Monday, May 16, 2005

Speculators Risk 'Bubble Bursting' : Lereah

The CBS News site has a story on more speculators being herded into the market. "Darryl Wortham says he's not speculating. 'I’m not looking to get a 50 percent return out in Vegas. I'm looking at 5 percent, 10 percent.'"

"Wortham, a tech project manager in California, has bought three houses this year in Georgia. 'So I bought all the properties really sight unseen.' That's right, he bought them online, through an Internet investment group."

"'You see they have all the pictures up here, so it makes it real easy to make the buy,' he says. 'You come down and see the 'purchase' button. That's all you have to do.' Asked if he's concerned about a housing bubble, Wnuk says: 'At least there won't be a depression in real estate.'"

This guy is changing his message every day. "'The second home market is surging,' says David LeReah, chief economist with the NAR. In some red-hot markets, he says, speculators are now driving up housing prices."

"'So there certainly is some risk,' says LeReah. 'There are certainly some pockets where they may be more vulnerable to a price bubble bursting than other areas of the country because of the speculative element.'"

22 Comments:

At 4:29 PM, Anonymous Anonymous said...

Wow, from "what bubble?" to "bubble bursting" in a week.

The end is not near. The end is here.

 
At 4:59 PM, Blogger realist said...

the end in some markets sparks the beginning in others. while carolina beach, nc, is peaking after a 117% year-over-year run-up, myrtle beach, which had been overbuilt and relatively flat (25% over the last five years), is just starting to take off. while you can still buy condos in golfing communities for around $50,000, a new highrise on the beach sold out it's one bedroom $225,000 units in a few short hours.

 
At 5:05 PM, Anonymous Anonymous said...

But when the final change in sentiment comes, I won't be surprised if all bubbles go pop around the same time. Fear is a lot more powerful than greed.

 
At 5:10 PM, Anonymous Anonymous said...

Ben,
It could just be perception, but it seems like you are getting more traffic on your blog. Can you track this? Is it really the case?

 
At 5:10 PM, Blogger dwr said...

when Lereah first released his survey that showed that 36% of sales in 2004 were to "investors" or vacation home buyers, he was "surprised" and seemingly alarmed. Then he figured out a way to spin it so that it was actually a good, healthy thing for the real estate market. Now it's back to being a potentially bad thing. I guess he found his scapegoat.

 
At 5:13 PM, Blogger dwr said...

"the end in some markets sparks the beginning in others."

Right now Orange County and San Diego are pretty flat, but South Central L.A. is booming. A rising tide lifts all boats, even ones with big holes in them.

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

I do see remarkable jump in traffic of this site. There is also much more media coverage of the bubble.

Can't figure out if the two are related though.

 
At 5:57 PM, Anonymous Anonymous said...

Help me out here -

A person buys a house for a million dollars with 30% down and a 30 year loan. The market goes up and the house is now worth 1.1 million. He has $400K in equity. The homeowner refis and takes out a hundred grand in cash. He now has 300K in equity.

The market dips and the house is now worth only 700G. The homeowner loses his job and gets foreclosed on. The bank sells the house at a foreclosure auction and accepts the high bid of 600K.

Under the new bankruptcy law, how much does the homeowner ower the bank and why?

A.) 100G

B.) 200G

 
At 6:02 PM, Anonymous Anonymous said...

David LeReah, chief economist is an idiot saying this bubble it only local ... That maybe be true for the 1-2yr of the real estate boom ... But now people have branch out to other markets then their own (Like for example the kid from NV buying 3 house in GA) ... So if there is a bust it would be widespread not just local!!

How many of you know someone how has bought a house in other markets?

I rest my case!

peace

 
At 6:02 PM, Anonymous jimbo said...

(The end is not near. The end is here.)

Could be. That Fortune article (referenced in another link) certainly sealed it for me. The thing that mystifies me is how blithe many of these speculators are to the risks inherent in leverage.

Take Las Vegans (originally from Calif) Debbie and Jason Jones. Since 2002, they've accumulated 13 properties---mostly tract homes in Vegas, Boise, Albuquerque. They started with no money down deals. Then drained their bank account of $140K to buy more. Then borrowed $400K from friends, family and lenders to buy even more. They are putting down an avg of 10% on these homes and now have homes worth $6M.

Here's the clincher. Debbie says, "It’s a risk, but I really feel like it’s a lot less risky than the stock market. Even if it does crash, it’s not like it’s worth nothing—like a stock, where the value can go all the way to zero."

She is speaking out of her southermost orifice.

Most people are invested in stock funds that track the SP500 and aren't on margin/leverage. Even if you bought at the absolute top in 2000, you'd only be down 25% right now. At the bottom in 2002, you would have been down 50% but the market quickly recovered. Very few stocks go to zero. And very few are invested in the ones that do, or have a very small % of their assets in those spec stocks.

I'm not trying to defend the stock market. But I keep reading these RE speculators saying how risky stocks are as if what they are doing has no risk.

Compare stocks with what Debbie and Jason are doing. They have drained their life savings and borrowed another $400K from friends and family to build up a $6M RE tract home empire. A tiny 10% hit on their RE holdings means they would be looking at a $600K shortfall, which is more than all the money they have in these homes. Plus most of the money they have in the homes is also borrowed. Plus they'd have to pay an additional 6-8% in fees to sell these properties. So the hit would be even worse.

Yet Debbie is scared of stocks because "they could go to zero." Well, Debbie, if your assets lose just 10% of their value, you will go below zero.

I guess they could always rent them out, but likely the rent wouldn't cover the monthly costs. And all of their loans are of the risky variety, so their monthly costs will continue to escalate in the years ahead.

When I read comments like the ones from Debbie, it becomes clearer and clearer to me that the RE boom has attracted some very naive "investors" who don't have a clue about leverage and risk.

 
At 6:11 PM, Anonymous jeepster said...

("Darryl Wortham says he's not speculating. 'I’m not looking to get a 50 percent return out in Vegas. I'm looking at 5 percent, 10 percent.'")

Selling a home eats about 8% of your profit. So either this guy is a liar or just stupid if he thinks a 5% gain is worth pursuing. And since no doubt his homes throw off negative cash flow, he'd better hope for a 20-30% gain otherwise he'll get nothing out of this "investment."

 
At 6:48 PM, Anonymous Rusty said...

Another article on the insanity, this time from Tampa:

http://www.stpetersburgtimes.com/2005/05/13/Northoftampa/Investors_ride_the_bu.shtml

"I think Florida is the next California"

 
At 7:16 PM, Blogger Ben Jones said...

5:10 anon,
The reply I posted earlier disappeared. So here goes again.

I do use a free tracker. The site gets more traffic every week; today will be the highest day ever, like most Mondays.

It is probably due to greater awareness of the issue. Also, several sites link to this one, which I greatly appreciate.

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

For all of you who track real bubbles, here will be the true sign that the end is nigh....

Back in the early '90's, I lived in NYC. One morning I joked with my wife as we ere walking to brunch that the old restaurant at 12th & third was probably was probably going to be a 'Saturday Night Special"- A mysterious fire on Sat night/Sunday morning when the least # of people could be hurt, but the insurance would still pay. We turned the corner, and the trucks were there cleaning up.
Just ask the 5-Alarm owner at Water St in Brooklyn- (DUMBO area)
He lost a zoning case and the building burned down soon after.

Keep an eye on arson/suspicious fires, and buy a ton of shorts on commercial insurance companies.

I am watching for wildfires on SoCal this summer. This will be the dangerous and sad indicator of the bubble's end.

Be safe and spport your local firefighters

 
At 7:39 PM, Anonymous Anonymous said...

200k- equity debt based on +100k at ref based on +100k at refi and -100k at sale loss

Love this site- thaks t
Love this site-props to housingbubble.com for the crosslink.

Its all about credit quality- look for someone to get a Pullitzer exposing Fair-Isaac. Fannie, Freddie are already taking the derivatives hit- wonder if the hedge funds are answering the phones these days- they didn't in 3/03. GM & F bonds are the base of the hedge house of cards.

 
At 8:08 PM, Anonymous Anonymous said...

5% expected return in a huge bubble like one in Las Vegas!? one must be an idiot to even think of speculating with such leverage for ONLY 5%. He's a tech guy he has no idea what he's doing, hope he is making enough to repay his future losses to the bank; the next 10 years his life won't be fun at all.. one has no idea what leverage means what it goes against you. I traded OIL and I can tell you what leverage means if an oil tanker goes against you you can not hide you can not run you can not stop it. The difference however is big - you can bail while losses are manageble; with RE you can not, there won't be anyone willing to buy it until it has crashed all the way to the floor, then vaulchers appear and relieve you from the greatest pain one had ever experienced.

 
At 8:44 PM, Anonymous Anonymous said...

I've been on the fence since summer of 2003. And regretted few times...problem with this bubble is that there is no needle. Maybe this years hurricane season (will be similar to last year) might slow things down in Florida. But since the Fed WILL keep mortgages down, i don't see it for a few years to pop. What will baby boomers do? Sell and downgrade? Maybe, but i dont see them buying 2nd homes (stats say that average worker saved $42 in 401k, thats not enought to have a mortgage again).

 
At 8:48 PM, Anonymous Anonymous said...

Lets say someone buys a house for $300k, than a year or two later is "worth" $450k, but a bubble bursts 30-40% and now it's worth $280k. That's still far, far from financial ruin, foreclosure, panic...and 30-40% is a HUGE decline.

After WWII there was a large nuber of people "on the fence" because of skyrocketing prices, those people never bought the house because it never came down.

But to summarize, I wish it does, i'm tired of instant millionaires.

 
At 9:12 PM, Anonymous Anonymous said...

8:44 Anon, a bubble does not need a needle to pop. Do you remember bubble gum? Blow too hard and it will be all over your face.

 
At 10:29 PM, Anonymous Anonymous said...

anon 9:12

cute analogy

 
At 12:50 AM, Anonymous powerpuffgirl said...

"But since the Fed WILL keep mortgages down"

The Fed has expressed the opposite numerous times and much more strongly recently. If they could have actually controlled long rates they would have been a lot higher long ago.

If foreign money ever wakes up to the risk associated with a bunch of junk MBS, long rates will skyrocket in an attempt to price the risk. The Fed would just as soon leave short rates where they're at and have long rates much higher (good yield curve) vs. what we have today (flat yield curve.) Mostly because a flat or inverted curve is always followed by a recession.

 
At 5:45 AM, Anonymous Anonymous said...

Hey, 7:32 PM, was that 12th St and 3rd Ave in Manhattan? Which corner, if you can remember? the South-West corner is a parking lot, so that most likely is it. The South-East corner is an NYU dorm, and the other two corners are old tenement styled buildings.

I've read a lot of accounts of tenants in the East Village witnessing their apartments on fire -- one guy was home, when a kid from the neighborhood (hired by the landlord) threw a molatov cocktail in his window. The guy was able to grab the bottle and throw it back out! It was a warzone. I'm not looking forward to fires all around, esp. when they're probably be cuts to the fire dept in an economic turndown.

 

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