Sunday, April 17, 2005

Newspapers Change Their Tune

Three newspaper editorials have titles that tell the story of a changing attitude toward real estate. "In Real Estate Fever, More Signs of Sickness", in the Washington post. "Sheer Speculation" in Signs On San Diego. "Pop goes a market?", in the Chicago Tribune.

All three share a common theme. Speculators that are spread thin and loving it. More economists that are worried. And a writer that is taking a skeptical view.

In Washington, "Jennifer Tyler isn't worried. She just took out a 10-year, interest-only loan to keep the monthly payments affordable. Anything can happen in 10 years, I can move, I can re-finance. Anyway, the house will almost certainly appreciate, too."

San Diego, "You're not going to lose money on property," said one speculator. "More than 40 percent of the 120 units in Park Boulevard West condo complex are non-owner occupied. At the 86-unit Crown Bay project, roughly half of the property tax bills are mailed to addresses outside the complex. At the 211-unit Horizons tower, it's about about 35 percent."

Chicago, "The facts of investing life belie the entitlement mentality. 'People think life is too short and they deserve to be part of a society that becomes richer and richer," Werner F.M. De Bondt said.

"Raymond James analyst Rick Murray wrote in research note last week, 'Investment sales have been a key driver of the housing market in the past few quarters and, in fact, the past two to three years. With nearly 12 million empty housing units in the U.S., we find it implausible to conclude that there is a housing shortage of the magnitude that would drive the recent levels of price escalation.'"

"Even the National Association of Realtors, usually an industry cheerleader, is cautioning that real estate is a long-term investment." The worm has turned dear reader, everybody fasten your seatbelts.

21 Comments:

At 10:51 AM, Blogger John Law said...

(real estate is a long-term investment)

I've come to the realization that only gold and silver are true long-term investments. silver can tarnish(or varnish I never remember) but it's still pretty good and been used for years. my grandfather gave me a US silver dollar from 1884. gold basically doesn't react with anything. I think arsenic is the only thing that it reacts too. maybe that's why my HS chem teacher said we shouldn't have gone off the gold standard.

saying all that, I still think stocks, bonds, RE and the like are good investments are certain times. not for the true long-term though.

 
At 10:55 AM, Blogger Ben Jones said...

John,
Silver turns green, but that won't hurt the value. Now. if I can remember where I buried those Krugerands.

 
At 10:55 AM, Anonymous Anonymous said...

Ben I'll just repeat what others have said: This is an awesome site! I'm just totally addicted to the news and analysis found here. Thanks. Thanks. Thanks.

The Washington woman took the i/o loan because it saved her $200 a month. I think that indicates the sensitivity level in her budget. What happens when the water heater blows, the roof leaks, a pipe breaks, the taxes are increased or any of life's multitude of unexpected expenses takes place, etc. It's a get in at any price mentality. And Capitol Hill aint no Shaingra la either, its still a dicey, but partly regentrified neighborhood.

Don't know when, but the real estate mantra will at some point turn from location, location, location to amortization, amortization, amortization.

 
At 11:01 AM, Blogger John Law said...

I visited san diego in 03 and 04 and I just realized now that there were a lot of construction I didn't think much about. I remember building near what I think was called harbor drive. next to my hotel was building.

 
At 11:11 AM, Blogger Ben Jones said...

John,
Professor Piggington has done a good job of tracking SD. The condo game there is doomed.

 
At 11:32 AM, Blogger Dan said...

Ben,

I found a buyer for my downtown Minneapolis condo. That place is doomed as well due to over construction.

However, I'd like to do a 1031 exchange which requires me to find another property in order to avoid paying capital gains.

Any suggestion where (domestic real estate) I should invest?

Dan

 
At 11:32 AM, Anonymous Anonymous said...

That r. jones analyst is the one person i've heard in the industry make the right call... in this crazy bubble, demand is not being driven by new immigrants or a significant increase in population or household formation... this market is being driven by speculators... i read the other day that nearly 25% of all home purchases in 2004 were for investment purposes... it doesn't get any clearer than that...

 
At 11:33 AM, Anonymous lesshairnow said...

How do you know where you're near the apex of a bubble? I consult something I call my "Korean Barber Indicator".

Back in the good ol' dotcom days, I ran a biz in downtown SF. I got my hair cut by a Korean woman in her late 50s who seemed fascinated by money. She always asked me, "How's business?". She would always tell me, "You very smart." Guess she wanted a big tip.

Most of here clientele were investment bankers and lawyers and other biz-types, many of whom were feeding at the dotcom trough. By early '99, every time I got my hair cut she would be on the phone shouting orders (to be heard over the blowdryer) to her broker, "Buy Healtheon, Buy Cisco", etc.

That's when I knew we were near the end. In early 2000, i sold my company (to a dotcom ironically) and stopped getting my hair cut downtown.

Recently, this past Xmas, I was downtown and decided to get my hair cut. I stopped by the old salon and, sure enough, my Korean barber was there. I told her that I had sold my business a few years ago. "You very smart," she told me.

I asked her how the stock game was going. "No more," she said, "I buy real estate now." She plans to buy a condo, make a few hundred grand, and retire.

When my Korean barber gets in the real estate game, it's as good as over. She's in. It's over.

 
At 11:43 AM, Blogger Ben Jones said...

Dan,
If the US consumer is going to slow down, I can't think of a region that won't suffer. The system is hyper-leveraged.

Depending on the tax hit you are facing, it may be better to sit on cash. Sorry I don't have a solution to your dilemma, but I have been all over north America and prices seem high everywhere. Congrats on the sale!

lesshairnow,
Classic tale, thanks for posting that! "You very smart" Ha!

 
At 11:46 AM, Anonymous baybee said...

Folks who believe that the current housing mania has something to do with supply and demand may want to re-read that Rick Murray item over and over again:

"Murray believes 5.1 million vacant housing units are either for rent or for sale across the country. An additional 6.5 million units are vacant for part of the year as second homes. "With nearly 12 million empty housing units in the U.S.," he said, "we find it implausible to conclude that there is a housing shortage of the magnitude that would drive the recent levels of price escalation."

If you factor in 3 persons per dwelling, this means there is empty housing enough in the US to accommodate 36 million people---over 10 years worth of population growth (at current rates) even if not one new unit of housing gets built.

Insane.

Saw a TV report last week in SFBayArea on crazy housing price escalation in Walnut Creek (bedroom community 35 miles east of SF). Interviewer talked to couple and their realtor who bought their tract home for $450K eight years ago and is selling for $1M today. They plan to buy a 1.5M home with the proceeds. The question inevitably came up about what is driving this boom. The couple and the realtor kinda hemmed and hawed for a while. Finally they said, almost in unison, "Guess it's supply and demand."

Guess again. That same day, the paper reported that apt/townhome rentals in the same area were at a 20-year high in terms of vacancies. Many of the apt complexes were offering 3-month free rent and offering finder's fees for anyone locating a tenant. Plenty of supply---particularly of fools willing to chase prices ever higher.

 
At 11:50 AM, Blogger Ben Jones said...

baybee,
If you pay attention to the reporting coming out of SF, they seem to know its over, but are afraid to state the obvious.

 
At 11:58 AM, Anonymous Anonymous said...

i'd just like to say that i think that it's very important for people to realize that the existing home sales total number now includes condo sales... last year, this was not the case... and in my mind, it's pretty obvious why... speculators are driving this market... and they are flipping condos like there's no tomorrow...

 
At 2:57 PM, Anonymous Anonymous said...

It is good to see somebody in Chicago admitting to
the market being rather bubbly here. My rent is not going up for the fourth year in a row. I share a large 3 bedroom/ two full bath apartment for $1000 a month, heat, water included. At $500 a month it would barely cover the Condo Association fee, utilities, taxes and parking. There a way too many unoccupied or barely occupied condos in Chicago.

 
At 3:03 PM, Blogger John Law said...

supply and demand may be an issue, just not like we thought. so many people must have 4 and 5 properties that supply is constrained because ofto many speculators. there are too many houses being held by investors so the houses remaining are fought over.

 
At 3:29 PM, Anonymous BoyInTheBubble said...

I visited san diego in 03 and 04 and I just realized now that there were a lot of construction I didn't think much about. I remember building near what I think was called harbor drive. next to my hotel was building.

I was there just last weekend. Within two blocks of the new ballpark are no fewer than SIX multi-story condo developments under construction, and that doesn't include several parcels of vacant land in the same area. This was JUST near the ballpark, ignoring the rest of downtown. I walked by an FSBO open house asking $730K for a very ordinary-looking 2br/2ba condo. Downtown is absolutely plastered with condo sales and real-estate agent offices.

SD today must be what Hong Kong was like in 1997. (Hong Kong prices dropped about 75% in 3-4 years. They've recovered a little, but not much.)

 
At 4:12 PM, Anonymous BoyInTheBubble said...

It is good to see somebody in Chicago admitting to
the market being rather bubbly here. My rent is not going up for the fourth year in a row. I share a large 3 bedroom/ two full bath apartment for $1000 a month, heat, water included. At $500 a month it would barely cover the Condo Association fee, utilities, taxes and parking. There a way too many unoccupied or barely occupied condos in Chicago.


Just curious, what neighborhood? I live in Chicago too. I can believe that for some parts of the North Side but if it's anywhere near the Gold Coast I wanna be your roomamate. :)

 
At 8:58 PM, Blogger Sunny said...

If anything, newspapers will probably begin vigorously reporting dour news as it comes along and will help the bubble pop to heighten the drama of it all. Keeps us watching and reading.

 
At 9:14 PM, Blogger Ben Jones said...

(SD today must be what Hong Kong was like in 1997)

The condo market is that overdone for sure.

 
At 5:35 AM, Blogger Sunny said...

To lesshairnow,

I hope you don't mind that I cut and pasted your Korean Barber anecdote to my blog on Florida real estate. Let me know if you don't want it there, and I'll remove it.

Sunny

 
At 6:54 AM, Anonymous Anonymous said...

Kind of funny about Korean barber. In Northern Virgina many Koreans are buying up condo as investment. There is this one apartment units converted to condo unit about half of 100+ condo units were bought by Koreans and Korean broker. Price ranges from 400k for 1bed/1bath to 750k for 3bed/bath. Koreans live in very close knit community here. Realtors are fuming the speculation by telling them this is sure thing. I still remember many folks getting into Internet and Telecom stock before the bust. But many believe that realestate is different.

 
At 10:19 AM, Anonymous Anonymous said...

BoyInTheBubble said...

I live in Ravenwood close the EL and the Metra. I park on street for free. I am 1700 west about 10 blocks from the lake. Believe me I am sure you can find condo rentals close to the lake for not much more or perhaps even less.

 

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