Tuesday, May 03, 2005

"As Hot As It Can Possibly Be"

One little barrier island in Maryland has seen land prices rise to the point that almost nothing can be built but condos. "'A concern has been [that] commercial usages, restaurants and the like , have been replaced with condo projects,' said Mayor James N. Mathias Jr."

"Geoffrey Robbins, a dentist would have kept Atlantic Cosmetic and Family Dentistry in Ocean City, but when he was ready to expand, he couldn't afford to buy additional land for parking. So he moved his practice to West Ocean City in January."

"'You can't pay a million dollars for a parking lot,' Robbins said. 'We were faced with either staying where we were and not doing what we had wanted to do' or moving out of town."

One speculator doesn't see a downside. Norman Gilden said, "With land and property, what is the worst thing you'll have to do? You'll have to sell it, and you're not going to sell it for a loss."


At 4:56 PM, Blogger SoldAtThePeak said...

The article is actually referring to Ocean City, Maryland, not Florida. The Sun-Sentinel source confused me, too.

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

Had a question.
I saw a few reports mentioned only 17% of homebuyers in Los Angeles County can afford to purchase the median priced home. In Orange County, the percentage is a miniscule 11%.

This is referring to 20% download payment with 30 years fixed rates
or ARMs too, anyone knows how this number comes out ?

Also, if the number is so low why so many people still can get loan,
if the affordability is really only 11% then the market should slow down by now.

At 5:14 PM, Anonymous Anonymous said...

I'm glad I bought last year. Pretty much anyone born in this generation better buy now or they'll forever be priced out of the market.

At 5:17 PM, Anonymous Anonymous said...

It's based on 20% Down and 80% 30 year Fixed rate mortgage.

At 5:18 PM, Anonymous Anonymous said...

EEEK... A Troll...

At 5:21 PM, Blogger SoldAtThePeak said...

I hope this isn't the same troll that's been lurking all day, but I'll bite. I used to think that, too: "Better buy now!" So, I did, in fall of 2002. And now after a 50% gain, my wife and I are selling and moving into a rental. (Turning paper gains into real gains!) The simple problem with your statement is that it says that no one will be able to afford houses in the future. If that's true, then who are current homeowners going to sell to? I have to believe that there will always be first-time buyers, and if they can't afford to buy, they won't. The demand will dry up, so the price will have to drop until the supply meets the demand. That's the fundamental basis of the bubble argument. Of course there's lots of other supporting data but it comes down to: Who is going to buy this house and at what price?

At 5:29 PM, Anonymous Anonymous said...

Why are we being innundated with Trolls today ? Isn't it funny that the housing bulls have to try to crash our party ? If I didn't know better, I'd say there is some jealousy going on.

At 5:39 PM, Anonymous Anonymous said...

5:29 Anon.

Yes...too many trolls showing up today. By the way...the 11% affordability in Orange County is based on 20% down 30 year fixed.

At 5:47 PM, Anonymous Anonymous said...


Good point, if RE becomes too expensive no one will be able to afford it, therefor who would they sell it to in order to get their cash out.

At 5:50 PM, Anonymous Rob said...

The trolls.

Its all Bens fault.

He landed a nice editorial on financialsense.com

At 6:14 PM, Anonymous Anonymous said...

Today, I recieved notice that my apartment complex in Folsom, CA is going condo. One other complex I know of in Folsom is also going condo very soon.

And if you are not familiar with Folsom, we are just east of Sacramento and a very hot housing market.

What effect does this have on the local bubble? Of course, this is happening in many other locales as well.

1) As the number of rental units decreases, the cost of rent will likely increase as we renters have fewer choices. The higher rents will help justify higher purchase prices.

2) This will also have a bigger psychological effect on many people. They may just give in and buy an overpriced condo fearing that they are getting priced-out.

So, even if the bubble should deflate/burst, higher rents will keep many investors solvent longer.

Can renters expect to remain on the "sidelines" of this whole mess, or will we begin funding the bubble through higher rents?

At 6:21 PM, Anonymous Anonymous said...

6:14 is a troll.

At 6:27 PM, Anonymous RentBoy said...

Yeah -- congrats to Ben for the piece on FSO, a truly great center of financial thought and analysis. FSO has helped me make a lot of money over the five years.

The "buy now or you'll be locked out forever" refrain comes up at the tail end of every RE boom, esp. in CA, where I grew up. It's pretty damn good indicator of the end. It's there to draw the greater fool who got stuck at the end of the line. Pure BS.

So, there will be no buyers of homes at the entry-level in five years? Yeah right. Idiots will tend to believe such a stupid economic argument, but no one with a modicum of training and the ability to part from the madding crowd will.

Besides, how exactly can just about anybody, except maybe a new immigrant from Chiapas, be locked out with zero-down or 110% LTV's....? I've even been reading about $200-$300K loans to undocumented immigrants here in Chicago -- anything to keep the Easy Al Credit Balloon in the air......

RE asset prices are headed for a serious fall, back to the regression line for their typical growth rate (barely ahead of inflation). Such has happened with EVERY single above trend RE boom around the world since decent economic numbers have been kept (about a century). Check out Grantham, Mayo, Van Otterloo's research on this score.

At 6:28 PM, Anonymous Anonymous said...

I see it differently. Condo conversions are usually done by investors that are anxious to get out. They are not very well timed and they tend to flood the market with low-price units all at once.

It is price-efficiency at work (bubble is price-inefficiency). We should welcome such development.

At 6:33 PM, Anonymous Anonymous said...

6:14 Anonymous,

I am also in Folsom. I considered moving to Roseville but found all the new apartments built in the last few years are

At 6:39 PM, Anonymous Anonymous said...

6:14 Anonymous,

Sorry, first post and hit the button too early.

I am also in Folsom. I considered moving to Roseville but found all the new apartments built in the last few years are converting. A few already have. After quite a bit of research, I found that this WAS the plan all along. The builders build new apartment complexes that look like condos. They then fill the place up and slap a notice of conversion on the residents. They then get to walk away with 100% profit when compared to the value if valued as apartments.

Apartments are generally valued at 10x rent per unit. They have been selling the condos at 200 grand on up. The owners of the condos get to pay the upkeep and HOA dues and the builders walk away free and clear with a large profit.

I am curious, what apartment complexes in Folsom are you aware of that are converting?

You can contact me at dempire1@yahoo.com.

At 6:48 PM, Blogger deb said...

Two comments:

All these condo conversions, etc., will result in more investors with units to rent out. There are still the same number of households, so somewhere the math has got to even out. If someone is going to owner occupy a conversion, then they have vacated something else, and so on.

Affordability. I am proud to say that I live in LA, ranked as the least affordable place in the USA by the Wells Fargo Housing Opportunity Index. On that index LA rates a whopping 5.2!!! This means that 5.2% of the homes are affordable to a household with the median income. The median income in LA is $53,500. Median price (as of Q4 2004 $415,000. No bubble here!!!


At 6:51 PM, Anonymous jl said...

6:14 Anon, good question. Condo conversion is the hot thing right now.

Overall, it shouldn't change the choice for renters. A conversion is neutral in term of vacancy rate. If the buyer of the conversion is a first time buyer, he will vacate a rental somewhere else. If he is an investor, he should put the condo back on the rental market.

Bottom line, rents will be determine by the vacancy rate. Vacancy rates are rather high and new units are being built at a furious pace. So I don't see rents increasing faster than inflation.

At 6:54 PM, Blogger goleta said...

NAHB has a different ranking:


our median home price passed $1.25M last year .

At 6:58 PM, Anonymous Anonymous said...

"I am proud to say that I live in LA, ranked as the least affordable place in the USA by the Wells Fargo Housing Opportunity Index. On that index LA rates a whopping 5.2!!! This means that 5.2% of the homes are affordable to a household with the median income. The median income in LA is $53,500. Median price (as of Q4 2004 $415,000. No bubble here!!!"

Egad! If my area (Monterey/Carmel) was big enough to be ranked the affordability index would 1/2 of yours! The mean household income is roughly the same $50K-$55K while houses average $800K!

Salinas (nearby farm city) is second on the list behind LA, and it's much cheaper than Monterey proper.


At 6:59 PM, Anonymous Paul said...

Orange County Register: Experts see risk in home prices

- - - - -
"What's the chance that Orange County home prices will be lower two years from now?

Economists at PMI say it's exactly 43.1 percent."
- - - - -

PMI Group: Economic and Real Estate Trends

MGIC: Market Trend Analysis

At 7:00 PM, Anonymous Paul said...

Just to clarify, that last post was in regards to Orange County, CA. (not FL)

At 7:02 PM, Blogger burbanman said...

I liken peoples' refusal to recognize this bubble to the same desensitization city-dwellers get with regard to the homeless.


Check out this one...

"upgraded" to full stucco and crammed onto a 50x124 lot...nearly $7k in taxes per year

At 7:18 PM, Anonymous Anonymous said...

6:39 Anon,

Condo conversions in Folsom:

Lakeridge, Ashton Place, Sherwood and Canyon Terrace. I believe combined, this represents a little over 1000 units. Lakeridge is going soon and the other three later on, but all at roughly the same time. Provided the city agrees.

At 7:36 PM, Anonymous Anonymous said...

I was telling a friend a few months ago that we had not seen the condo conversions yet and that we were not at the end of the cycle until we do. Now they are everywhere. We are at the end, as soon as we burn thru the condo conversions there is no cheaper alternative to housing.

First the houses get priced out, then the next affordable alternative is existing and new condos, once those are no longer affordable people look to the next affordable housing solution - condo conversions, after that there is nothing cheaper unless you consider mobile homes.

It happened at the end of the cycle in the 1970's and the 1980's, then we didn't see any conversions until now - the end of the 2000's cycle.

This market will be over with before many of the conversions in the pipeline get finished or off the ground.

At 8:04 PM, Anonymous Anonymous said...


6:14 is not a troll. Just asking a question. I don't propose to be an RE expert. Why not dispense with the troll hunt and just respond with good sound data, or not at all. Neither people nor trolls can argue with that.

At 8:09 PM, Anonymous Anonymous said...

during the last not really a bubble bubble ('87-90) a friend bought a condo and once the market hit the skids they turned them into apartments.

he got screwed.

At 8:26 PM, Anonymous Anonymous said...

Two things:

1. What happens to occupancy rates when apartments are converted to condos? Do the owners let units sit empty some months (waiting for appreciation or a quick flip)? Do the units sit around during foreclosures?

2. In my experience those who complain about trolls are often cranky old men with a fossilized opinions. The TrollGuards(tm) can't imagine that anyone would think differently than they do. Many ignorant or innocent people get chased away this way.

At 9:05 PM, Anonymous Anonymous said...

In my experience trolls are small minded people looking for an audience. We've got a nice housing bubble discussion going here and we really don't need to be told "buy before its too late" or "real estate never goes down". Such are the fossilized thoughts of people who don't read and can't think.

Unfortunately, we live in the new RE era, powered by leverage, IOs, ARMS and silly, silly buyers. In this era, RE is going to go down and the only thing that is happening too late is SELLING.


At 9:31 PM, Anonymous Anonymous said...

Anon 9:05 missed the point anon 8:26 was trying to make.

People are suffering from a mix of conventional RE wisdom and silly NEW (and likely bad) theories.

NO ONE KNOWS HOW THIS WILL TURN OUT BECASE IT HAS NEVER BEEN TRIED BEFORE! It could end with either a little or a lot of pain. Lots of naive first time buyers have been lured into a fantasy. It is too good to be true but those who disagree aren't trolling.

Not even close to touche'

At 9:38 PM, Anonymous Anonymous said...


I didn't think you were a troll either... 6:21 was out of line...

6:14 Stay with the blog, read your 8:04 post, you sound like a reasonable and inteligent person.

At 9:41 PM, Anonymous Anonymous said...

I didn't miss anything about RE. I was making a point about people on this blog being able to think in new ways, ie being able to see a set of circumstances that might lead to a price decline in spite of one never having occurred before.

So what if we've never seen one before ? That doesn't mean we can't survey our situation and predict that one is likely to occur !

All the factors are present"

a) consumer are wallowing in debt
b) the only thing keeping them liquid is their RE holdings
c) RE prices have lost grounding owners earning power and equivalent rents
d) the mortgage industry is a mess
e) the junk bond market is about to get saturated by GM
f) the country is running massive spending and trade deficits
g) Asia at some point is going to get its fill of supporting the US deficits.
h) RE is presently being priced with historically low interest rates
i) inflation is present/building and the Fed has vowed to fight it.
j) anyone who has any chance of buying a house has already bought one (or two)

Take that information and piece it together. Please explain to me how RE could rise 10% this year and another 10% next year.

There is nothing new about economic common sense. You can take all the bubbles that occured since 1700 and analyze them and arrive at one conclusion: people started buying assets with debt because they thought that some one else would pay more for them later in spite of the fundamentals not supporting that purchase.

Unfortunately that is the present situation in the RE market.

At 10:18 PM, Blogger John Law said...

the mobile home thingie is happening in Cali.

At 10:59 PM, Blogger John Law said...

(There is nothing new about economic common sense. You can take all the bubbles that occured since 1700)

you could say since the minute settlers signed up to go to america as part of joint-stock companies they were speculating in America.

At 4:59 AM, Anonymous Anonymous said...

hey.... speculators are people too... they have feelings just like everyone else... but... eeek! a troll!

At 5:55 AM, Anonymous Anonymous said...

Hold on a second Ben Jones…Ocean City is not "one little barrier island in Maryland." Ocean City sees millions of tourists each year and is by far the largest of just a handful of beaches for the entire Baltimore/Washington area. Coastal real estate is scarce in the B/W area and the drastic price increases were a great indicator for a shrewd investor, because coastal property prices hit the stratosphere at least 18 months before mainland property took off.

Also, if everyone is talking about a bubble, can it truly be a bubble?

At 6:37 AM, Anonymous Anonymous said...

Ocean City's been my family vacation spot for many years. Last year I took my family to Vegas instead. About $1500 I spent in Vegas for family of four including air fare and room at Paris Hotel for 2 nites was cheaper than staying in Ocean City for 4 nights. New Holiday Inn with suite in Ocean City cost $369 plus 9% room tax per night during peak season.

Many Condos prices doubled within last few years in Ocean City. One condo on the Bayside starts at upper 500's to million. It used be that you could buy a condo within Ocean Block at prices that you can recoupe with rental income. I don't think thats the case now.

At 7:12 AM, Blogger burbanman said...

I'm sure your legislators in Congress would love to get their hands on flippers' profits for the tax coffer.

Check out what Shanghai is doing...


At 7:26 AM, Anonymous Rob said...

"It has imposed a 5.5-per-cent capital gains tax on properties sold within a year of purchase."

Congress is very welcome to 5.5% of my profits on anything I do. If only that were so.

At 7:32 AM, Anonymous Anonymous said...

Ocean City is a really awful place. I wouldn't go anywhere close if you paid me.

In the DC area there are a lot of conversions and I heard the term "rondo" recently. The units are generally purchased by investors. The quality of construction is extremely poor in this region, especially for these former rental buildings. If you check apartmenratings.com you will see how bad they are. The trend is that amateur "investors" buy them. The rental market is flooded with these units. Often the asking price for rent is way overpriced and the units sit on the market for months.

I think low occupancy partly drove these conversions. According to the census bureau rental vacancy has gone from 7% to 14% from 2000 to 2004 in metro DC. The other factor is of course the profit of selling a crappy building at $300+k per unit that would have fetched less than half that when it was built in 1999.

My friend who is currently not working rented a unit where the owner faces -$500 cashflow per month. (The owner admitted to this.) This after 200% price appreciation since early 2001!!! (But it can only go up, right???) I calculated that his negative cashflow would be around -$1000 with conventional financing.

Thus, a condo purchase by conventional financing is close to double that of market rents! None of the recent sales since last summer are by people who intend to live in the place.

I wonder if these bubble "investors" even analyze historical price trends. This particular complex was a conversion from the late 1980s. People bought for around $80k. Prices went up to $100k or more by 1989-90. Then it went back down to the $80-$90k range for most of the 1990s. Then in 2000-1 it crossed $100k (this is when I moved here). By 2002 $140-$150k. Then early 2003 $180k. By the summer of 2004 my jaw dropped when I saw a listing for $275k. Now the record is $340k. I went and looked at the latter. It is an utter dump that has not been painted since 1986 and now has been on the rental market for $1250 for months.

At 7:49 AM, Blogger John Law said...

do condos take awhile to come back because they are the last to benefit from a bubble?

At 8:04 AM, Blogger goleta said...

Everyone loves a property with ocean or lake view, but with the way the ice in Antarctic is melting, the sea level will keep rising. Islands and coastal areas will be flooded much more often and eventually under water. Green house gases are trapping more energy in the air and water and that will result in more violent storms. In a few decades, no one will want those properties, unless the greenhouse effect can be reversed, which is very unlikely.

At 8:17 AM, Anonymous Anonymous said...

7:32 AM Anon,

Interesting info. If I recall, I think the rondo issue was recently in the Post. What area is your condo/rental in?

My lease is up in the next few months, and while I want to purchase something, the condo prices are ridiculous. I definitely do not want to buy at the top, and we're getting close. Hence, I'll probably continue renting. I've noticed some rental prices by condo owners (e.g., on craigslist), and I think many are deluded. I get the impression they're trying to cover their mortgage, etc. costs but no one in his/her right mind should be forking over some of the dollars that the "investors" (rather flippers) are asking. Even then, I doubt the rent covers everything especially when the condo fees approach $400 for a 1-bedroom.

At 8:58 AM, Anonymous Anonymous said...

Having just moved out of Silver Spring, it seems the attitude is that no matter what happens elsewhere, the DC metro area is protected from the housing bubble simply by virtue of being the seat of Federal Government.

At 9:04 AM, Anonymous historian said...


---Also, if everyone is talking about a bubble, can it truly be a bubble?---

Ah, the age-old question. Should you fade the consensus? And when fading the consensus becomes the consensus, should you fade the fade?

I wouldn't get too hung up on examining the nature of sentiment and contrary opinion.

We have a very good recent example of this process in action with the stock market of the late '90s. The stock market bottomed (in nominal price terms) in 1974. Yet in 1979, Business Week ran their infamous cover story "The Death of Equities". And the stock market didn't begin its' 20-year bull run until late 1982.

So though stocks actually bottomed in '74, it took another eight years for it to really take off. The consensus during that time was that stocks were a terrible place to invest, even though the market had bottomed years earlier.

By the late '70s and early '80s, real estate had replaced stocks as the investment du jour. There were some voices in the wilderness who had the contrary notion that stocks were wildly undervalued. But few paid any attention.

Of course, by the late '90s, the sentiment had completely reversed. Stocks were golden, real estate was for codgers. There were some voices in the wilderness saying that stocks were grossly overvalued but few paid attention.

By 1999 and 2000, the contrary sentiment was building strength. Stocks were still rising, albeit in a very volatile fashion. Most insiders were selling and smart analysts were calling it a bubble. Then, of course, they were proven correct.

So can there be a bubble with so many people saying it is a bubble? Absolutely. In fact, it nearly guarantees it. It comes down to timing. At first, everyone believes things are great. Then a few cranks start pointing out the flies in the ointment. They are ignored. Then more people begin to question. The market gets emotional and volatile. At some point, the tipping point occurs and sentiment moves negative. That's when the dominos begin to fall.

At some point, perhaps years later, as the market is deep in decline and sentiment is sour, a few voices in the wilderness begin to claim that bargains are again to be had. They will be early, but that is the first sign that the market is bottoming. But it may take years still for the market to turn around.

At 9:57 AM, Anonymous Anonymous said...

"do condos take awhile to come back because they are the last to benefit from a bubble?"

Yes - As a Realtor, having gone thru past downturn markets, condos do take longer than SFR to regain their value after a market correction.

At 11:54 AM, Anonymous Anonymous said...

If you read Shiller's analysis of the LA and Boston bubbles of the 1980s - early 90s you will note that condo vs. SFH depends on the market. In Brookline, MA houses flatlined after 1990 whereas condos tanked and did not recover in nominal terms until after 1995.

The fact that I have seen condos appreciate 200% in 4 years in suburban DC suggests that the crash will hurt this segment. SFHs have had more modest increases. As mentioned, my market analysis shows only 25% appreciation in the late 1980s and then small contraction and flatlining for over 10 years. This real bubble with 100-200% in 4 years is a completely different animal. I was arguing with a realtor type recently. He argued that historically there has never been an average price decrease, govt jobs, DC will catch up to NYC (!), etc., etc. 1) If you flatline for 10 years then it is a real decrease. Add transaction costs in RE when you want to sell. 2) DC has never had crazy price appreciation; this is a completely new experience, so historical data is rather worthless.

My earlier example was in reference to a development Tysons Corner/ McLean. My earlier example is not here but the most infamous "rondo" in this area is called the "Gates of McLean" if you want a case study. I think it was built circa 1999 as an apartment complex. It is located inches from the Beltway.....

At 12:28 PM, Anonymous Anonymous said...

My girlfriend's Grandfather is buying her a Mobile Home. He and her Grandmother have been hassling her to get on the RE bandwagon "before its too late" for awhile now. I've practically begged her to reconsider...for her to ask Grandpa to hold onto the cash (he's wasting overpriced Mobile) and give it to her to buy when the market turns. Her Grandfather is very stubborn and from a "don't question my authority" cultural background. It's going to be sad times when he realizes the hit he's going to take on this Mobile that should be $5k not $18k.

Schiller was right on the money regarding the psychology of this whole thing (RE Bubble). Irrational Exuberance is a watered-down descriptor for what's going on in my opinion.

I'd prefer to label what's going on as mass hysteria. I think a smaller version of the big RE bubble hysteria is readily observed in the public retail shopping sector. I'll explain...

I attend Gemstone shows as a part-time jeweler. Coming from a
psychology background, I'm always intrigued and amazed at the psychology of greed, curiosity and collective behavior at work.

Here's the scenario...

The Gem dealer stands in his booth with a LRGE WAD OF CASH in his hands--acting as if he's counting it and taking inventory of his stock. It's all posturing and BS, but boy does it draw people in!! So, ok, a couple people saunder up to Mr. cashwad and start looking around. Here's where it gets really interesting. Mr. Gem dealer sets down his wad and starts his pitch...selling these folks gems, jewelry, or whatever. Now, curiosity sets in with passers-by. "What's going on over there?," "what's he selling," "what am I missing out on?" Collective behavior (curiosity and greed) sets in and you've got more and more folks stepping up to the booth to see what their "missing out on." Some walk away to be sure, but many are drawn to buy, simply because of the psychology of the whole thing.

It's so easy for us to enter into the psychological trap of thinking "I'm missing the boat!" "rates are low!" or "what if there's never the opportunity to buy like this again?" These thoughts can work against our sense of logic and reason if left to run on--causing us to overlook facts that should indicate pause.

I thank my lucky stars that my years of education FORCED me to develop the ability and instinct to research, analyze facts and make decisions based on rational thought before taking action toward important issues. Especially when it comes to money issues. RE prices are INSANE right now. Period. Save, wait and be patient.

Take happy resolve in the fact that you're the lemming that didn't jump with the others.

At 5:40 PM, Anonymous Anonymous said...

In Ocean City, MD, I've noticed a *HUGE* decrease in the rental demand this summer -vs- last summer. At least 50% of the "rental weeks" for all units in our high-rise condo are still available. This time last year, it was fully booked. I sense a storm is approaching...


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