Monday, April 18, 2005

The Housing Bubble Made Me Quit My Job

The rubes are piling into the condo craze in Florida, setting up a spectacular crash. "I'm getting my hair cut last week, and the owner tells me she just bought two condo conversions. Now she's frightened and wants to know if I think she'll be able to sell them in a year or so and make a killing."

"Jeff Merlin, a car salesman turned real estate investor, plans to buy two townhouses with the $71,000 profit he just made on the sale of a Coral Springs townhouse he purchased last year. 'I don't believe' there's a housing bubble, he said. Real estate consultants estimate investors make up about 70 percent of the new condo buyers in Miami."

"Jason D. Brown, is undeterred. He quit his job as a waiter after earning about $80,000 last year doing four real estate deals part time. Now he spends six days a week searching for homes to purchase by knocking on doors. 'I don't plan on going back to working a regular job, I'm doing great.'"

Another article from the same paper points to the "vultures" in the wings. "With 30,000 new units expected to come on the market, everyone will try to sell and rent at the same time, and it's going to be a disaster."

35 Comments:

At 10:12 AM, Anonymous Jim in Venice said...

I know other people have posted similar sentiments... but when waiters and hairdressers are getting involved in the real estate market, the end is imminent.

 
At 10:29 AM, Anonymous great caesar's ghost said...

Ah. Makes me nostalgic for those days of yore when bike messengers quit their jobs to become day traders only to discover a few months later that it wasn't such a good idea after all to make a leveraged buy of Priceline at $125 a share.

 
At 10:40 AM, Anonymous Anonymous said...

Now that the stock market is tanking and interest rates edged down because of a perception of a
slowing economy,do you think this will add fuel to fire to the current housing bubble?

 
At 10:57 AM, Blogger Ben Jones said...

(do you think this will add fuel to fire to the current housing bubble?)

Up to a point, when even easy money can't prevent a meltdown. We'll see.

 
At 11:14 AM, Anonymous Anonymous said...

I actually think it's LOW interest rates (that simply don't go up no matter what the fed does) that will pop the bubble. People will realize that there's no real urgency to buy NOW, rates have been practically the same for 2-3 years now. And then the yield would invert, we will head into recession, and then game over. Any thoughts?

 
At 11:32 AM, Blogger dryfly said...

I actually think it's LOW interest rates (that simply don't go up no matter what the fed does) that will pop the bubble. People will realize that there's no real urgency to buy NOW, rates have been practically the same for 2-3 years now. And then the yield would invert, we will head into recession, and then game over. Any thoughts?

I think that is exactly right... I know lotsa folks who rushed to close because they (1) weren't flipping, staying in the region long term (2) couldn't afford to risk higher rates...

If they thought low rates would stick around another year or so... many wouldn't have rushed.

But I don't think rates can stay where they are or go down... only 'up'... Not while we rely on the Asians to cover a half trillion dollar gov't debt while running a half trillion dollar trade deficit... The Bank of Japan sets our rates now, not the Fed...

So I think interest rate increase will only increase the tension... rates go up, more people panic.."Am I too late?"... Goes up more, repeat... until it is so lofty and unstable no one involved can support the instability... then a very bad end.

Are we close or another year or two out? I don't know... I thought the NASDAQ was 'there' as early as 1998... then it went on for two more years...

 
At 11:40 AM, Anonymous stockjock said...

I'm a little confused with the "stocks bad, real estate good" line of thinking. Clearly, the avg Joe is scared of stocks and has transferred his attention to real estate ("never goes down like the stock market").

Yes, stocks broadly fell from 3/00 to 10/02...30 months. But then they climbed from 10/02 to 3/05...30 months. In fact, the dowdy Dow gained 50%, the S&P 500 (which is what much of 401k money is indexed to) gained 57% and the Nasdaq gained 102%.

If you look at the major averages, it looks like stocks are still way down from 2000. And for tech/telecom, you'd be right. But many sectors (banks, smallcaps, energy, materials, cyclicals, brokers, emerging markets, hospitals/HMOs, etc., etc.) are well above their 2000 highs---even after the mini-crash of the past week.

And the broadest measure of US stocks---the Wilshire 5000---just made its all-time high in early March.

The weakness we are seeing in stocks right now may have further to go. But since many of the broadest measures hit their all-time highs just five weeks ago, it would not be uncommon to see a signficant retracement (38.2%, 50%) of the gains off the 2002 lows. If we see a 50% retracement for the S&P, we could see if fall all the way back to 980-1000 before climbing again.

To many, this would look like a savage bear market. But in actuality, it would be a relative normal occurrence.

In the longer-term (5-10 years), I see asset deflation (all asset classes in decline) in our future. But for the next few years, it wouldn't surprise me to see another leg up in the stock market while the real estate market is moribund---as we saw in the early 80s and the early 90s.

It looks like this year will be a retracement year for the stock market and the last hurrah for real estate. Then sometime early next year---as it becomes clear that real estate is in for tough sledding---we might see the stock market rise via asset allocation out of real estate and back into equities.

If this comes to pass, the folks piling in at the top in real estate will be hit quite hard just as those folks piling into tech/telecom stocks in late '99 and early '00.

What I also find curious is that these condo speculators seem to believe that the stock market is risky. Yes, buying tech stocks on 50% margin was very risky. They could fall 10-20-30% overnite. But still, you could always click your mouse and get out in an instant.

With real estate, most of these folks are leveraged at 90-95-100%. While real estate rarely falls 20-30% overnite, a tiny 10% decline would completely wipe out these folks. Plus, with rents nowhere close to meeting the costs of ownership in bubbly markets, they will be losing money every month in addition to seeing their investment dollars disappear.

At least with stocks, once you've bought them, you don't have to pay extra to keep them.

 
At 11:40 AM, Anonymous stockjock said...

I'm a little confused with the "stocks bad, real estate good" line of thinking. Clearly, the avg Joe is scared of stocks and has transferred his attention to real estate ("never goes down like the stock market").

Yes, stocks broadly fell from 3/00 to 10/02...30 months. But then they climbed from 10/02 to 3/05...30 months. In fact, the dowdy Dow gained 50%, the S&P 500 (which is what much of 401k money is indexed to) gained 57% and the Nasdaq gained 102%.

If you look at the major averages, it looks like stocks are still way down from 2000. And for tech/telecom, you'd be right. But many sectors (banks, smallcaps, energy, materials, cyclicals, brokers, emerging markets, hospitals/HMOs, etc., etc.) are well above their 2000 highs---even after the mini-crash of the past week.

And the broadest measure of US stocks---the Wilshire 5000---just made its all-time high in early March.

The weakness we are seeing in stocks right now may have further to go. But since many of the broadest measures hit their all-time highs just five weeks ago, it would not be uncommon to see a signficant retracement (38.2%, 50%) of the gains off the 2002 lows. If we see a 50% retracement for the S&P, we could see if fall all the way back to 980-1000 before climbing again.

To many, this would look like a savage bear market. But in actuality, it would be a relative normal occurrence.

In the longer-term (5-10 years), I see asset deflation (all asset classes in decline) in our future. But for the next few years, it wouldn't surprise me to see another leg up in the stock market while the real estate market is moribund---as we saw in the early 80s and the early 90s.

It looks like this year will be a retracement year for the stock market and the last hurrah for real estate. Then sometime early next year---as it becomes clear that real estate is in for tough sledding---we might see the stock market rise via asset allocation out of real estate and back into equities.

If this comes to pass, the folks piling in at the top in real estate will be hit quite hard just as those folks piling into tech/telecom stocks in late '99 and early '00.

What I also find curious is that these condo speculators seem to believe that the stock market is risky. Yes, buying tech stocks on 50% margin was very risky. They could fall 10-20-30% overnite. But still, you could always click your mouse and get out in an instant.

With real estate, most of these folks are leveraged at 90-95-100%. While real estate rarely falls 20-30% overnite, a tiny 10% decline would completely wipe out these folks. Plus, with rents nowhere close to meeting the costs of ownership in bubbly markets, they will be losing money every month in addition to seeing their investment dollars disappear.

At least with stocks, once you've bought them, you don't have to pay extra to keep them.

 
At 11:45 AM, Anonymous no waiting said...

Why do I have this suspicion that the former waiter in the article will be waiting tables again within 12 months?

 
At 12:46 PM, Anonymous Anonymous said...

The long term rates are staying low
while the short term rates that effect ARM loans are rising that could be effecting affordability already.
If we go into another recession with low interest rates it could
fuel more investment in realestate.
I do wonder where people are going to put there money next once the housing market softens and the stock market is doing poorly?

 
At 1:42 PM, Anonymous Anonymous said...

stockjock,

If I remember right, people in the late 1920s were speculating in stocks with 5% margin. The result of that, of course, is why we have 50% margin today (at least for the average joe).

Today we have people speculating in real estate with ZERO margin. The only factor in restraining prices at all is how much banks are willing to lend. Does this have any precedent? Robert Allen has come out with a "Nothing Down" book every 10 years or so, but I get the impression that, up to now, that was considered to be on the shady side of the street.

 
At 2:49 PM, Blogger John Law said...

there are practically no books on a real estate bust. I looked for books on past ones and there aren't any. not even one on Florida I could find.

quitting your job to do RE is the new daytrading.

 
At 3:06 PM, Anonymous Anonymous said...

(In fact, the dowdy Dow gained 50%, the S&P 500 (which is what much of 401k money is indexed to) gained 57% and the Nasdaq gained 102%.)

Since that, the US dollar has down 30% compare to other major currency. Therefore IMHO it calculated as the way below ( use Dow as an example) :
(11800 (Hi) - 7200 (L)) * 0.70 = 3700 * 0.7 = 2200.
or just 50 % * 0.70 = 35%.

 
At 3:19 PM, Anonymous Anonymous said...

stockjock
I like your comments. They resemble closely my opinion, even though I have been full time real estate speculator for many years now. But I want to bring to your attention, that future asset allocation may not go to stocks. I strongly feel next craze and "bubble" we will see with underappreciated asset: gold and maybe wider in commodities. I bet that next time Joe Sixpack will become gold bug or quit his job to become professional futures speculator.
I think I will be still in real estate picking up those run down properties.

 
At 3:33 PM, Blogger John Law said...

the new hot assest will be

savings
retirement savings
paying down debt
commodities, I hope.

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

(11800 (Hi) - 7200 (L)) * 0.70 = 3700 * 0.7 = 2200.
or just 50 % * 0.70 = 35%.

My God! I just make a big mistake,
and I have PHD in Math (Just a joke!). the number should calculate this way:
DOW:
10800 * 0.70 = 7500 and then
7500 - 7200 = 300.
So DOW really went up under 5%.

That is what DOW again from 2002 Low to 2005's Hi.

Dow closed at 10100 today, so the valuation of DOW is depreciated
10% during this 3 years.

 
At 4:22 PM, Anonymous Anonymous said...

this site is pretty scary and obviously one-sided and it's always easy to predict a decline of some magnitude. Being from nyc, and living the changing real estate conditions (rich people moving into manhattan, others leaving for brooklyn, queens and elsewhere where the prices are somewhat lower) it's hard to see the bubble bursting here any time soon.
when it's obvious to the entire world that nyc is the greatest and most dynamic city to be in, there is always a constant and growing demand. My point is, that the bubble might burst, but in hot and unique destination cities, other factors apply.

 
At 4:32 PM, Blogger Ben Jones said...

nyc,
For the record, I don't relish the idea of people losing money. Having lived through one of these episodes, I find it scary, too. Good luck and may there be no bubble in your neighborhood.

 
At 4:46 PM, Anonymous Anonymous said...

anon from nyc,

the scary thing for me is the friends telling me that RE will never go down and encourage me to buy!

they dont even believe even after shown the graphs of real estate prices from SC for the past 20 years!. they always come up with 'This time it is different!' . I just tell them so be it and wish them good luck.

My thing is, if I cant offord to pay on fixed interest loan for 30 years for a budgeted 30% of my salary or equivalent rent, it is not worth it!

I wish you good luck also (if you own)

 
At 5:04 PM, Blogger John Law said...

ask Trump about NY RE

 
At 5:22 PM, Anonymous Anonymous said...

Don't scoff at the entrepreneurial waiter. 5 years ago he would have been the CEO of a dotcom. Who says things are getting back to normal levels?

Seems like commodities would be an interesting place for some diversification. Any one look at the Rogers International Commodity Index Fund?

 
At 5:31 PM, Anonymous Anonymous said...

(when it's obvious to the entire world that nyc is the greatest and most dynamic city to be in, there is always a constant and growing demand.)

The meaning of terms like "greatest", "most dynamic", "hot", regarding cities, is as capricious as "fashionable" regarding clothing. A better term to describe New York, London, etc, is "glamourous", and what is glamourous today may be dowdy tomorrow.

Possible scenario: some sort of world-wide flu epidemic causes people to flee big cities, where risk of exposure is greatest. The new glamour spots might be secluded resorts like Aspen, with tight controls on who and what can enter. The only people left in New York are the people too poor to flee. The city goes bankrupt, the unions go on strike, the garbage piles up, crime is rampant. Not really that far-fetched in an age of modern telecommunications, when business don't really have to be located in big cities.

In any case, I would argue that Hong Kong and Shanghai are currently more "dynamic" than New York. The economny of New York is based on speculation, which is not a true source of long-term wealth, whereas the economies of Hong Kong and Shanghai are based on manufacturing, which is a source of long-term wealth. We can't fight World War III using derivatives and asset-backed securities, after all.

 
At 6:29 PM, Anonymous Anonymous said...

wow, I didn't realize that such doom and gloom scenarios exist!
nyc may no longer be the manufacturing mecca that it once was, I grant you that. Having lived here for my entire life (54 years), I can testify to the fact that it has never been safer, cleaner, more diverse and without a doubt more of magnet for all of the world's peoples with its unmatched culture, energy and the sense that it is the most welcoming place despite any flaws (which any city would have). For this reason, it's worth the price and more people want a piece of apple than ever before.
As an investor, you still must be smart. I buy in neighborhoods that are obviously coming up and I only buy quality units such as loft condos with high end appointments. I have never lost money. Twenty five years ago I bought in Soho and through the years (I can tell you how many times), agents would call to say now is the time to sell, the crash is coming..blah, blah. There wasn't one year that the price didn't rise. If you buy a intrinsically great property with great aesthetics, it will always have appeal. I believe in that and it has always worked. That place in Soho cost me 90,000 and I sold it for 2,000,000 (only because of a divorce). It would be around 4,000,000 (there's a reason to stay married!).
Anyway, I'm as scared as you guys are about bubbles and the like but if your smart and astute, you can still make money.

 
At 6:44 PM, Anonymous Anonymous said...

if real estate in new york never goes down, as you say, why doesnt every bank in the world allocate 100% of their capital to purchasing new york real estate?

 
At 6:52 PM, Anonymous Anonymous said...

I never said it never goes down. I said that it is necessary to be smart, astute and have an eye for a property that has real intrinsic value, i.e. something that always will have appeal.
Banks don't invest in ny because they're too busy losing their money in other places. on the other hand, I guarantee that all that property they own on Park Ave. has not hurt their balance sheets.

 
At 6:53 PM, Anonymous BKlawyer said...

Anon regarding NYC properties is correct. There are different classifications of people who will be affected by the bubble. The rich people living over the hill from me in La Jolla, CA generally have enough liquidity to survive any fluctuation in price/value and are insulated from a rise in mortgage payments. The rich can survive. That's why they're RICH.

However, the problems will be with the masses who:

1. sucked out their artificially-inflated equity to pay off consumer debt. Switching your credit card debt to a HELOC and calling it a "mortgage" doesn't make it anymore affordable;

2. are 1st time buyers on the 80/20+ loans with ARMs and Neg.Amort. loans who have absolutely no idea what type of loan product they have. They are especially vulnerable to drops in income when the husband gets laid off or the wife gets pregnant;

3. are the "stepper-uppers" who sold their $500k home and REALLY stretched to get into that $1.7 mill. property. But it's OK, their real estate agent and broker said their loan wouldn't adjust for 3 years.
. . .It's true soylent green IS people

 
At 6:59 PM, Anonymous Anonymous said...

I'd agree with the NYC guy that people who are smart and do their homework should be okay. That's how you'd want things to turn out in any field of work. Even in the article Ben posted, there are people who have done the research to make sure that their rents will cover their mortgages (and, again if they're smart, they have contingency plans and deep pockets in case prices fall or the rental market goes soft). The people who are going to get hit are the ones who're simply betting on double-digit price gains and can't even be bothered to look for tenants. Even Robert Kiyosaki warned against that mentality.

 
At 8:54 PM, Anonymous will said...

As a fellow NY'er I agree with Mr. Soho that things are more complex here as there is always gentrification which has been happening all over the city since the late 1970's. BUT there was the crash of '87 when coop prices collapsed all over the city.
Now, you have neighborhoods like Williamsburg/Ft. Greene, Clinton Hill in Brooklyn which are obviously gentrifying so the bubble effect is harder to figure out. However, in this Sundays Times there is an article about Bellerose Queens, where prices have gone up 100% in 4-5 years.
Bellrose is not any "cooler" than 5 years ago, and the people buying there aren't making double what they were 5 years ago. Looks a little bubbly.

http://www.nytimes.com/2005/04/17/realestate/17livi.html?

 
At 9:25 PM, Anonymous Anonymous said...

“I have never lost money. Twenty five years ago I bought in Soho and through the years (I can tell you how many times), agents would call to say now is the time to sell, the crash is coming..blah, blah. There wasn't one year that the price didn't rise.”

To this I would simply say that the economic and financial conditions that fostered the highly stable and dynamic real estate markets in NYC and the SF Bay Area over the last 25 years have very little in common with today’s housing bubble to which this blog is dedicated. The Great Credit Bubble (housing is only one part) has more to do with the incredibly complicated world of credit default swaps and other derivatives, CDO’s, hedge funds, leveraged speculation and a healthy does of reflation, artificial liquidity injection (via the Fed), fraudulent mortgage finance, and Asian savings propping up the dollar. This ain’t your daddy’s real-estate bull market!

I’ve lived in Northern California for 35+ years (some of the most stable and expensive real estate anywhere) and I’ve NEVER seen anything like the last 3 years. Like you, I’ve made some good money investing in real estate and agree it takes effort and skill to spot the good values. However, this classic bubble blow-off isn’t “more of the same” appreciation and you would benefit by taking a close look at some of the articles floating around in here.

 
At 9:37 PM, Anonymous Anonymous said...

I am the first to admit that New York is safer, cleaner, etc now than since at least the 60's. But real-estate, contrary to what many so-called investors seem to think, is a LONG-TERM investment. Rental prices reflect current glamourousness and desireability of New York as a place to live, but purchase prices reflect expectations of future glamourness and desireability, with the future extending for many decades to come. Consider yourself warned.

 
At 10:15 PM, Blogger John Law said...

NYC is the financial capital of the world, you think that when all these bubbles pop NYC won't go down too? I'm sorry, some of the highest prices are being paid by hedge fund managers. NYC will suffer similar declines as San Diego, Florida and LV. there is no new real estate economy for NYC. it's not special.

 
At 11:31 PM, Blogger dryfly said...

Soho & nyc...

The real issue isn't 'bubble' or 'no bubble' in NYC... it is 'leverage' and 'cost to carry'...

When the downturn comes - and it will - the folks who aren't highly levereaged or at least have manageable 'carry cost' won't suffer. They will hold on and wait any down turn out... Hell, they might not even know what their property would REALLY be worth 'cause the only way you know that is to put it up for sale and SELL IT... and they aren't doing that.

But many OTHER people are either over leveraged or are financed through ARMs & I/O balloon financing... these folks are in deep trouble when the crash comes... even if they own good property... they could easily be caught in a cash squeeze and forced out if they can't carry their property through the down period.

 
At 11:33 PM, Anonymous Anonymous said...

Yeap ! Seems the real estate market in Florida, is just ripe for DAY TRADING. Hurry quit your job for Real Estate Day Trading. No experience needed and no brains either.

 
At 3:30 AM, Anonymous Anonymous said...

I just got a certified letter stating my rental in Coral Springs florida was converting to condominiums...what's a real estate bear to do?


"Just When I thought I was out, they pull me back in" ... Michael Corleone

 
At 5:22 AM, Blogger Sunny said...

There are sectors of the RE market which will go down (the overleveraged mainly). But I agree with Soho that if you are smart and go with properties with universal, immutable appeal there is less of a chance to get burned.

The exclusive attitude regarding NYC has nothing to do with the viability of a RE investment, however. If anything, that capricious sentiment might be one reason not to invest for the long term (the only way to invest in anything, RE or equities).

 

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