Speculators In ‘Frenzy Of Over-Confidence’
This financial advice answers some questions for speculators. “Q: I became a real estate investor last year (probably, too late) buying a small townhouse, which, fortunately, I rented out within a month. The idea was to let the property increase in value and sell it in two or three years. Now I know that plan will not work. How do you see the picture for investors who recently purchased properties?”
“A: There are three essential issues you need to address: First, are the rent and the value of tax write-offs sufficient to support the property? If not, can you reasonably continue to carry the loss?”
“Second, did you finance with a loan where payments may rise significantly in the next few years? If yes, will you be able to reasonably afford the higher payments? Third, what is happening in your local market? Are the population and job bases growing? Speak with local brokers for details.”
“If you can carry the property in a market with good fundamentals, then you have to question whether it makes sense to sell now and take a loss.”
“Q: Two years ago I refinanced my home. The lender appraised the house at $165,000. I did the loan, a two-year ARM, now the ARM ’start’ rate has expired. My monthly payment has gone from $1,200 per month to almost $1,600. I went to refinance with the original company that gave me the loan and they said my home was now only worth $150,000 tops. I owe $160,000. The people who made the original said that due to foreclosures in my area property values had dropped in the last two years.”
“I now rent the property for around $1,250 per month. I would like to sell next spring but will be looking at a $5,000 to $10,000 loss. Any ideas?”
“A: Interest rates are now rising thus your monthly cash loss a year from now could be substantially larger. You need to get this problem quickly sorted out.”
“The fact is the real estate is a commodity. Prices go up and down. In your case both property values fell and interest rates rose at the same time, the worst combination for a short-term investor. Huge numbers of people have invested in real estate with little down and financing that they only expected to hold for a few years. They gambled that if prices rose in those few years they would be able to sell the property, avoid higher loan costs and earn a profit from the sale. Some investors, in a frenzy of over-confidence, never considered what would happen if property values simply remained stable or actually fell.”
“Ask if your tenants if they would like to buy. If they have no interest, speak with local brokers where the property is located. Also, speak with other lenders, they may have a different view of local values.”
“By the time you’re done with closing costs I suspect your losses will be greater than $10,000. Thus you have a situation where you both cannot keep the home and also cannot afford to sell it.” “It may be that it will be necessary to downsize your current lifestyle, get a long-term loan to cover your losses, get a second job or sell off a car or other asset. None of this is easy, but the situation would be worse with a foreclosure and bankruptcy.”
I love reading this blog. Oh what a different tune from last years ‘prices never go down’. LOL. Thanks for the blog Ben. I’m sitting on my cash and watching the blood bath from the sidelines!
2/04/2006 01:48:19 PM
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mad_tiger said…
“Some investors, in a frenzy of over-confidence, never considered what would happen if property values simply remained stable or actually fell.”
That pretty well sums up the last five years.
For more bubble problems checkout yesterday’s online real estate discussion at the Washington Post:
“I recently purchased my first home — in September. It took all I had to get into the house, now I find that I don’t have what it takes to stay in the house. Compared to my rent payment, which was about $800, my mortgage payment is almost double. Then there’s the upkeep of the house, making improvements and such etc. It’s more than I can handle (I don’t have a cash reserve either). I don’t want to lose the house, but I don’t see how I can weather the storm. If I moved out and rented the place that might help me, or would it? Do I go into foreclosure, which is probably expected, since I’m one of those people that got stuck with a sub-prime loan that is through the roof? Do I seek credit counseling? Also, I ran up my credit card once I moved in, buying paint and supplies, etc. I really need your advice on this. Thank you.”
Ow.
Also two or three questions from folks wanting to know how to get their pre-contruction deposits back:
http://www.washingtonpost.com/wp-dyn/content/discussion/2006/01/20/DI2006012001256.html?nav=left
2/04/2006 02:00:11 PM
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Mo Money said…
Just got back from running chores around San Jose. The Open House Frenzy is back……
2/04/2006 02:01:37 PM
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christiangustafson said…
Correct answer, losangeles. This and the long Housing Crash Continues page from patrick.net really alerted me to the housing bubble, and we happily rent and save cash here in bubbly Seattle. Our plan is to buy in 2008 when this blows over and cash is king.
Thanks, Ben!
2/04/2006 02:06:01 PM
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PhuckTheFlippers said…
HOW DUZ THIS APHUCKT YOUR CONFIDENCE??
Phoenix
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2/04/2006 02:09:02 PM
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george_ie said…
“Our plan is to buy in 2008 when this blows over and cash is king.”
You’re going to end up with bloody hands from catching that falling knife…
2/04/2006 02:20:51 PM
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betamax said…
The fact is the real estate is a commodity. Prices go up and down. In your case both property values fell and interest rates rose at the same time, the worst combination for a short-term investor.
This quote gets to the heart of the speculators’ error: once you treat housing as an investment-class commodity, it becomes subject to the same price increases *and decreases* as any other market, particularly when prices become disconnected from fundamentals.
The oft-quoted adage that “people live in houses but not in stocks” becomes irrelevant to pricing decisions, both upward and downward.
And, as the quote suggests, falling prices amid rising interest rates is going to create a perfect storm for herd investors who didn’t get out at the top.
2/04/2006 02:24:57 PM
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WArenter said…
These stories are really sad. The person who got the $165k loan - what interest rate is this guy being chared? If his pmt includes PITI it would be around 9.5%. Why is anyone paying a rate like that these days? A lot of regular people who just bought a house to live in, or sought help with a refi, are getting badly hurt.
2/04/2006 03:06:54 PM
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Dukes said…
I am sorry if I sound like a jerk but: “I love this stuff!”
It is sooooo obvious to me that these people did NOT hear one bit of common sense advice before they jumped into real estate. It really is their problem.
The crazy thing is that this is STILL going on, people are STILL listening to real estate whores who goad them into losing propositions. Wow, what a train wreck…
2/04/2006 04:16:51 PM
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lunarpark said…
“Just got back from running chores around San Jose. The Open House Frenzy is back……”
Yep, open all over Mountain View as well.
2/04/2006 04:52:56 PM
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MIDMONEY said…
More Open House noticed in Orange County, CA.
2/04/2006 08:07:20 PM
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Auction_Heaven_in_07 said…
It’s fun to drive by all the open houses in Huntington Beach…
…and wave…
…with my surfboard safely secured to the top of my BMW.
(grinning)
If I could, or would, talk to those open houses, I’d say this:
“See ya in October 2006!”
“I’m going surfing!”
LOL.
2/04/2006 08:31:07 PM
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poor said…
Dukes,
This effects us all. An analogy would be likened to Katrina. We are the ones that acknowledged the warning and got out. Problem is that we will still have to go back and sift through wreckage of the american economy. Paying for it as tax payers. We are all going to pay for this one and that’s what pisses me off.
I remember when the stock bubble burst one of the channels had a professional broker on discussing fundamentals. Basically he stated the pros(con artists) were long gone and the amatuers were left holding the bag. Same situation here.
I wonder what’s next?
Keep something in mind as we ponder the next bubble. A good con artist is always one step ahead of you. Just when you think you have it figured out. BAM, You’ve been had!
2/04/2006 08:37:03 PM
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Max said…
Dukes said…
I am sorry if I sound like a jerk but: “I love this stuff!”
You are not the only one
2/04/2006 08:47:51 PM
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MarknearSeattle said…
Here is an interesting article re: Fannie and Freddie. Maybe a little doom and gloom but fun to read.
http://www.resourceinvestor.com/pebble.asp?relid=16568
2/04/2006 10:11:12 PM
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CHILIDOG said…
Open Houses EVERYWHERE today in Alhambra, CA.
2/04/2006 10:26:40 PM
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asu_west2 said…
phucktheflippers–
thanks dude, appreciate the data. Have you been gathering this along the way, or did you find a spot that carries the historical listings?
2/05/2006 07:42:20 AM
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Eastofwest said…
Just saw the new Ditech.com commercial
It now states for every one ( 1% ) percent interest rises ,your payment goes up 11% . I think alot of the razor edge financiers will be learning hat hard lesson…well, just about now.
2/05/2006 08:00:35 AM
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azrenter said…
dukes, you said it all in a few sentences. thats exactly how i feel also. thanks for making my day.
2/05/2006 08:57:56 AM
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LtnTechie67 said…
smug comment alert:
I love my 2 story house I bought in Aguest 2003. 1800 sq. ft., built 1992, 2 story. Big back yard. Got it for 215k on 4.75 fixed 30 year. My payment is about 1300.
It was all luck when I jumped in. I can say its the best decision I ever made. I also laugh at thes people that are paying 500k and over.
2/05/2006 10:39:59 AM
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SeattleMoose said…
Here is Seattle (eastside) you had to stand in line when a sign went up and bid the price up. That was last summer. Now signs are starting to spring up and sit and sit…. Also, there are even “New Price” signs on some of the longer standing properties. Price reductions are typically only $10K-$15K on $400K properties.
Too early to tell if this is seasonal or tied to the impending crash. Lots of California “equity refugees” hanging around like sharks waiting for the blood in the water. The inevitable “dead cat bounce” will hopefully suck in the more impatient CA ERs this spring. Thank god the supply of CA ERs will dwindle as CA sellers get more and more stuck holding out for the big sale (that won’t come) like the proverbial monkey who won’t let go of the marbles.
Since Seattle economy is still strong (Boeing, Microsoft still hiring) expect Seattle to follow the rest of the country (led by CA, AZ, FL) down with a lag of 1 to 2 years.
The coming crash will make the CA crash of the early 1990’s (a localized crash) look like a cake-walk. All the shaggy loans, record consumer debt, record national debt, and the sharks who fled the Stock Market (after they ruined it) and brought their “Enron Gaming Mentality” with them to the RE market.
Now that the peak is past, it will interesting to see where all these parasites go for their next “quick buck”.
This spring will give us all a better sense of the timing, direction, and magnitude of the crash.
I have friends in AUS and POL and they have bubbles over there too. Both of those countries are also past their peaks. It seems the RE bubble is a world-wide “pandemic”.
I can hardly wait to see the RE/Loan industry come up with more and more desperate euphemisms….
2/05/2006 11:10:30 AM
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christiangustafson said…
“Our plan is to buy in 2008 when this blows over and cash is king.”
You’re going to end up with bloody hands from catching that falling knife…
We’ll wait longer, then. I’m in no rush to purchase a depreciating asset. I’ll wait until “Time” publishes their “RE is SO Dead” cover story to buy.
2/05/2006 12:37:51 PM
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Blissful Ignoramus said…
It is sooooo obvious to me that these people did NOT hear one bit of common sense advice before they jumped into real estate.
What’s funny is that you used to hear it from, get this, your lender!
Hard to believe there was a time when lenders didn’t want to give loans to people for fear that they wouldn’t be able to pay them back.
2/05/2006 12:45:49 PM
Slightly OT, but has anyone in SoCal seen any “ethinically specific” house listings? I’ll give you two examples from my neighboorhood:
In October, a 3,125 sq. ft. SFH house went up for sale in my neighboorhood (Chino Hills, CA). The sellers and the listing agent were hispanic, but that’s common enough. What was uncommon was that the sign, the literature in the info box, and the telephone recording describing the house were all in Spanish only. I saw ten or twelve couples visit open houses at this place, and all of them were hispanic. Then, about a week before the sign disappeared, the realtor appeared on a Saturday followed by a van full of well-dressed hispanic businessmen - about six of them. In December a hispanic family moved into the place. Four adults and four children. But that’s another topic…
Now it has happened again, only different nationality this time. Two weeks ago a house across the street and two houses down from us went up for sale. This time the sign had a glamour-shot picture of a Chinese woman, and the sign was all in Chinese characters except for the phone number. I called the number and the realtor’s message was in Chinese! I left a message with her asking for information, and when she called me back she told me in extremely broken English that the place was “already gone”. That was last week. Yesterday (Saturday) they had an open house. I decided to be a nosy neighbor and worked on my car in the driveway off and on all day so I could keep an eye on the open house traffic. I’m sure I missed some of the traffic, but I did see three couples visit the house. All of them were Chinese.
What’s the deal? Anybody else seen this? What would be the advantage of keeping a real estate listing within a specific ethnic group?
Hah,
You were all wrong.
This is much less boring than watching paint dry!
Two years ago I thought the builders had learned their lessons in 89′ and were going to avoid speculating (finishing inventory with no buyers), but I was wrong. They are balls to the wall even as they fully admit that the market is taking a dive.
I originally thought the market would go sideways for at least two years before starting to decline in earnest. Looks like last fall (05′) is gonna be the top and next fall prices will sliding down fast.
A buttload of sellers pulled their listings last year and are going to join this years sellers (post superbowl), all these new listings are going to pump our allready bloated inventory. All this will happen in the face of many less buyers, no greater fools or anyone that can/will buy.
The next big step is when the buyers of MBS lose money. They will run for the hills and remove all the funding of unqualified buyers. Ignorant sheeple with a financial death wish will no longer have the ability (access to funds) to move the market up or give it any level of support.
LOOK OUT BELOW!!!!!!