Losing Sleep In The Housing Bubble
The big media outlets are getting excited about the housing bubble these days. Many of the articles are like this one at MSNBC, which was provided by a reader. But what I thought was interesting is that the couple made a little money and then dove right back in.
"After attending a $3,000 real estate seminar the Materas bought a little bungalow on Long Island. They sold it two months later and made a 50 percent profit. Since then, the couple has taken equity from their own home and invested in a half dozen properties now worth over $1 million, much of it pre-construction properties in red hot Florida developments."
"Florida, Arizona and Vegas, that’s where everybody else is going too. It’s kind of like the stock market, really." That from an RE investment club guy. Remember all those stock clubs? What ever happened to them?
This quote should make speculators think twice. "'Every time you close on a deal, you lie in bed worrying at night,' said Paul Matera. 'I don’t know how my wife sleeps at night.'"
17 Comments:
They dove back in because speculation is an addiction. Just ask the dot com investors. Once you've tasted easy money, you will forever be searching for more of it-until you lose your shirt.
The sad thing about the MSNBC article is that poor Paul know's he is speculating and he's doing it anyway, just like a lot of folks, in hopes he will be able to "find a chair" once the music stops. He also sounds like a prime candidate to get blown to bits once the market turns. Pyramiding gains at the top never works!
In fact I talked to a friend of mine today who is a mortgage broker in OC and he was telling me I should do some stuff in Arizona or Reno. His belief is that "it's free money" so why not use it to your advantage. He says "you can't go wrong" if things slow down " you can sell in a year and still make a profit". Where have I heard this before! This is coming from someone who doesn't want to trade up to a bigger house in OC b/c they can't afford the property taxes on the "larger estate". OH MY!
Hey Ben,
It's nice to see all this activity on your blog - keep up the good work - I hope to be reading about you soon from some mainstream news sources - please let us know or send mail.
Reminds me of the whole Dan Rather - 60 Minutes - Bush military record blog phenomenon.
There are some important differences between RE and stocks that make it a lot MORE risky.
1) RE is typically highly leveraged. So you could not only lose the money you have, but owe a lot more if your equity goes negative.
2)Brokerages limit margin debt to 50% of your portfolio then call the margin if you start to go into negative territory. There are no such stop-loss mechanisms in RE.
3) RE is a lot less liquid than stocks. So if prices start to tumble your stuck unless you discount the property for a huge loss.
IMO people who think that RE is less risky than stocks are not thinking. My advice: always follow the financial fundamentals.
For investors, if you buy a piece of real estate make sure that it is in a decent market and your rents can easily cover all of your expenses, with some cushion to allow for vacancies. If you can find that magic formula then go for it.
For home owners, don't buy unless it is about the same as it would cost to rent a comparable home in that area (using a traditional 30 year fixed rate mortgage). Be patient. The market will return to its traditional support level. That support level is where rents and mortgages are about the same.
As for me, I won't buy up to a bigger house because my mortgage is paid for (at age 38). I don't want to pay more in propery taxes and I don't want no freckin mortgage!
The only good debt is debt that pays for itself. And a house is really only a shelter for crying out load!
Hi Tim,
(I hope to be reading about you soon from some mainstream news sources)
We'll see. My approach doesn't jive with big media, but sentiment is changing. If anyone wants to contact me just leave a post. I will probably post a public email soon. I hope I can make as big an impact as you suggest!
Anon,
(I don't want to pay more in propery taxes and I don't want no freckin mortgage!)
A lot to be said for staying put these days.
John,
(one person thinks lenders are going to get even MORE creative when people are struggling with house payments)
Wasn't that the laugh of the decade?!
Great posts all..Ben
Hey Ben - want a gmail account for your public email? I can shoot you one if you want - send me email at van.housing@gmail.com
John Law:
I'm an American who has been living in Japan since 1995. I can tell you the after-effects of the RE bubble are just as you describe. Example: My Japanese sister in law and her husband bought a townhouse in 1997 for 40 million yen (about US$370,000). They are (unfortunately) getting divorced this year, and will sell their place. Its assessed value today? 18 million yen (about US$167,000). With mortgage rates at about 2.5% fixed.
Anybody who thinks this can't happen in the US is living in a dreamworld. It can and it will.
...and to put the Japanese prices into perspective, they peaked about 90/91, so your sister in law bought when the market had already fallen, slowly but steadily, for several years. This year prices in Tokyo seem to have stabilized, but they continue to fall everywhere else in Japan.
This is something to consider for anyone who is thinking there will be tremendous RE "bargins" in 18 months or so. For the very reasons that a poster identified above (lack of liquidity etc.) the overall RE market, while potentially dangerous to people's net worth, has never shown a tendancy for *sharp* breaks - people tend to hold on to what they have, restraining the supply on the market.
To put it another way, housing is in most cases providing at least some aspect of shelter ie. it is in most cases not purely speculation on capital gain, and in a declining market can't be liquified without incurring an even greater penalty (transactional costs) and presumeably having to move to rental digs. Selling stocks at a loss is punishing, but it doesn't disrupt your life - selling your house does. Most people will take a large paper loss before they are willing to take a real loss on their property, and there has to be a reason to do it - job loss, divorce, illness, whatever.
So if history is any guide, the real "bargins" are potentially 5 to 10 years out as the current nuttieness is swept away and coinciding with baby boomers trying to liquidate some part of their assets . Waves in RE are thick and massive and and you have to paddle *way* out to sea to get them.
I think the market correction is going to be differenet this time because
a) everyone is so highly leveraged (Was Japan usings ARMS and interest only mortgages ?)
b) US homeowners have no savings
c) the interest rate correction is going to be severe because right now interest rates are near zero
d) probably 50% of the market is held for speculation in one way or another
e) there is going to be a credit crisis too.
I don't think Japan had all these factors.
I couldn't say how leveraged the Japanese were, and they definitely had a higher rate of savings. On the other hand they also introduced *100 year amortizations* (to help *affordability* of course) on residential property, and had a commercial real estate collapse and a domestic banking crisis as well. And 3 recessions since then.
Quantifying 'speculation' is pretty tricky, but what matters is the relative weighting of speculation within an asset class. Because of the utility of housing relative to, say, stock certificates, housing (at least in mature markets) has a relative tendancy towards stability - it takes years to get bid up, and years to come back down again. It takes years to get a supply in the pipe, and years to liquidate that supply.
I guess it also depends on what you think a "bargin" is. Could the last 5 years of Californian appreciation be wiped out in 18 months? Anything's possible, but it implies economic circumstances so catastrophic and disruptive you'd have to have a lot of courage to decide to get *in* to the market. I bet that surveying the landscape after such events (which would presumeably include scenes of people fighing one another for dogs to roast in the park, and converting burned-out Hummers into small dwellings) most of us would prefer to sit on our cash.
(In response to pb:
Most people will take a large paper loss before they are willing to take a real loss on their property, and there has to be a reason to do it - job loss, divorce, illness, whatever.
)
divorce: one in two marriages ebnd up in divorce
job loss: job loss or job changes are very common in US
illness: aging baby boomers will tend to get sick more; lack of savings, rising interest rates, and historically high debt loads will likely have further impact
I would be intertested on articles/threads on the Vacation hOme/Time Share industry. This industry seems to be on the most extreme thin edge of the RE bubble. Most buyers off resort properties justify doing so because they see it as an investment.
I am skier. It is shocking to see the number condos built at a resort like Steamboat Co. in the last 5 years The Ski Resort industry is dominated by a handful of large players. It seems that the publicly traded resort stocks have become nothing more than highly leveraged fronts providing the infastructure, ski lifts, snow grooming, staff...., while all the real wealth is being extracted out the backdoor through real estate speculation and shipped out of state. Just like an Old West Mining town.
All the while the number of skiers is flat or in decline and certainly aging. If the owners of a Ski Condo are aproaching 70 they better consider selling or plan on leaving it to their kids. That could apply to lots of properties in the next ten years. Also what is going to happen to Real Estate values if the Resort goes bust? Lots of these resorts are on shakey financial grounds?
I'd be a buyer of a Deer Valley ski-in ski-out condo at $150K. Anything more than and it's better to pay $2,500 at a five star resort for that week of skiing I'd get in there anyway.
Don't get me wrong - I think that prices will retreat, and quite a bit. Nationally I would expect something at least on the order of what was seen in the early 90's. But I think that unless we see sharp rise in unemployment associated with an generalized economic melt-down I believe the bursting of the bubble will not be as swift as some might think. People have been quoting the 50% divorce rate number for as long as I can remember, and while health care strains are increasing they are doing so gradually. Strictly speaking the baby boomers haven't even begun to retire yet.
Of course, things are different this time (they always are: as someone said history doesn't repeat, but it rhymes.) The savings rate is abysmal, so people who do get into trouble have less of a cushion, and the real "bubble" is the credit market, which seems totally out of control. But again I come back to the idea that if housing values really plummet the way some think they will it will be within the context of an economic disaster where most of us will be looking for bargins on 9mm ammunition, not housing. My hat is off to those who will have the courage to step into a sharply declining RE market. How do you know when you've hit bottom?
I note that even the most bullish bulls (Harry Dent, Lereah of the NAR) seem to believe that the party ends around 2009. Dent (hsdent.com), who believes the stock market will quintuple by 2009 due to his cockamamie "demographics is destiny" logic, sees a major recession/depression after 2009. And the NAR's Lereah has a new book out which talks about the boom lasting 'til 2009 as well---also something to do with demographics.
My take: if the most bullish folks believe that catastrophe lies dead ahead after a few more years of extraordinary good times, wouldn't we likely see the markets (both RE and stock) begin to discount this possibility well ahead (say 2007)?
If so, look for RE to crest soon and one more asset allocation back to equities for 2006-2007 before everything goes down together. The debt bomb can be delayed but not denied.
i don't buy the strong demand due to increasing demographics... that's non-sense... according to the NAR, nearly 25% of all homes bought in 2004 were soley for investment purposes... which means speculators, my friend... artifical demand...
im seeing "investors" purchase properties with no reserve money (from the income) for repairs etc. Rents now are at 100% or so of the purchase price. Not a great investment imho...speculation is very high now..
how do you know when the top is here, when your cab driver tells you real estate tips...AND is RIGHT
how do you know when the bottom is done, when owners come to settlement with there check book..
Post a Comment
<< Home