretty conservative by buying a lower priced house than the one they just sold, even if they DON'T see a huge gain on their new house.

Am I missing something?

At 9:32 AM, Anonymous Anonymous said...

and they bought a weekend cabin, my friend...

At 10:07 AM, Anonymous Melissa said...

They did ok by keeping their former home and selling it when the new one was ready. That way they made their profit.

But what they did initially was go from a $230K house to a $390K house. It was risky, but it worked out for them. This time.

At 12:14 PM, Anonymous ChrisH said...

[You know you're getting close when the most resolute bears start to say, 'maybe I was wrong.']

Check this out in the Orange County Register. This guy kept predicting home prices had peaked and it looks like he now has thrown in the towel and thinks it is sustainable. "Maybe he was wrong"

-Changes doomed my guess on prices-

At 12:15 PM, Anonymous ChrisH said...

Oops...didn't post the whole link

At 12:55 PM, Blogger Omari said...

On WDC job creation:

A popular mass delusion here in the D.C. region is that the area is immune from housing bubbles because of federal employment. I think it's likely that people all over the country are saying "we're immune to a bubble because of [x]," and federal employment is simply the local version of [x]. (In Florida, [x] is "all the boomers are moving down here, and demographics are changing.")

This mass delusion ignores some simple realities. First, though there has been significant job growth in the region, housing construction has kept the pace with job creation. You would think people would realize this because they keep complaining about how crowded the region is and how traffic is getting worse. Yet on the other hand they claim there is a shortage of housing. This makes no sense. All these new people crowding in are living somewhere.

Second, there is plenty of buildable land in the region. The District's population stands at a fraction of what it was decades ago, and dilapidated burned-out buildings are commonplace. Prince George's County has loads of land throughout the county (so does Montgomery, though much is artificially locked up in an "agricultural preserve.") For those who prefer to be farther out, Loudoun is the next frontier and there is lots of land there.

Third, rents in the region have been stagnant for years. Apartment landlords are not doing "two months free rent" promotions because they are generous people.

Finally, the expansion of the homeland security apparatus may not continue indefinitely, especially in an era of exploding deficits.

The DC region is not bubble proof. When the bubble bursts, things will be just as ugly here as they will be in other bubble markets.

At 6:40 PM, Anonymous Anonymous said...

A lot of comments seem to assume they are using a lot of leverage here. I realize there are lots of highly leveraged "owners" out there. but no where in the article does it suggest what kind of leverage this couple is using. We don't know how much they put down on their first home, or more importantly their second home. All we know is that it cost them $380k, and they had at least $215k of equity from the sale of their previous home to possibly use towards the purchase of this newer, more expensive one. So, in theory they could be carrying a mortgage of less than $165k on a home where comparables are selling in the $500k range. That isn't excessive leverage by any stretch of the imagine. They may not be selling for $750k anytime soon, but they won't necessarily be homeless either.


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