The Housing Bubble

Reades suggested a topic on opportunity in the housing bust. “Let’s talk about how to profit from the bust.”

“The group of moneyed investors guided by a Wall Street friend of mine (are) currently buying REO single family houses by the dozen from banks at 10% off list. When I mentioned the risk to my friend, he said these investors already have buyers. I don’t believe it. Most of this investment group are MD’s.”

A reply, “Most of the MD’s just fed the investment shills. Many rode the stock market crash down and then switched heavily into RE gaining most of their properties in the worst markets at their peak.”

“In Bakersfield I knew a banker in the ’70’s that bought the best foreclosures from the bank (BofA) and turned them into rentals. Some of us would classify the properties as ’slum’ but they cash flowed because you didn’t have to fix them up for the type of people needing a roof overhead.”

“Today you have a problem in CA with disclosure once you want to sell, so if your property is not up to snuff but cash flows it might not resell later without a lot of fix-up expense. Bakersfield has had its share of settling problems in different areas of town, some areas are on septic, some areas were sprayed heavily with chemicals before recently being turned into housing; ergo know the area well before jumping in.”

One posted, “This sort of slumlord stuff is disgusting, IMO. The idea that, because somebody can’t afford much, that they don’t mind, or are even deserving of, substandard housing is despicable.”

‘The greed disease runs deep in this country. There’s nothing wrong with being financially successful. But there are moral and ethical principles which people should adhere to. Unfortunately, it’s not always the case. Taking advantage of the disadvantaged is ugly any way you look at it.”

One answered, “Or maybe instead the property owners could fix up the homes, and pass on the additional cost to the renter in the form of higher rent?”

“Oh I forgot, slumlords by definition sit on their butts all day, rubbing their grubby bellies and laughing as they thumb through their envelopes of cash, dead cigars dangling from their lips. They’re all masters of maintenance and thus just need to apply their ample free time to spic-and-spanning with no extra charge.”

“You generalize to the extreme - so can I.”

And another, “People who can’t afford things up to your standard are almost always will to settle for less as a cost savings. That applies to everything including housing.”

“‘Slum lord’ is a term invented by rich people to make them feel better, by ‘fighting’ against the ‘plight’ of poor people. If you force ’slum lords’ to upgrade properties to higher end stuff, then there would be no more slums and people living there would then become homeless.”

“How about this, if you feel so strongly that one person should be forced to provide another person housing at below-market or below-cost rents, you can demonstrate your convictions by buying RE and doing exactly that. Until then, you don’t have much credibility to be able to knock someone else for not doing what you also don’t do.”

One asked, “I did the right thing by not buying a house in Florida, now what?”

“Last February I moved all of my retirement loot into TIPS funds much to my dad’s dismay. He’s always trying to give me ‘investment advice.’ He’s like every other boomer that just doesn’t want to wrap their mind around the bust. Last I checked I’m still getting around 6% and he’s losing 6-8%.”

“I am trying to be prudent and knock off the last amount of debt I have, but that opportunity could be at a great cost. I’d love to short some companies I know are doomed. So… what should I do? Start an online account and go nuts? My approach would be like when I go to the casino - bring X dollars and stop when they’re gone, or pull out when I’m ahead. Maybe I’d start with $5k and see what happens. Seriously, where should I start?”

One suggested, “If you have money set aside to buy a house, I would keep it somewhere where principal is protected and not take short-term gambles, as I feel housing will be a sure bet in two years. Assuming you have a stable job and are not worried about job loss, you may be able to play with your retirement funds.”

“For me personally, there is a disconnect between when I think things should happen and when they actually do happen. I will probably stick 5% of my 401k monies back in aggressive funds each month and just sit on them for the long haul, or remove during the peak of the next bubble. Getting in near the bottom and holding long term is safest for ppl like me.”

One posted, “Cash, relative to real estate, is increasing in value, which means you should relax and allow the market to complete its work.”

Another question, “For those with experience in the matter, should you expect positive cash flow with 20% down (10%, 5%?)? How much cash flow makes for a good investment?”

A reply, “Cash flow itself does not make for a good investment. You have to look for return on investment dollars less the opportunity cost of your down payment. If you think you can predict the future, you can also factor in appreciation, but I can’t and don’t.”

“In recent years, it has taken about a 50% down payment to make apartments ‘cash flow,’ but typically that’s not a very good investment because of all that cash tied up compared to rate of return.”

“I would consider buying more apartment buildings if I could find units that ‘cash flowed’ with 15 to 20% down. I have not seen anything like that for many years. And I wouldn’t touch single-family houses as investments unless they were practically giving them away. Even then - what a hassle for not much income.”

One noted, “I look at whether you can buy at a cap rate that is higher than the cost of any debt on the property. If so, the property might be worth buying. If not, the bank’s debt is making a greater return than your equity, and it is senior to you (less risk). That doesn’t make sense.”

“By the way, I heard the other day that if FNM and FRE stopped lending on apartments, market cap rates would go up by 200bps almost overnight. Even if they keep lending, they’ll need to raise rates to attract the capital to buy the notes.”

“It’s not a good day if you’re an apartment developer and needed to sell at a 6% cap rate.”

One had this, “I’m more interested in what folks did to *capitalize* on opportunities in the 70’s, 80’s or 90’s…”

“I’m actively on the lookout for businesses to buy and/or assets of companies with cash-flow problems. Seeing very few today (wishing prices with valuations based on last 3 years of ‘free money’). But as biz credit lines are shrunk/cutoff, there will be opportunities.”

Lastly, “In tough times, Stronger companies will buy very good (but struggling) companies at a deep discount due to market fears and tight credit. Maybe it might be a great time to invest in solid, well financed and well managed companies and let them take some of the risks.”

“Because a lot of us can’t afford to go short, it might be cool if those in the know can give some of us novices some advice so at the very least we might be able to attach our sails to a good wind.”

The Citizen Patriot. “With for-sale signs planted in lawns on seemingly every block in Jackson, residents are doing an extreme makeover on how to sell their home. From trading houses like baseball cards to hiring home stagers to ’short selling,’ some Jackson homeowners taking a by-any-means-necessary approach to selling.”

Lights, camera, open house

“After years of being rented to transient residents, Velma Henson’s north Jackson house is showing signs of wear. Her 800-square-foot vacant dwelling has a slanted patio and a shattered front window; the carpeting needs cleaning and the lawn is pleading for help.”

“After watching her house, priced at $80,000, sit on the market for about a year, Henson recently hired accredited home stager Karen Goss of Jackson to spruce up the site.
The home could be ready for showing in the next few weeks and Henson hopes to sell the house in a month or two.”

“‘There’s so many homes out there that the market is so depressed,’ said Goss, who started Jackson-based Creative Image Home Staging this year. ‘You have to have something that the neighbor or five neighbors don’t have.’”

“As houses sit on the market with owners wanting to get fast cash to help with payments, more buyers are asking for short-term lease agreements with either formal or informal declarations of their intention to purchase the house at the lease’s end. Broker Susie Mohlman, estimated that one in 10 prospective buyers at her agency is looking for a lease-to-own option.”

“Still, the method has its perils. ‘You’ve got a stranger moving into your house for an extended period of time, just like any rental situation,’ Mohlman said. ‘They can potentially do damage, you have to correct the damage and you’re at square one where you have to put your house on the market again.’”

“While novel ideas have begun to permeate the housing market, an old housing adage still rings true. ‘This has been a good year for the sellers to kind of come to terms with saying, ‘OK, I need to become realistic with the pricing of my house,’ said Tim Atkins, president of the Jackson Area Association of Realtors.”

“Average home sale prices by association members have dropped 30 percent from 2007, the number reflects smaller homes with lower base prices selling faster than larger homes.”

“Atkins advises sellers to stay on-board with their real estate agents during the Michigan market’s perfect storm — even as lower listing prices are suggested. ‘If the seller is realistic in the pricing … a good Realtor will get their home sold at a fair price,’ Atkins said.”

The Seacoast. “Economic growth in the United States is sluggish, and there are several reasons to be pessimistic about macro-economic performance in the balance of 2008, if not beyond.”

“The adjective ‘macro-economic’ is crucial. We should never forget that, even when major sectors of a country’s economy are experiencing hard times and macro-economic statistics are gloomy, there are always great opportunities for entrepreneurs and investors to be found in various micro-economic niches.”

“That being said, it seems to me that the piper now needs to be paid for decades of economic mistakes, and that painful economic corrections and adjustments will continue for the foreseeable future.”

“The housing bubble bust may weigh on us for years. While housing prices rose from 1998 through 2005, between 1.25 percent and 3.25 percent of Gross Domestic Product consisted of spending financed by homeowners wwithdrawing equity from their houses. This debt-financed spending splurge was painless as long as prices of houses continued to soar.”

“However, now that home prices are deflating, home equity credit has contracted.”

“In sum, the economic outlook for the coming months is dicey. Appropriate advice for most Americans would be Warren Buffett’s two rules of investing: 1) Don’t lose the money; and 2) Pay special attention to rule No. 1.”

The Herald Tribune reports from Florida. “David and Heather Hash are like many who bought homes at the height of the housing boom: Now, looking to sell, they find they owe more than their house is worth. Their three-bedroom, two-bath house, which they bought in 2004 for $337,000, has been on the market for eight months — now listed at $325,000 — without a single offer.”

“‘We’ve had a lot of heart-to-heart talks with our Realtor, who has checked with other Realtors to make sure it’s priced right,’ David Hash said. ‘The house is in good shape, but with the inventory out there, we’re not getting anyone coming through.’”

“They are not headed for foreclosure. They are not even behind on their payments. They have a second child on the way and had wanted to move. To Hash, it feels like financial options for homeowners in trouble are the most abundant for those who have behaved the least responsibly.’

“‘What’s frustrating for me is the people getting the help are the high-risk borrowers and lenders who knew what they were getting themselves into,’ he said. ”And now they are going to pretty much get bailed out.”

“Joe Murphy, a Coldwell Banker Residential Real Estate agent, says he is ‘neck deep’ in short sales in Manatee County. ‘It seems like everything we show right now are short sales or foreclosures,’ Murphy said. ‘Short sales have been getting better and easier to deal with in recent months as the lenders have been more cooperative.’”

“‘A year ago I would dissuade someone upside-down in their house without a real hardship from a short sale,’ he said. ‘Now all bets are off.’”

“Murphy recounted a recent successful short sale in which the seller was not behind in payments and had investments that could have been liquidated to pay the difference, yet the bank still wrote off $100,000 when the property sold.”

“‘The banks don’t want the houses back,’ he said.”

“Mary Kleiss missed a mortgage payment for the first time in her life in June. Now she has missed July’s, and expects to soon lose the house she has lived in for 30 years.”

“The death of her husband two years ago started a chain of events that pushed Kleiss into a financial crisis. It culminated with the loss of her job in February, just before she saw a spike in her flood insurance.”

“‘I’m heartbroken to walk away from this home; I see the plants that Joe and I put in in 1991,’ Kleiss said. ‘Whatever Joe did I would like to take with me. Not the new stuff, the memories.’”

“Kleiss is among a growing number of traditionally self-sufficient people plunged into a new world by the steep economic downturn. They are skipping their mortgage payments, standing in line at food banks and reaching out to social service agencies for emergency aid.”

“The house will not fall into foreclosure until she misses four payments, something she cannot imagine avoiding, even with assistance. So, she is planning now to move into an apartment complex where the rent will be cheaper than a mortgage.”

“‘I’ll just walk away. I have no choice,’ Kleiss said.”

From The Ledger. “Polk County has never seen this many foreclosures, at least not in recent memory. In June, 815 foreclosures were filed with the Clerk of Courts, up 114 percent from the year prior and the highest monthly sum in county records dating to 2002.”

“The filings - primarily residential but also commercial properties and land parcels - totaled nearly 4,500 through the first six months of the year. Polk had roughly 5,100 in all of 2007.”

“‘This is not just sub-prime people, people with bad credit. Foreclosures are hitting people within all income brackets,” said Janet Folkerts, financial counselor. ‘They’re not all deadbeats. They’re people living the American lifestyle to the extent of their paycheck. It didn’t take much for them to go under. When I have people in my office that have over $10,000 a month in income and can’t make it, that tells you something.’”

“Tallahassee-based nonprofit group Florida Legal Services says there are now some 77,000 homeowners in foreclosure, second only to California.”

“‘The increase is shocking,’ said John Corbett, president and CEO of Winter Haven-based CenterState Bank. ‘It’s a six- to eight-month process from when foreclosures are filed to when the bank can take possession. What that tells you is a wave of homes are probably going to come on the market in the fourth quarter of this year and the first quarter of next year, and that’s going to continue to put downward pressure on prices.’”

“Corbett attributes the tide of foreclosures largely to investors bailing out as median home values continue to plunge.”

“‘Having said that, with depreciating home values and increasing fuel costs - which affect everybody - there will be a squeeze that we have not experienced for the past decade. People have been living off the equity of their homes as part of their lifestyle, and that extra cushion has gone away,’ he said.”

The Orlando Sentinel. “With mortgage foreclosures still on the rise across Florida, downward pressure on home prices is expected to continue at least through the end of this year and possibly much of 2009.”

RealtyTrac said Thursday that 40,351 residential properties in Florida were foreclosed on by lenders in June — second only to California, which had nearly 67,000 filings. Florida’s foreclosure total was nearly double the volume of a year ago.”

“Real-estate professionals in the Orlando area contend that both single-family home and condominium sales are healthier locally than many people think.”

“‘My father and I have real-estate projects all over Central Florida. My cousins and uncle have real-estate developments in South Florida. My projects in the south Eola district of Orlando are the strongest in the entire portfolio,’ said Orlando-based condo developer Steve Kodsi. ‘In fact, if we only had the Sanctuary and Star Tower [condominiums], we’d be having a profitable 2008.’”

From Canadian Business. “Attention, real estate shoppers: the entire U.S. sunbelt is now officially on sale. Prices in many areas of Florida, Arizona, Nevada and California have dropped 40% from their peaks of a couple of years ago, to the point where the deals seem nearly too good to be true.”

“In Naples, Fla., a three-bedroom, two-bathroom home that sold for $350,000 in 2007 is on the market for only $200,000. A starter home in Sacramento, Calif., that sold for $215,000 in 2004, is on offer for a mere $129,000. And remember: these aren’t sale prices. They’re asking prices.”

“Sandra and Pat Parente of Richmond Hill, Ont., scouted condos in Fort Lauderdale, Fla., in March of this year. Their eyes lit up when they saw a handsome two-bedroom, two-bathroom unit only steps from the beach. It had been listed this past October for $239,000, but had since been reduced to $199,000.”

“‘My immediate thought was, ‘Wow, this is fantastic,’ says Sandra. ‘It needed a bit of sprucing up, but there wasn’t anything that needed urgent attention. It had a green area all around it, and a pool, and we saw it as a great way to get into the Florida market.’”

“The Parentes’ wariness is justified, say real estate experts. Many believe we’ve seen just the beginning of a monumental real estate collapse.”

“‘The size of the U.S. real estate bust on the way down will be proportional to the size of the real estate boom on the way up,’ says Robert Campbell, a real estate economist in San Diego, Calif. ‘There’s no slowing down this train. The areas that had the biggest booms will have the biggest bust. Prices are heading lower - way lower.’”

“‘Believe me, the real estate community is biased and will encourage you to buy, even as prices keep falling,’ says Campbell. ‘You have to avoid that.’”

“In the Miami-Fort Lauderdale area, the supply of single-family homes and condominiums for sale is enough to last for 34 months. The backlog is 21 months in Orlando, 18 months in Tampa and Las Vegas, and 14 months in Phoenix. Meanwhile, even more units are coming on the market as builders finish the projects they started in better times.”

“‘Builders are offering huge incentives and lease-back programs,’ says Mark Dziedzic, president of a real estate firm that specializes in helping Canadians buy second homes in Arizona. ‘Here in Arizona, some will guarantee you rent of $1,500 a month for two years on any property you buy, while others offer huge discounts on sale prices. The competition is tremendous.’”

“‘I know Canadians will be saying to themselves ‘look what we pay here in Canada’ and compare it to what they can get in the U.S.,’ says Campbell. ‘But don’t look at prices relative to where you are. Instead, look at prices relative to where the real estate market is in the U.S.’”

“Ann Bosley recently bid on an 1,800-sq.-ft. condominium in Hilton Head, S.C., that comes with maintenance and security included.”

“Bosley says her search for a U.S. property taught her never to think that any offer is too low. ‘Nobody is bidding the asking price on any property right now,’ says Bosley. ‘In fact, U.S. real estate agents are advising clients to bid 20% under the asking price, then take off extra for necessary reno costs.’”

“Canadians Sandra and Pat Parente, have put off buying a U.S. property. In April, the Parentes received a phone call from their Florida real estate agent informing them that the seller of the condo in Florida had reconsidered and would accept their $175,000 offer if they wanted to resubmit it. The couple chose not to.”

“‘We’ve reconsidered as well,’ says Sandra. ‘I’m reading every day about more foreclosures happening in the next few months and I think we need to do more research on taxes and rental issues. When we finally buy - which we’d love to do eventually - it will be with our eyes wide open.’”

What do you see in your housing market this weekend? Condo problems? “A high-rise renovation project in central Phoenix that received high praise when it was converted from apartments to condominiums in 2005 appears headed for serious trouble. The Landmark Towers was built as Camelback Towers in 1963. Some who bought units in the Landmark say they were fooled into thinking the building’s guts also had been replaced - and now they are paying for that mistake.”

“Meanwhile, amenities originally promised to prospective buyers, such as valet parking, have disappeared. The exorbitant HOA fees make it nearly impossible to keep up with dues or sell a condo unit in Landmark Towers, owner Rene Kyl said.”

“Of the towers’ 238 units, 34 are in foreclosure, most of them owned by out-of-state investors, according to Mesa real-estate analysis firm Ion Data. Local analyst Jim Belfiore said Landmark Towers is by no means alone as a struggling condo project in the Valley.”

“‘The high-rise condo craze took off here when the market was peaking, and the products coming out today are struggling,’ he said.”

“‘They put lipstick on a pig,’ Kyl said.”

Fewer buyers? “Almost overnight, investment bankers and others on Wall Street have gone from being Manhattan’s most aggressive apartment buyers to real estate pariahs. As financial services companies continue to cut jobs and bleed billions of dollars, their employees have far less cash to spend on high-priced apartments, and very little optimism about taking a risk right now anyway.”

“Rick Wohlfarth, a Manhattan real estate broker for three decades, said that during the economic slowdown of the late 1980s, fewer people had Wall Street jobs and he could count on a more diverse pool of buyers. Now, his firm’s 18 agents are advising 60 clients who work in finance and are struggling to buy or sell apartments when market conditions have turned against them.”

“‘This downturn is more profound because it has hit the largest customer base we’ve had,’ he said.”

Builder difficulties? ” The Diamond Group has cut its asking price for a 2-acre lot in the city’s Morrell Park neighborhood in half. The lot has room for 20 new townhomes. Anne Arundel County home builder William Douglas Homes has four parcels of vacant land for sale in Maryland. Four years ago, selling empty land was an afterthought for the home builder.”

“And most lots are sitting on the market for months, a significant difference from five years ago when land would be under contract before it listed, said NAI KLNB broker Stephen J. Ferrandi.”

“‘Builders were very eager to acquire land for the sake of further developments and they got crazy,’ said Bernard Markstein, a senior economist at the National Association of Home Builders. ‘With the bust in housing, it has become a liability.’”

“The California-based development team Pacific Summit Partners entered the Austin market with a bang in 2005, investing more than $100 million in land from Southwest Austin to Liberty Hill in just two years, with plans to build thousands of homes.”

“Now financial troubles such as foreclosures and ballooning late payments have jeopardized or erased those plans. Since November, about two dozen suppliers have secured or attempted to secure scores of liens on properties owned by Pacific Summit and several affiliated partnerships and companies, according to claims filed with the Travis County clerk’s office.”

“At Aviara, a large sign advertising garden homes starting at about $300,000 and condos starting at about $200,000 still stands, but what should have been a busy construction site was quiet this week. More than a dozen houses and condos sit in various states of completion, and the development is secured behind a locked gate and patrolled by a security guard.”

“No one answers the phone number listed for the sales office. ‘I’m not resigned to the fact that I’ll have to write all of this off, but this is by far the worst collection problem in the 15-year history of my company,’ said Michael Patino, owner and president of High-Tech Carpets, which is owed nearly $175,000.”

New incentives? “It is a new tactic that some are considering, said Pat Skiffington, of Keller Williams Classic Realty in Orlando, Fla. He’s arranging for a prospective buyer to stay overnight in a downtown Orlando condo.”

“‘Buyers are being much more selective and there’s much more to choose from,’ he said. This is one way sellers can make their home stand out.”

“Even if the buyers decide they love the home after staying there, it might not be enough. Just ask Jeri Moran, a realty broker who had people stay over in her second home in the Blue Ridge Mountains in Georgia. The buyers love the home, but haven’t made an offer.”

“‘They’re sitting on the fence,’ said Christy Reece, her agent with Keller Williams Realty Mountain Properties, Blue Ridge, Ga. ‘The house is wonderful and they even fell in love with it further once they stayed there. But it comes down to people, in our market, thinking that prices will continue to come down.’”

“You might expect sellers to go the extra mile when marketing their properties in the midst of a downturn. And now one estate agent is throwing in free cars in a desperate bid to tempt buyers.”

“Clients who buy one of 247 newbuild flats in Newquay, Cornwall - worth between £150,000 and £1.5million - could drive away with a Smart Car, a Volkswagen, a Mercedes or a Range Rover.”

“Stuart Shield, branch manager at Bradleys estate agents in the resort, said it is the first time in his ten-year career that he has offered any incentives. ‘We have got an awful lot of buyers - but, very often, they go home, read about the latest ghastly story about the housing market and lose their nerve,’ he added.”

“Aryen Moore-Alston has found a new way to showcase homes in the Mid-South area. She will be cooking healthy dishes in the kitchens of homes currently on the market as her mother, Realtor Karen Moore, introduces viewers to the rest of the house during the TV show ‘This House is Cooking!’ that is scheduled to debut later this month.”

“The show is the two Realtors’ creative answer to selling homes in a declining real estate market. Moore-Alston’s food preparation will show potential homebuyers how the house’s kitchen will fit their needs, while Moore will showcase the rest of the home.”

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