2005 Housing Speculation At ‘Record’ Highs
The USA Today reports that speculative home buying is through the roof. “Americans snapping up second homes, as investments or vacation properties, accounted for four out of every 10 sales of existing homes last year, a record that helped drive the real estate market to new highs, according to a report being released today by the National Association of Realtors.”
“Nearly 28% of homes bought last year were for investment purposes, and an additional 12% were vacation homes, the figures show. ‘Real estate has outperformed virtually every other investment vehicle,’ said (broker) Ron Peltier. A lot of people have just speculated in real estate.’”
“Sales of vacation homes rose 16.9% to a record 1.02 million, while sales of homes owned for investment purposes increased by 15.7% to a record 2.32 million, the real estate industry group said.”
“The trend really started after 1997, when Congress changed the tax code, allowing most homeowners to duck capital gains taxes when they sold their homes. Under the old system, the only way to avoid the tax was to ‘roll’ the gains into another home of equal or greater value. Americans bought bigger and costlier homes. But now, they can downsize and use the equity built up in their homes to buy second homes.”
“‘That’s what spurred all this on in the beginning,’ says David Lereah, the NAR’s chief economist. ‘It’s like all the stars are aligned.’”
“He thinks the trend crested in 2005. With rising interest rates, tighter lending standards and slower price appreciation, Lereah expects second-home sales to drop this year to 30% of all existing-home sales, and maybe into the 20% range. ‘What’s going to be leaving the market right now are the speculative investors who came into the market and were trying to flip homes,’ he said. ‘They were buying one, two, three or four properties at a time, and that was distorting the numbers.’”
“More than three-fourths of the buyers had no interest in renting their property. About 20% said it would one day be their retirement home.”
“Joe Klein and his wife bought their first vacation home last year on Lake Wabedo in Minnesota, three hours from their primary residence. He says he might like to retire there but might have to persuade his wife. ‘It’s something that we could hand down to the kids,’ says Klein. ‘But secondly, I see it as an investment.’”
‘Sales of vacation homes rose 16.9% to a record 1.02 million, while sales of homes owned for investment purposes increased by 15.7% to a record 2.32 million’
There’s your speculative overhang. I remember when the NAR was shocked at the 25% number for 2004. Then they came back with the gibberish about how September 11th had changed what a home was forever. How come they get away with the economic analysis of ’stars being alligned’? This is an unimaginable number. I bet the percentage of spec new homes is even higher!
I bet its closer to 50%! This investment, err speculation is way out of hand and is as bad as everyone on here has been saying for a year now. It just took these clowns much longer to figure it out.
I’ll bet you’re right about it being closer to 50%, maybe even higher. Not everyone is completely honest when they say the purchase is “owner occupied”
This just goes to show that some times an educated guess (aided by a look around) is much better than official statistics based on hard evidence, especially when the producers of such stats have a vested interest in hiding the truth.
This brings to mind the story about the weatherman who forecast a 20% chance of rain, while failing to look out his office window, or even to hear the rain that was pounding against it…
I wonder what percentage of the new homes is invesment.? (I am assuming NAR is pre-owned homes
Ben,
It seems that quite a few of the us suspected this number to be higher! I must admit though I was very shocked. What’s more alarming is the SCALE of these second/vac./inv/ homes! In most circles if you told people that you had a 2nd home the first thing they want to know is the sq. footage THEN where it’s located. Whatever happened to a simple cabin by the lake? I can’t imagine the work (let alone the expense) of maintaining 3,500 sq. ft X 2!
As long as you have double-digit appreciation, you will build wealth much faster by buying homes in the $1m+ range.
the first thing a flipper/investor will try is to treat the purchase as a primary or second home. they all know that they will need to put more money down and the rates will be higher with an investment property. the number is probably over 50% imho.
I had a realtor instruct me to say that it was owner occuppied. Didn’t do it.
OT… another good article today from Washington Post
Is reliance on housing bad for U.S. economy?
Economists worry slowdown could have broader effects
By Neil Irwin
Updated: 12:31 a.m. ET April 5, 2006
http://www.msnbc.msn.com/id/12157736/
“Is reliance on housing bad for U.S. economy?”
I will field that one: The answer is no, provided the economy is diversified across housing and other productive sectors. But if distortionary govt policy sets off a raging mania which results in a huge excess of investment in the housing sector, then it is very bad, as the resulting fundamental economic imbalance is not sustainable and will result in a crash when it corrects.
‘It’s like all the stars are aligned.’”
Sound like Dave Diarreah is getting his lies aligned for the coming backlash.
‘Joe Klein and his wife bought their first vacation home last year on Lake Wabedo in Minnesota, three hours from their primary residence. He says he might like to retire there but might have to persuade his wife. ‘It’s something that we could hand down to the kids,’ says Klein. ‘But secondly, I see it as an investment.’
As Peter Schiff pointed out, this ‘first vacation home’ is actually a spec buy, as most vacation homes are these days. You can find a resort for just about any vacation that is cheaper than owning.
“‘Joe Klein and his wife bought their first vacation home last year on Lake Wabedo in Minnesota, three hours from their primary residence. He says he might like to retire there but might have to persuade his wife. ‘It’s something that we could hand down to the kids,’ says Klein. ‘But secondly, I see it as an investment.’”
Thats right Joe. Real estate always goes up. Enjoy those carrying costs.
‘But secondly, I see it as an investment.’
Hey Joe! Been there done that… ‘investment’ always seems like a neat way to look at it-
but the raking of the leaves, the doubling up on utility bills, property taxes, furnishings upkeep, security, putting the dock+boat in/out at the start/finish of the season, blah blah blah- all added up to more of a headache than it was worth. I’m with Peter Schiff… just find a great resort to pamper on those vacation days, and leave all the rest of the stuff for THEM to worry about.
Americans have to OWN everything. It’s a mental disease. Their leisure time is the same way. They can’t see a show or musical performance or go anyplace without buying a giant sack of souvenirs to go with it. My inlaws own a motor home the size of a small house. The costs associated with one of those things, even on the days where you’re not even using it, make staying at the Ritz Carlton seem dirt cheap. Idiots.
Well said OCMax. The fact that the majority can’t say no and have to spend every dime and more is the reason we are where we’re at. The problem is, the Bank owns all of it. Nobody owns anything anymore as they don’t have the discipline to say NO and save.
Add to this we have this idea floated by our wonderful government that spending is “good for the economy”.
We’ve been lied to and we proceeded to embrace this big is better consumption based economy. Joe SixPack then believes his 4 door toyota is inadequate and states, “I need the room and capability of a SUV”. What does he do? He gets a HELOC and finances a Chevy SLOBurban. The roads are choked with them now. I noticed lately they are showing up on front lawns with for sale signs on them. Dumbasses.
The entire capitalistic economic system runs on consumption. Growth is always good, at all cost. This, folks, is unsustainable. Resources are depleted fast and the environment is being destroyed. Consumption, as opposed to basic needs to sustain reasonable life, is going to destroy human civilization along with the Earth.
You’re correct on the capitalism=consumption. You’re also correct that the rate of current consumption is unsustainable. Given the fact that consumption by the US has rapidly accelerated over the past 6 years, why would we not promulgate public policy to develop alternatives? Why do we encourage JoeSixPack to consume even more at any cost?
I disagree with your assessment on consumerism = captialism. Capitalism was alive and well when this country was founded. Yet people like Benjamin Franklin preached thrift and planning. Consumerism is a creation of the late 20th century, a fad that will pass much as is did during the Roaring 20’s. When global labor arbitrage smoothes out the purchasing power of the US relative to other countries, conspicuous consumption will be replaced by thrift and prudence again.
The system is built on consumption, without which it will just collapse. We have to find an alternative system — call it “Modest Life & Sustainable World”. Bicycles, natural farms, no plastic wrappings, solar power. You get the idea.
Thanks Anachronist. You are correct. I meant to speak of the consumerism. It is a really ugly thing.
What will happen if Ben Franklin is running Coco-Cola, or P&G, or Toll Brothers today? Will he preach thrift and prudence with his millions of stock options sitting there?
The system has evolved from Franklin’s time to today’s consumption based economy, with Wall Street watching your quarter to quarter “growth”. They make all this unnecessary junk (causing pollution) and sell you on your debt, so they can book their profits and reap their millions. The fact that both the country and citizens are in debt to their eyes foretells the implosion of this consumption-based economic model.
Implosion based on currency imbalances maybe.
As a Capitalist some form of Price to Performance analysis and comparison to current and past comperables should always come first. This is why the most successful capitalists tend not to own that much property. The Millionaire Next Door, anyone?
The current fad for consumerism is just that. Recall that the craftsman and small house movements followed the consumption explosion of early industrialization, so maybe some similar change could happen now which would sweep away our Affluenza epidemic.
The psychological roots of the OWNERSHIP disease may partially lie in the Great Inflation of the 1970s, when those who did not own hard assets and were long $US had their wealth stolen by the stealth tax of inflation. A word to the wise: History has a way of repeating itself. Go buy yourself a McMansion before it happens again.
GetStucco-
I was too young then to be aware of much of that, and certainly too young to make any sense of what I did notice. What were CD’s and high-yield savings accounts paying back then? Wouldn’t those peoples’ CDs and high interest-paying accounts offset the “loss” from rampant inflation?
GetStucco-
I have the same inflation fears myself. Used to be that a home was a family’s hedge against inflation, but that option has been exhausted in all of the bubble areas. I don’t know anything about metals either, and I have cash in the bank who’s value I don’t want to see simply erode away to pay for all this irrational exuberance.
There is something to that. For many decades we’ve had the “American dream of home ownership” drilled and hammered into us like a weekend do it yourself project. It was just something everybody wanted. Relatively few have seriously questioned the merits of owning versus renting.
But that unabiding faith in owning land may go back further than that. The whole of idea of America, of the United States, was to be able to own your land instead of being a serf on another’s land, and to be your own boss. Remember Scarlett O’Hara’s father, telling Scarlett that land is “worth working for, worth fighting for, worth dying for, because it’s the only thing that lasts”?
This even boils down to small items. I was down in Key Largo a few weeks ago at a resort and went ahead and rented a jet ski for my family. $90 bucks an hour seemed high at first and my wife was surprised I did it…but I told her it’s actually a bargain. Just think if we spent $5K on our own jet ski, had to haul it around, insurance, gas, storage, maintenance…etc. Renting is a good deal even for these type of small luxuries.
So true. Had a house near Mammoth Lakes Ca for 10 years and tired of paying the taxes, upkeep, snow removal etc. Now when I get the urge to do some skiing, I pay $150/nite for a condo which is much less than property taxes I was paying and I leave the cleaning to the owner. Always better to rent rather than buy resort living.
Well said, SLO. This way, we actually get to ENJOY our vacation time vs. the continued rat-race maintenance of the “2nd home”.
My friend bought a builder spec house in 1996 for $260k. A steal today at $2 million. Ten years of $2700+ taxes, $30k. Ten years of mortgage after deductions, $130k. Upkeep and improvements 10 years, $80k. Lost opportunity of downpayment, $50k.
$2,000,000 - $30k - $130k - $80k - $50k = $1,710,000. I’m I’m being hyper-conservative with the $2m valuation. I don’t know which 10 years you were “in” but it wasn’t these last ten years. 50% haircut? Who cares? 80% haircut? Even then not only can they afford it but they’ve had years of enjoyment with their children and friends at an extraordinarily low cost.
What’s your point, Robert? That we have had unprecidented appreciaption in real estate assets in the last 10 years? That anyone who was lucky enough to have bought property at the bottom of the last cycle is sitting on an incredible gain right now? That you can cherry pick data to make it seem that $1.7 million gain is typical of most 2nd homeowners experience?
What do you think the future holds?
Lucky for him, but how cheap is it for the guy who buys at the current price of $2 million plus? Work out his costs, then come back and tell us how wonderful an investment is.
Sounds like a neo-con everything is wonderful half story.
Sorry Robert, but I have to call BullShit on you on this one. First off, exactly where could you buy something for $260 in 1996 that you could get pay $2M for today. This is not just unrealistic, I dare you to post an address and we can zillow comps on it and check county recorder’s transactions on it to prove it.
Second, you’ve got some of your numbers screwy there. Taxes will be a bit higher than you’re stating there (even with 30% write-off, but you didn’t adjust anything for the opportunity cost of using a standard deduction.) Your payments are WAAAAAAAAAY low, considering financing costs in ‘96 were nearly 9%. At that rate, even after-tax costs would be closer to 20K per year. And, you forgot the all-important maintenance costs. I doubt that you would be spending a paltry 10K per year on a $2M property. I know people who own $1.5M property who swear they spend 15K per year on maintenance. Besides, a $2M property is going to be a 4500 sq ft place anywhere in southern california (LaJolla to RSF to Beverly Hills). I think your “hyperconservative” is plain bullshit.
Third, if you took the conservative approach and invested the “opportunity costs” presented by the numbers, you would have made only a paltry $622K. If you invested the amounts into a slightly more aggressive index (Russell 2000), you would have $797K. But, you’re comparing apples to oranges and trying to justify prices paid at the low-point in a bubble with prices paid at the high-point of a curve. Let’s try that same bullshit with prices paid for that same home in 1991 and 2006. I am confident that your appirition of wealth will simply disappear. Only the smartest or luckiest of investors knew that housing prices were bottoming out in 1996. There is a name that people on wall strett call people who always buy at the bottom and sell at the top. They’re called LIARS.
No offense personally, but one anecdote does not a strong case make.
I used to like Mr. Cote’s posts but me thinks he is blowing smoke up our collective asses.
johndicht,
Have you read Schizomania? If you haven’t, there is a review of it on my website. It may be your cup of tea. The author, Jack Lessinger, a retired professor of real estate and urban planning, has developed an economic model called Omniotics which states that the US has experienced numerous real estate/migration trends, lasting about 120 years and overlapping each other, in which each new trend is developed to solve the problems that the old trend created. The trend toward massive consumption, the development of credit, and suburbanism (to house all the crap people buy on credit), started around 1900ish, and will die. A new “green” trend toward sustainable living, started to develop around 1960. Where the trends clash, we end up with economic downturns. Anyway, take a look if you aren’t familiar with it.
Thanks a lot. I will take a look.
Hey! Oprah Winfrey owns a bunch of houses! Why can’t I own a bunch of houses?!
I think that’s the mentality that we see today.
I don’t watch Oprah, but I saw a picture of her in the last couple years (probably at an airport newsstand) and she looked appreciably thinner than I recalled her being the time before (perhaps even 10 years ago). I didn’t even recognize her.
Your comment made me think it’s too bad more Americans don’t follow her lead in that regard.
“Nearly 28% of homes bought last year were for investment purposes, and an additional 12% were vacation homes, the figures show”
So 40% of homes bought last year were either investment or vacation homes. Wow. The bubble markets are NOT in for a soft landing. This thing is going down hard.
David
bubblemeter.blogspot.com
LOL - from today’s online chat going on now at Wash. Post.
Northeast, D.C.: Neil,
Your article is very interesting. However, with this region insulated from various factors unlike other parts of the country what does your article mean to the 6 million or so residents in the D.C. Metro Area and our housing market? To take national data with regards to our national economy and try and throw a blanket over our market doesn’t paint the whole picture. Everyone knows this region is an anomaly.
In short, what will change our housing market and local economy? That’s the real question.
that first one was classic, but the rest were pretty much in line w/ what we preach here… that or they were struggling and asking some good questions re: IOs/ARM resets, inventory rising, cheaper to rent vs. buy, etc. oh, and here’s one that had to be a Ben’s blogger:
Arlington, Va.: but DC is “different”.
they aren’t making anymore land.
the population is growing.
babyboomers retiring and buying second homes.
real estate always goes up.
so sayeth NAR chief economist David Lareah, has anyone noticed that economists and weathermen are the only jobs where you can make completely assinine predictions and still keep your job?
“Nearly 28% of homes bought last year were for investment purposes, and an additional 12% were vacation homes…”
This is almost EXACTLY what the stats have recorded for Santa Barbara.
30% of SB homes last year (2005) were snapped up by investors… meaning that they were not purchased as primary residences. In 2006 this practice has completely dried up, as word has gotten out that easy flipping is a thing of the past.
This change of trend effectively has wiped out nearly 1/3 of all buyers for today’s higher inventory… and now that interest rates have ticked up, and wacky loans are much harder to get- it all adds up to the STAGNATED MARKET we are now witnessing.
Anyone else out there observing the same thing in your town???
What you describe for SB almost exactly describes what I see here in your “sister county” (well, that’s what people here like to believe), Marin.
Interesting Marinite.
Both places are great to live in! But that still does not negate the fact of what is happening to the housing markets!
I am so ticked. I just saw a property go up for sale for 225K last October (raw land, but perked) and now a flipper wants 428K. This is 1 hour west of D.C. I wrote a letter in protest to the agent’s office. Maybe I’ll write one and publish it in the local paper.
An hour west of DC? Why don’t you just say, “West Virginia?” At that price, the parcel should be, what, 2,000 acres?
Any raw land is worth no more than $1000 an acre.
This is in Fauquier County. But just down the road, there are prettier parcels with brand-new homes on them for about 620K, and they are not moving at that price. So pew on that agent. (I sent a nastygram to the office, though, it felt good). Fauquier is a funny place, with a whole lot of land in conservation easements. There was just an editorial about that - in one huge subdivision acreage-wise, rich folks are able to not pay taxes on the land because it’s in an “agricultural’ easement - but they’re also not allowed to have farm animals, or grow crops, according to the HOA rules. The HOA provides the ‘agriculture’ - in the form of lawn mowing they call “hay-making”.
Check this listing.
Let’s assume a very very generous $300K to replace the structure. Works out to about $28M/acre for the land.
Such a deal.
How do you figure that Caveat? He still hasn’t told us how big the parcel is. I’ll agree that Fauquier County is weird, though. It’s sort of a hybrid mix of high-end horse farms and trailer parks.
Lot size = 0.06acre. It’s in the listing (up near the top)
($1995000-$300000)/0.06acre = $28.2M/acre
You’d really have to go nuts to spend $300K building a 766sqft “cottage”. Looking at it, I think $300K is being generous. And how the heck do you cram 3 bedrooms into 766 sqft anyway? Spacious living quarters to be sure.
As I’ve said before- people are speculating on land, not bricks and sheetrock. $1000/acre is probably low- maybe right for undeveloped rural midwest. But on the other hand, I think $28M/acre is probably a tad high.
Just another sign of the insanity.
‘vacation homes rose a record 1.02 million, while sales of homes owned for investment purposes increased to a record 2.32 million Real estate has outperformed virtually every other investment vehicle,’ said (broker) Ron Peltier. A lot of people have just speculated in real estate.’
Since most homes bought in 2005 would be cash flow negative, even though the study says only 20% rent them out, Mr. Peltier might note that 3.34 million buyers in 2005 are losing money everyday on their ‘outperforming’ vehicle!
I thought I smelled smoke when I walked out the door this morning…
“Nearly 28% of homes bought last year were for investment purposes, and an additional 12% were vacation homes, the figures show. ‘Real estate has outperformed virtually every other investment vehicle,’ said (broker) Ron Peltier. A lot of people have just speculated in real estate.’”
It will be interesting to see what the numbers say this year.
Simmsays…
Check out: Roo Poo and Other Wacky Products from Australia
http://www.AmericanInventorSpot.com
AmericanInventorSpot.com
when will the novelty of taking care of multiple properties wear off?and the second great question of the day is how good will vacation home owners feel about that great view and fresh air when the value of the property is dropping 10% per year?
“when will the novelty of taking care of multiple properties wear off?”
When they get their first $3,000 tax bill and HELOC payment for the new roof it needed. But that would be right after they realize that the place is sitting empty 330 out of 365 days a year.
I second that…. they will then see its cheaper to rent out a place for a vacation…
I saw this article in my paper…didn’t keep it dammit…on how some folks are working out a way to structure a vacation scheme like buying a condo…I think people are buying something like a share in a co-op, and then can stay in properties in various vacation-locations, condos/homes in various places. And they pay like 300K, as though they were buying a condo, but somehow they believe this is a better deal, maybe because it’s sorta hotel-y in that they get to visit various places and have ‘management’ staff take care of things like stocking the fridge and the linens. It’s just nuts, that people feel they need to “own” their vacationing…that’s what it’s come to in our “ownership society”. Such a psychological-sociological premium placed on “owning” and what you “own”, that it’s not even good enough to rent your damn vacations anymore…gotta go figure out where the celebs you aspire to sidling next to or being like are buying their vacation homes (brad pitt, so said the celeb blurb in the front of my paper, was checking out the dominican republic just last week! dominican republic houses for everyone!) and then go snap it up! And if you can’t afford that at least you gotta get one of them places down in florida, right? It’s gonna be so ugly when this crashes!
Was the article about Exclusive Resorts?
http://www.exclusiveresorts.com
I’m sure there are others, but the $300k price makes
me suspect you’re thinking of this Co.
Steve Case of AOL is on the board.
yes, that’s it; thank you!
It seems like it’s an investment “club” then? where you put in your money and they buy the props for all the members?
nutty…
cheers!
Does anyone know what the inventory in Phoenix is up to? I check specific areas and everything is up! Have we passed 41K yet in Phoenix?
protest letter?
wait till 07
it will equal 03
anyone have numbers from 1987-1990
for 2nd homes ?
flat asks: “anyone have numbers from 1987-1990 for 2nd homes?”
I don’t have any numbers, but I can tell you that the 2nd home-ski town markets in northern New England got crushed.
An acquaintance bought condos for “half off” or more a few short years later - in cash, I might add.
Comment by sf jack
2006-04-05 06:58:36
flat asks: “anyone have numbers from 1987-1990 for 2nd homes?”
I don’t have any numbers, but I can tell you that the 2nd home-ski town markets in northern New England got crushed.
An acquaintance bought condos for “half off” or more a few short years later - in cash, I might add.
_____________________________________________
It sure did. I bought my current residence in 1992 from a NJ/NYC/CT slimeball who thought he was on his way to millionaredom. He got absolutely hammered here. He had 150k into this place. I watched him drop his price from 175 in late 1989 to 75k in 1992. He got crushed on multiple properties in this town alone.
Gladly, he went back to NJ. Right where he belongs. And we’re watching happen all over again except on a much larger scale. The vacation/retirement “home” idealism of these NYC/NJ/CT maggots is truely laughable. It’s taken some time but they are getting the message that they REALLY AREN’T WANTED HERE.
I was lucky since I was moving to FLA i sold that ski home in NH last year, Even though my place was new when i built it in 94 i still learned it was a pain in the ass to up keep and did not use it enough, Glad its gone…
Didn’t like them winters huh Al?
was always a dream to ski every weekend like when i was a kid,, then came work with all crazy hours and just realized I’d rather lay on a beach then be freezing my butt with a runny noise waiting for the ski lift…lol
And how long have I been saying that flatlanders never stay here? They always liquidate, most of the time at a loss, and leave. [smiling]
Lingus, the funny thing is that your region’s economy is dead without tourism dollars from the NYC region. We may not be “welcome” in your eyes, but you need us just the same.
Tourism is one thing. Creating the very environment you’re trying to escape is another matter of stupidity. Actually, VT/NH/upstate NY does and has done very well without tourism. We don’t need stripmalls and starbucks but you people bring them just the same. Just like home huh? Car dealers, stripmalls and Chevy SLOBurbans. It’s no wonder Fat Tony and Hairy Marie feel at home. Until the winter sends them south again.
Hmmm…I believe tourism is Vermont’s leading industry.
http://en.wikipedia.org/wiki/Vermont#Economy
I don’t disagree with you that there are a lot of idiots from NYC region driving up propery values, but you can’t deny that their contribution to your economy is significant. It is a good thing most people in Vermont are friendly and personable - I assume you don’t work in the tourism industry??
Well, If widipedia is where you place your trust, then proceed at your own peril. Ag has always been the leading domestic product in the state. Dairy farmers found they could make more money by subdividing. This doesn’t change the fact that ag was #1 for 150 years.
Say…… What is it you fear about our contempt for NYC/NJ/CT slimeballs? Are you one of them? Are you one of them that think they have a right to come here and never leave? I’m guessing the latter.
If things get as bad as many of you believe, the percentage of homes going to investors will be going up in 2007. That is, only the bottom fishers will be buying at the foreclosure auctions. Everyone else will be too afraid, or unable to qualify for the mortgage.
“If things get as bad as many of you believe, the percentage of homes going to investors will be going up in 2007. That is, only the bottom fishers will be buying at the foreclosure auctions. Everyone else will be too afraid, or unable to qualify for the mortgage. ”
You’re on another planet. SpecVestors are already leveraged, hence adding to foreclosure inventory. Where does this money come from?
Totally agree. Those who haven’t joined the Kool Aid party already are simply waiting it out. The majority of those waiting it out are in-the-know with what’s going on in regards to inventory, YoY comps, and mortgage-to-rent ratio. Most, if not all speculators are already in the roach motel. We’re just waiting for them to yell……”RAID?!?!?!”.
Clif Droke, author of “America’s Housing Bubble: the real estate outlook for 2006-2012″, thinks there could be a temporary shaky bounce in 2007 from bottom fishers and foreclosure buyers too eager to jump back in. But then he thinks the market will just resume a long downward sickening slide for several years after.
I wouldn’t be entirely surprised to see a scenario with an echo boom (i.e. suckers rally) in 2007. Echo booms are not uncommon in bubble markets and are typically characterized by a boom > small crash > false bottom > shaky boom w/a smaller peak > full crash to the bottom. It happened with the NASDAQ. The Dow Jones increased by 38% between Nov. 1929 and April 1930, before continuing its crash.
If we combine modestly falling home prices in 2006 with interest rate cuts in late 2006 early 2007, it could bring in some buyers priced out/waiting on the sidelines that “missed their big chance the first time around”. Don’t catch a falling knife!
Bottom feeders won’t be buying at the sale this time. They’ll be buying from the banks that are trying to stay afloat
Financing a property as a 2nd home is a lot easier and at a lower interest rate than as an investment property. IMHO the 2nd home buyers are the naive investors who will be hurt the most.
in the 80’s I’d buy w 20% down and rent at positive cash-
NO one did that in 04/05
my in laws sold their home near Boston last August and bought two new homes with the proceeds (plus still have some money leftover). one of the new places is in Arizona (future retirement) and the other is a smaller house in a cheaper town near where they’ve always lived.
I have an aunt and uncle who have done the same thing during the last year.
the point is that some people can buy two houses for cash in cheaper areas with the proceeds of their one inflated value home. so maybe not all of these people are screwed
Nope. The people that are screwed are those who bought the overpriced properties.
Good point Penny. If you executed the transaction as a buyer in the last 5 years, you got screwed.
Your inlaws can’t cash-flow that place in Arizona and have given up the opportunity cost of what that home cost them. It would have been better to put that cash in CD’s and buy the Arizona home when it was time to retire. My point is, they are speculating, even if they don’t realize it.
you are definitely right and I tried to explain this to them before they bought in AZ. showed them the rapidly increasing inventory, etc. they didn’t care. the idea of opportunity costs seems compelling to me since I’m in my 20’s, but people who are 60 may not think it’s worth it to wait things out
And the baby boomers bought at high prices to . Like you said they should of waited until they retired ,(now they have holding costs ). What if they don’t get the price they thought they were going to get on the home they took the equity from to buy ? I think alot people thought it was smart to buy at low interest rates ,and they believed prices would keep going up .
great point!
They may just decide to keep both houses if they are anything like my neighbors. They spend 6 months in California every year (Winter) and 6 months on the east coast (Summer).
‘It’s something that we could hand down to the kids,’ says Klein. ‘But secondly, I see it as an investment.”
Ooo la la. My father left our second home to his four children, and it was one hassle after another. My brother-in-law, a CPA, always advises his clients to NOT leave their vacation home (in Vacationaland! aka Maine) to their children. He says pick one to give it to or sell it. And if there is no money for maintenance, and one of the children doesn’t have money, well….you can imagine the fights, all bringing up childhood feuds. I finally sold out my share–my children are still mad, but I have peace of mind.
The fantasies people have about second homes are undoubtedly naive.
Comment by sharecropper
2006-04-05 07:09:18
The fantasies people have about second homes are undoubtedly naive.
—————————————————-
BINGO
Investment homes are always the first people let go of in hard times.I find it hard to believe that the NAR didn’t know that investment sales were the reason for a banner 2005 year . I keep saying it was all false demand in that alot of those investment buys were for short term flips .
Well said Housing Wizard,
Looks like the $h!t is going to hit the fan in ‘Ohhhh!-6. (2006)
ISTM that if this is true, one of the difficulties when this unwinds is that the worst of the oversupply of homes would be in “vacation” areas. There is always a relative oversupply of homes in vacation areas relative to the number of year-long residents. When the First National Bank of Mortgage Equity Withdrawal closes its doors, demand for rentals in vacation areas will also go down, meaning an even greater spread between rental returns and the current prices. Vacation property could get hammerd like condos. And vacation condos? That’s where we could see declines of greater than 50%. It will be as difficult to call the bottom is it is to call the top, but there will be buying oppportunities a few years from now. Some of these “dark towers” could be great places to buy if you can get the crack-heads out.
What is a “vactation” area? NYC and other big cities draw a ton of tourists. I know people who have a second condo in the city so that they can return to the city on the weekend.
It’s just not clear to me where all these second/investment homes are located. I’m hesitant to predict that prices will fall faster in Maine than in SD.
Am radio in the bay area this am reported that 150 home owners are flooded out in Madera. Bad news for flippers that bought any of those properties. In another story, several homes have been red tagged (slipping down the hill) in the bay area but the newscaster said “It has nothing to do with how the house was constructed”….I always thought that where the house was constructed went hand-in-hand with how it was constructed. Inclimate weather is going to be the death knell for some speculators…
Sliding down the hill (with the proper insurance) is not the worst thing in the world. I think the market will be less charitable than the weather!
in 2005 wasn’t it clear to most the party was over
MN and all of NE was toppy from the beginning of 05
OK boys and girls, today’s lesson:
1. Record high real estate prices fueled by record low interest rates
2. Record high levels of speculation by investors & 2nd-home buyers
3. Record high consumer debt
4. Record low savings rate
5. Record high level of home-ownership
6. Extremely lax lending practices
7. Rising interest rates, ARM resets coming soon
8. New Home building continues at record levels
9. Rapid increases in new and used inventory on the market
10. Sales of new and resale homes on the decline.
Nope, no bubble here. All is well. Things are returning to normal. Now is a great time to buy. Homebuilder stocks up today. Everyone’s happy. Have a nice day
don’t forget 11. US finally in a mood to curb immigration
Fred,
I love your comments but EVERYONE keeps missing the #1 contributing factor! In 1997 the tax code was changed to allow people to downsize w/out penalty! One of the articles today (Ibelieve in USA Today) finally mentions this. Any list of bubble factors has to start there! If people had a 15 or 28 or 35% tax bill dangling over their heads do you think we’d have to deal w/all of this silliness? I’m not trashing your list, just revising it.
Silly me. You’ve picked one of my biggest bones of contention with our “system”, that is, the gross tax preferences given to homeowners via the tax code. It’s truly the greatest tax giveaway in history (the cap gains exemption and the interest deduction). The “landowner middle class” is a tax-subsidized welfare society. Employers of illegal immigrants are exploiters of cheap labor. Politicians on both sides of the political spectrum pander to the landowners (NAR), businesses (NFIB/ASBA), while the attorney’s (ABA) ply their trade of suing anyone and everyone for anything. The factionalism created by these problems are dividing our country. I’ve probably touched a few raw nerves here so I’ll leave it at that and look forward to more commentary.
Keep going, please!
Fred,
No, by all means don’t let me stop you! Right along with the generous subsidies is the fact that we are encouraging people to get the biggest loan and then “write it off” against their income. What a farce. Let’s do this, you can write off up to the MEDIAN in your area. Anything above that is a “lifestyle choice”. And I for one choose not to subsidize THEIR lifestyle. It’s just ridiculous.
Of course the favorable tax codes was one of my reasons for selling a place I lived in for 23 years in 2005.
Don’t blame you a bit. I am in a position to play “buy/sell” every 2 years. It’s the best deal in the history of earth. But you must be able to buy profit going in, something extremely difficult to do at this point in time. In the meantime, save lots of cash.
I disagree. If you downsize to a less expensive home, this will NOT inflate a bubble. The trouble is that second homes and investment homes get many of the same tax breaks as the primary residence.
Can anyone please inform us as to exactly how second homes are treated differently regarding mortgage deduction/capital gains/prop taxes? Thanks!
Oohhhhh TEACHER FRED…
Sometimes people have to get bit in the a$$, when the obvious truth is in front of their face.
I was in a good mood then DinOR got me started.
Fred Hooper,
Fred, this garbage gets me going EVERYDAY! I appreciate your intelligent treatment of what is to many a very touchy subject.
Renting a vacation home is easily 75% less expensive on a per night basis, plus there’s no commitment!
We regularly rent up & down the CA coast, with access to multi-million dollar homes, for never more than $200/night all-in (rent, TOT, cleaning).
Unless you’re an end-user, or believe real estate will grow to the sky, there’s no economic reason to own a vacation home.
norjacwy,
I have to agree with you “in principal”. My youngest daughter’s H.S grad. this June calls for getting a beach house (tradition in OR) and most required a weeks stay and were more like $300 a night. I’m sure that can be negotiated. No matter. I’m not buying a “vacation/inv. home so we can spend 2 weeks (maybe) out of the year there w/ year round bills.
norjacwy,
Are you in Jackson, Wyoming?
If so, what is the market doing there?
Haven’t left a link here in a while, but today’s post on the Pomona Report is pretty interesting:
Debunking the Dismal Duo
Hey Ben!
It is .
“A small group of economists argue that housing prices in many parts of the nation, including the Washington area, have so outstripped those supported by economic fundamentals, such as income levels, that they are due for a painful and rapid correction that could cause a recession.”
I guess that some of us here are part of this SMALL group. I’d rather expect the worst and things not get that bad then to expect things will be rosy and find the bottom falling out.
“Economy.com figures that mortgage refinancing put money in Washington area residents’ pockets equivalent to 14.5 percent of personal disposable income.” Does that mean we can put a minimum loss on future retail spending?
(SpecVestors are already leveraged, hence adding to foreclosure inventory. Where does this money come from?)
Who knows? Maybe 10% of current American homeowners will end up renting from the Chinese. The point is that smart money makes money buying assets when money is tight, not when it is loose. The speculators I refer to are those who haven’t been buying in the bubble.
Gotcha. Makes sense Larry. Speculators speculated in the bubble. Investors will invest in the bust.
As long as I can rent a $1M home for $2,000 for less, I don’t care who owns the home. I’ve completely given up even the thought of owning a home. I can actually afford most CA homes outright, but I’ve got better use for my money. Why not just take advantage of the situation to be a happy renter?
Hey Goleta,
I’m right there with ya. I’ve owned many a SB home…. but I don’t right now. The market got too goofy, so I pulled out at a good time, and now rent- waiting for things to ‘adjust’. A total gamble on our part, but when you see a window of opportunity- you just got to take the chance and do it. I suspect there are a lot of us (on the blog, etc) that are sitting on the sidelines, waiting for a ‘better’ time to buy.
I think you and Goleta may have discovered the hidden secret to retiring wealthy in CA: buy low — sell high (and I am speaking of residential housing when I say that, of course!).
I’m one of them. Sold summer ‘05 because it just seemed stupid not to cash out. Happily renting and watching my real estate gain churn out $2000/month in interest. I think there are a lot of people waiting on the sideline, but I don’t know a single other person personally doing. Most of my friends bought in ‘03-’05, and most of them tried to talk me out of selling. And these aren’t normally stupid people. Just got caught up in the frenzy.
Way to go VioViv. Nothin’ like makin’ free money! Your friends will think you are smart, but it’s going to take a year or more before they realize it
I’d have to agree, the next round of buyers will be the professionals and the vulture funds. It’s going to be like taking candy from a baby but thats what they do.
Maybe that explains why Toll’s minions are sniffing around Carlsbad. Although the article I read last Sunday made it sound like they are in a big hurry to build $1m+ McMansions up there (could be a head fake: pump & dump for now, with a long-term plan to purchase land after the bust).
Get Stucco,
Definitely the easy money has dried up, and I don’t doubt your theory that the seasoned will try just about any ploy to dump holdings.
I think this article and many of the ones out in the media lately confirm alot of the assumptions that were made on this blog for the past year. I always assumed that speculator purchases made up alot of this bubble, but 40% (if it isn’t higher) is really amazing.
Speaking of vaction homes, how about 975 (half of them shorefront) being dropped down in the middle of the Maine Woods? Well that’s the plan that was announced yesterday by Plum Creek, apparently the nation’s largest REIT.
An interesting article and reader comments can be found at http://tinyurl.com/rrlwy. Seems developers will go anywhere for the almighty buck and nothing is sacred. Lingus - can they do this in Vermont instead? Rumor has it you like these folks from NY-NJ-Ct.
C’mon dude. You know as well as I do these people don’t have the physical fortitude to deal with the elements. Especially Maine. Let the REIT’s build and build some more. As we’ve seen here on this blog, the investment paradigm of the 20th century doesn’t hold water now. RE, domestic equities, gold holds no promise. Globalization is upon us.
And NO! We don’t want your NJ/CT/NYC scumbags. We have enough of the retards running around here. [laughing]
“Nearly 28% of homes bought last year were for investment purposes, and an additional 12% were vacation homes, the figures show. ‘Real estate has outperformed virtually every other investment vehicle,’ said (broker) Ron Peltier. A lot of people have just speculated in real estate.’”
This is astonishing. 40% for second homes? I would love to know if the number has ever been this high before. Amazing.
Here are some ideas to prick the bubble and to remove gross inequities in how these “luxury” items are taxed:
1. Remove the mortgage interest deduction for everything but the primary residence.
2. (In California and other relevant states) Remove the Prop 13 assessment freeze for second homes.
3. Treat second homes exactly like any other investment with respect to capital gains.
I tend to agree with you . As any person would ,I took advantage of the favorable tax codes last year on my primary residence ,but I didn’t own anything else. In Canada they do not allow a interest right off on the primary residence ,(only on investment property do they give the tax breaks).
I didn’t live in Canada , Im just giving you a example where the tax structure is different .
What would happen to your business if 40 percent of your customers were gone?
RE is going to find out.
“Americans snapping up second homes, as investments or vacation properties, accounted for four out of every 10 sales of existing homes last year, a record that helped drive the real estate market to new highs, according to a report being released today by the National Association of Realtors.”
Oh — my — gawd… (Mouth is gaping open…)
Calm down Get Stucco… we’ve all grown accustomed to NAR shenanigans…
four out of every 10 sales of existing homes
I only just noticed that. I’m with GS here.
Had to share this statement from a realtytimes realtor in the SFV:
“A number of homeowners in South California have relocated out of state for employment. Several available homes have flooded the market as a result driving prices down. The number of sales noticeably drops, while prices are increase statewide. No bubble here, but we are experiencing a more normal real estate market. The economy is improving. Single digit appreciation is anticipated, prices are not expected to drop. This could finally mean a break for buyers.”
(And NO! We don’t want your NJ/CT/NYC scumbags. We have enough of the retards running around here. [laughing])
Yep, that’s the attitude. Stay down there. Just send the state income tax dollars.
Hey. As long as they aren’t showing their faces here, no problem.
what’s funny is that the RE people couldn’t even connect these dots…it’s not all vacation properties, it’s also just people deciding it’s reasonable to play landlord. In my college-rental town of Ann Arbor MI I have never ever seen so many “For Rent” signs. A realtor I spoke with said he was shocked to hear these numbers (I think they were at the time unconfirmed still for 2005) but at the same time he knew that there were just soo many sales in town made to people thinking that they could do a little landlording as an investment. And when I drive through town there are For Sale signs everywhere as well; it’s rather astounding really. There are some homes which had For Sale signs on for the last year or so, were un-signed for a couple months, and now have For Rent signs on them lol!
Is the NAR going to hold on to their party line about a “soft landing?” Because this statement from their chief economist suggests that a hard crash is more likely:
‘What’s going to be leaving the market right now are the speculative investors who came into the market and were trying to flip homes,’ he said. ‘They were buying one, two, three or four properties at a time, and that was distorting the numbers.’
Wave goodbye to 40% of the demand pool. And those were the ones who thought RE would go up forever at double-digit rates. The remaining 60%, who have a stronger interest in buying homes at affordable prices because they only want a home to live in, not to satiate their greed, is more inclined to wait and see what end of the forecast range of -10% to -50% price declines proves correct before they buy anything.
Bye bye 40% of the demand, hello to double the inventory (which is exactly what is happening).
Astute observation. There’s no data to support a soft landing, despite how Lereah attempts to spin the facts he’s forced to report.
NAR Snake Oil for everyone!!! Whatever it takes to massage the masses.
This is the capper that forces me to consistently doubt Dataquick’s analysis and objectivity:
“Down payment sizes are stable, as are flipping rates and non-owner occupied buying activity, DataQuick reported. ”
You can read this sentence or subtle variations thereof, at the end of every single SoCal Monthly Market report they release.
Non-owner occupied buying activity has reached a permanently high plateau of 40%.
The actually inflation number, during past three years, is much higher than the manipulated CPI number. The Fed should bring interest rates to around 7-8%.
To deflate RE bubble, the mortgage rates should go up to around 10% to justify the underline inflation. If the Fed stop rates hiking at 5%, the RE bubble will NEVER pop and IMHO this is the scheme currently Fed members try to do.
If word gets around that your “much higher” inflation figure is correct, the bond market will eventually do the Fed’s work for them (like it did in the late 1970s, before Paul Volcker took over and brought inflation under control). You can fool the markets for a while, but not forever.
Speaking of the Fed, do you suppose this figure, that “40% were investor/vacation homes in 2005″ could reflect their future thinking on rates?
Specifically, will they turn the screws tighter on rates than they would otherwise (than if there were fewer investors/vacationeers)?
And what if there is a recession beginning later this year or next? Ease up less than they would otherwise?
[Yeah, I know their mandate and all, but I don't believe they don't consider assets in at least some of their thinking]
I can’t imagine BB or anyone else who taught econ at Princeton believing that this housing-driven economy can be sustained without accumulating further damage and creating an even bigger collapse down the road. Whatever his exact strategy, I am fairly sure it has a primary objective of letting the air out of the balloon slowly enough so that it does not pop. This is easier said than done, given that the balloon is stretched to the breaking point already.
Do not underestimate the committment of the current insurrection to drown the government in the bathtub. What better way to destroy the great society than by instigating financial chaos to usher in class warfare. The wealthy will not be affected and the rabble will be shot as they rise in self-defense. Boom! And Bust!
I saw this number on the USA Today and was shocked. It’s houserifically high. I could never understand who was buying all the homes I see when I visit my parents in the burbs. MegaHomes everywhere. Even jamming them in between homes in previously developed divisions (like behind my childhood home, where a farm stood until a few years ago). In my parents current home, they used to be secluded, but someone built a 3 storey across the street, which is too big for it’s lot (they subdivided a big corner lot). Then there’s the condos everywhere, and “luxury townhomes” for $400k-$1M, in Pittsburgh! I love my city, but if I thought something funny was up a several years ago, I can’t imagine how bad this might end up. They’re still building here - suburbs keep moving further out. It’s insane.
I took a detour on my way home in SD last night off SR 56, as traffic was not moving. I got lost in this vast McMansion tract — it was like a city unto itself of super-sized homes, all clearly built in the last five or less years. The area was so humogous and byzantine that I began to doubt that I would ever find my way out alive!
After reading this thread, I am dying to know whether more than 50% of these are investor or vacation homes? Knowing this figure might go very far towards explaining San Diego’s chronic housing shortage. Anyone who tries to carry the costs of one of these behemoths for a few years as a second (or more) home is going to quickly learn that there is more to real estate investing than whether you can afford the monthly payment, especially when 10% YOY appreciation is a fading memory.
I cannot speak to SD but in Napa there is an awful lot (>10% of new sales) of second home vacation home investment hybrids with part or zero time occupants. A few years ago, Napa 40% of the real estate in Napa was rentals. Dont know how sustainable the recent and continuing trend is because Napa is a postcard destination and its different if you are rich and its a great time to be rich in America. The prices are pretty sticky here but we are seeing some reductions and volume is declining. But the inventory has not spiked. Maybe realtor collusion or people with means who are not so desperate.
Getstucco,
I know the area you are talking about. Funny thing is that San Diego built low-income housing right in the middle of those McMansions. The low-income units look like the McMansions (same color, look, feel) but much smaller in size.
I too was wandering if those were investment homes. Half of them look empty. I did have a relative who purchased a home back in the early 2000s before the 56 was completed. He told me that all his neighbors were counting their two years so they could sell and pocket the profits. He was lucky. He got out at the peak. Since then the area has sprouted more McMansions than one can count!! I assume the new owners are trying to do the same.
a few facts inflation number in OC during past five years,
———————-
Non-CPI items:
RE prices up >= 130%
Gas up 120 >= %
———————
Rent — up >=30%
Food — up >=40%
Car — same, with improved features, CPI down 20%
Computer - ………………………., CPI down 20%
Electronics —————- down 20%
—–
—————————————————–
What a smart idea of this for CPI readings,
The inflation rates at least 8% pace per years,
but CPI is just about 3%, that’s the main reasons
to create RE bubble, IMHO,if CPI measured the way as it is,
the RE prices will NEVER be deflated.
I am not surprised at this article. Just check the pictures of homes on ZipRealty or even Craigslist. A good portion of the listed properties, as far back as mid 2005, are vacant!!
Also, as a downtown SD renter, I notice it everytime I drive home at night. So many dark condos at night!!
I say: “San Diego condos for everyone!”
They’ve all gone to Houston to buy there too.
An investment newsletter commented last year that the level of speculation is even higher than most acknowledge. In his opinion, anyone buying zero-down / interest only for their primary residence was speculating, since their situation was entirely dependent upon continued appreciation. Very astute observation.
RE agents and lenders should beware: Their commission is a pittance compared to the cost of litigation. They need to disclose up front and in writing the extremely high risk of buying residential housing today.