For Speculators, ‘It’s Time To Skip Town’
The Wall Street Journal has some real estate advice. “As many real-estate markets soften, speculators are finding they can’t flip their investment properties for a quick gain. That leaves them with a tough decision: Should they hang on and rent or should they bail out, possibly at a loss? Here’s a look at that agonizing choice, and why selling your investment property is likely the best strategy.”
“To find out if you’re in the ‘no choice’ camp, simply run the numbers. Take the rental income on your investment property and subtract your costs, including the mortgage, property taxes, insurance and maintenance. If the house or condominium is a sizable cash drain and there’s no way you can keep covering the shortfall, you’ve clearly got a problem.”
“‘You have to be able to afford to hold your properties. Most of these people ought to sell, because they don’t have the aptitude to be a landlord and they don’t have the cash flow.’ said John Schaub, a real-estate investor in Sarasota, Fla. And don’t kid yourself: If you have a cash-flow problem now, it could get a lot worse. What if you have trouble finding tenants? Imagine how grim things could get without any rental income coming in.”
“To make matters worse, you could be hit with rising borrowing costs, as the rate adjusts upward on your mortgage or as principal becomes due on your interest-only loan. ‘A lot of the people who bought investment properties are using these exotic loans,’ says economics professor Karl Case. ‘You could have the double whammy of falling prices and rising carrying costs.’”
“Even if real-estate prices simply stagnate, many property speculators will be reluctant to sell their homes and condominiums, because they will be under water once they figure in the 5% or 6% selling commission. Indeed, this reluctance to sell at a loss helps explain why a slowdown in home sales typically precedes a price decline.”
“Homeowners have a target selling price, it might be the price they paid, or the price they could have got at the market peak, and they initially refuse to accept anything less.”
“But waiting to ‘get even, then get out’ could be a huge mistake. Not only will you have to cope with the property’s monthly cash drain, but also you could be hit with leveraged losses. If you bought that Florida condo with 5% down, all it takes is a 5% price decline to wipe out your equity.”
“‘When prices start to fall, they usually continue to fall for a while,’ real-estate professor Chris Mayer, a warns. ‘You want to be aggressive in setting a price that allows the property to sell, rather than slowly lowering your asking price and following the market down.’”
Thanks to the readers who sent in these WSJ links today.
“Sell when you can, not when you have to.” as the saying goes.
I actually like Trademark Properties’ “Flip This House” TV show on cable. This latest episode they overpaid and overspent, and at the end of the show the owner said if they had to sit on this for a year or more to turn a profit they would. “Sitting on it” might have worked for the last 6-8 years.
That seems to be a common theme in the show episodes, they buy something, fix it, and then it doesn’t sell (at least by the air date of the episode). They also never seem to be able to stay within a budget. Not a very well run business, but it does make for interesting television.
The last episode I watched had the owner running around looking to borrow more money before the court took away some of his 50+ investment propertys.
That is a great show. In one episode they didn’t file a building permit and law enforcement shut them down. The owner told the camera that they work without a permit all the time, it’s no big deal and told the construction crew to keep working. Law came back again threatened arrest and charged a fine. At the end of the show you see the owner kissing the county clerk’s butt to get a permit.
That show has taught me that buying a “remodeled” house may not be a good idea. A lot of the time they just cover up stuff without fixing it. It’s best to buy an older home with good foundation and do the remodling yourself or hire someone and watch them closely. I’m thinking about joining habitat for humanity or some other organization in order to learn a few carpentry skills so that I can do some work on my future house myself. Do it yourself is sometimes the best plan.
I love ginger
I think the whole construciton crew loves ginger and her high heels. Who wears high heels to a construction site? Come on.
>waitingitout
>Who wears high heels to a construction site? Come on.
As dwr said: it does make for interesting television.
Yes, Ginger is great. The show where they were fighting over installing a deck in the back of a house captured some of her best moments so far.
A couple of comments about remodeling:
1. You don’t want to be living in a place while you remodel it, trust me.
2. If you don’t have the skills already, you are better off hiring people to do the work, at least the first time around.
3. Some skills are not worth the time and effort to learn unless you plan to make a living using them. Examples include finish carpentry and finish painting.
Oh I’m not talking about putting in a whole new kitchen. I’m smart enough to know when I’m in over my head. I’m talking about small stuff like painting a room a new color or at least when I do hire someone to re-do my kitchen I will be able to scritinize their work. At this point, I coulnd’t tell you what kind of paint to use inside my house. I’m just now savvy with anything that has to do with house maintenance or small upgrades.
We “lived” in our house while a reno in the kitchen.
If we ever buy a house that needs a new kitchen, we will have it put in before we move in. It was horrible.
sm Landlord “Is Correct”….
Those shows were good for showing the public how much money they were putting in the pockets of flippers. After 20 or 30 grand in work, some dope would go into debt to put 100 grand in some flippers pocket. If anything I think those shows helped to educate the public.
To many people decided to become flippers after watching these shows . Flippers either bought over priced fixer uppers or they bought something they didn’t do anything to .
Most people will not buy a fixer-upper even if it is only cosmetics that are needed. People want “turn-key” and are willing to pay a premium for it. I love ugly paint, old carpet and outdated kitchens and baths. There is definitely serious money to be made if you know what you are doing.
Average Joe thinks a new kitchen will cost 100K and have his house torn apart for 6 months. Most people have no vision at all. I really like the show. I’ve done many of these “flips” and can guesstimate the contractor costs, carry costs, closing costs, etc. fairly accurately. I always add a “surprise” factor for unexpected problems.
But I don’t think the general public would ever consider a fixer. I would say you lose 90+% of your potential buyers even if the house is discounted to reflect condition and even in a hot market.
I like fixer uppers too. I am looking for a house to live, not for investment, so I will buy this year or next if some thing decently valued comes up. So many places have been fixed up. Not interested in paying premium price for what someone else likes. Eample: granite countertops and stainless steel restaurant appliances. Ugh! What a waste of money.
I love fixers. If I’m looking at property to invest in if I don’t smell urine and trash I’m at the wrong address
va_investor. Your right most people are lazy. The only question they consider is if they think they can afford the payment, so they can just go home and sit in front of the T.V..
if I don’t smell urine and trash I’m at the wrong address
That’s how I feel when I’m going to a party at a friend’s house.
I actually like stainless steel appliances. However, I am speaking of the common, more stylish, and less industrial appliances you find in European homes. Companies like Neff and Miele make fantastic gear - but nowhere near as expensive (at least in Europe) as those Viking super-sized appliances.
I’m the permit person in my town. It happens all the time. I think it’s called “putting lipstick on a pig”. I ran into one today where the contractor was working without a permit and was just about to cover up some sick looking wiring when the inspector showed up. You better find out what you’re buying when you buy one of these fixer-upper flip-jobs.
That reminds me of the 30 minute house flipper show on HGTV where the contractor refused to work unless the flipper obtained the proper permits for the work. She promptly fired him and found a more ‘willing’ contractor.
Habitat might not be the best way to learn the techniques, as they typically use methods that are not always the best or easiest but make use of the massive labor pool they draw from. (ie Air guns are a great tool for all but the smallest projects, but I’ve never seen one on a Habitat site labor is free and vols will get bored if there is nothing to do so the investment would be a negative). Try to pick days when there aren’t a large number of others there (as most of the day will be spent organizing the masses). That said it’s a great charity, and their construction seems to be of very good quality.
My h was formerly in construction. In NH a lot of my male friends did professional residencial construction for some good summer money while in college. But they often can’t do projects alone. People learn so much from each other when you get a group of guys sharing skills and helping each other with projects. I’d recommend that type of situation for learning.
IE My husband put on our new roof with the help of 2 friends. Later they did the other 2 guys’ roofs. My h was the one with the speed and skill but he absolutely needed the other 2. (We paid $2500 for our 30 yr achit shingle roof while my unskilled neighbor was getting quotes of $8000 to $10000 from people who had no insurance and his roof wasn’t even as complicated as ours) Construction skills can be worth their weight in gold!
I loved the episode where they painted the same house 3 times before they got the color right…
New idea for a cable TV show. “Flop this House”!
I have bought many a fixer upper in my lifetime , but these days you can’t get them cheap enough to warrant the fix up .
As I recall, the same TV show that made “sit on it” popular was also responsible for “jumped the shark”.
This is one of my fave shows. They don’t have cash flow problems, though, the owner is really loaded. He’s been raking in the bucks every 10 days for the last decade, and doesn’t live lavishly.
He could have retired years ago.
Had he started his business today, that may be a different story, but he didn’t.
Holy smokes. The WSJ encouraging the investors out? Maybe hoping for a stock market influx? I read the Journal and subscribe on-line (obviously I didn’t get to it in the last bit) but I wouldn’t have expected this.
Is this huge?
Yes, cause a lot of folks take WSJ as gospel especially on the East Coast. Unfortunately Californians need to see the sheriff at the door before they figure it out.
I saw the CEOs of E*trade, Ameritrade, and Scottrade on CNBC a couple of weeks ago and they were all saying they have had a dramatic increase in investments since the housing bubble began its’ “soft landing”.
Holy smokes. The WSJ encouraging the investors out? Maybe hoping for a stock market influx? I read the Journal and subscribe on-line (obviously I didn’t get to it in the last bit) but I wouldn’t have expected this.
Is this huge?
I wouldn’t call it “huge.” In fact, it sort pisses me off that, while they’re suggesting everyone should sell their real properties, their wholly-owned subsidiary, Barron’s, is pumping the homebuilder stocks. Makes me want to puke.
They don’t call it the “Wall Street Urinal” for nothing.
Why could it not be that houses are over priced, while builders were underpriced? While both are subject to the same general trends, there are a host of varying dynamics that impact the two in many opposing ways.
A quick example would be what if the builder companies were discounted heavily enough the companies were selling at a price that equalled SFH (in bubble areas) valued at $200,000-$300,000. Would that not be a pretty good deal, even if selling your personal residence was a bad idea?
Houses are seriously overpriced. In strong bubble areas the percentage of the population that can afford a home is so small that by the most common statistical definitions it is no longer significant. It makes sense for luxuries to be targeted at less than ten percent of the market, but not homes.
Bluto - I don’t understand your question. But I will say that builders are classic cyclicals. Everyone is shouting “it’s different this time,” while the builders’ order books decline and their profit margins shrink. It ain’t different man.
Theoretically, yes, houses could be overvalued while builders are undervalued. If you can help show me a builder stock that I should buy right now, I would appreciate it.
I’m certainly not saying one is, just that there exists the potential for the situation to develop especially when the builders liquid stocks have tanked in the last six months, but house prices have essentially remained flat (even if volume dried up).
Barron’s is usually far more reflective and generally has good insights even if the conclusions drawn are occasionally odd or incorrect. It’s useful as the beginning of a sounding board if nothing else.
“If you bought that Florida condo with 5% down, all it takes is a 5% price decline to wipe out your equity.”
No, all it takes is anything less than 1% appreciation to wipeout your equity but I’m being kind. Any costs are actually equity protection fees. That monthly HOA is ‘poof’ every month. The undeductible interest is not building equity unless prices are at least stable. This is exactly like going into apoker game with inadequate stake. no matter how good, you can be wwiped out by random variation.
Or just one tenant who sets up a meth lab in the place.
Or one neighbor down the street.
monthly HOA is ‘poof’ every month.
I’m glad you brought this up. Nobody seems to include their HOA costs when they brag about how much money they’ve “made”.
And don’t forget, you can’t predict HOA costs! If one of your neighbors sues the HOA and wins, all the other neighbors can (and will) get a “special assessment” to cover the judgement.
In Orange County, Florida, new communities have MANDATED HOAs! (The government thinks it will save them $$ on code enforcement, etc). This includes SINGLE FAMILY DETACHED HOUSING!
And these HOAs come with other horror stories. Imagine some old biddy on the “Review Board” telling you what color you can paint your trim! Is that any way to live in the United States of America!?
It took me about a year to find un-encumbered land in Orange County, FL for me to build a summer home one (and some legal work to get it exempt from a pesky “village overlay”). As people with crazy mortgages get squeezed more and more, these HOA dues will be more and more burdensome.
Even when the residents are reasonable, conditions may not be so kind. Plenty of Florida and Gulf Coast owners are having to contribute huge amounts to the repair of storm damage even when their own units were unscathed.
No HOA was one of my non-negotiable requirements when I was looking for a house. I figured if I wanted some buthead telling me what color I could paint my front door I might as well continue to rent, thank you very much.
…and don’t forget the 6% RE transaction fee….
Or the REO accross the street…
Read about ISecond Home Blues.
“I can’t help but hope that those buyers who helped to set this new record had planned to hang on to these properties for a while and not rely on their real estate appreciation for investment income.”
it ’s gonna take me hours to get through all today’s blogs.
sleep is for wimps
Yeah, Ben was on fire today.
We even had ANOTHER rehash of the lecture on bad form in celebrating the natural consequences of speculating.
I can’t imagine the feeling speculators must feel in the pit of their stomachs if this article is the first realization they have that they’re screwed. I read and thought to myself, “who wouldn’t consider these things before buying?” I guess that’s why I only own one property - my house.
Who cares what they think or feel? I care not. People make and lose money every day in all types of endeavors. Real estate is no different. Why do people on this site obsess so much about winners and losers?
Perhaps because unlike stocks or other investments, the “winners” create a serious hardship on the “non-winners.”
The whole game is seems rigged. The information the “loosers” follow (the media) is believed by them to be fair and balanced. When it hasn’t been.
Everyone was a winner on the way up. Now it’s time for lots of loosers.
I assume you mean “losers” not “loosers”. Anyway, the so-called winners did not “create” any hardship for anyone. Owning a home is not a necessity and who ever said life was fair. I want to win the lottery or be Bill Gates. Too bad, so sad.
>Why do people on this site obsess so much about winners and losers?
Why are you obsessing about what other people are obsessing about? As you said, “who cares?”
These comments take up time and space and add nothing to the discussion.
there is a concept known as resource management. It has broad applicability. If ignored in large proportion, the collective wealth, our culture, is f*’ed!
the WSJ seems pretty relentless in its real estate coverage recently. i’m now noticing corners full of “for sale” signs during the week, not just weekends. also, “reduced” listings on craigslist are skyrocketing. i think we’re at a point where things are coming unglued. there are no data points coming out that things are getting better; every single data point is flashing red.
” i think we’re at a point where things are coming unglued.”
and paints peeling, tile is popping loose, rooves are leeking.
>there are no data points coming out that things are getting better;
>every single data point is flashing red
Nope, the “big one”, the one that Joe Sixpack and Nancy Pinot Noir look at the most: Year over Year changes in median price! If/when you see column after column of LA or OC (Cali) zip codes (finally) showing YOY declines, you can finally stick a fork in the “Permanently high plateau”.
When did Joe leave Sally Winecooler for Nancy Pinot Noir? Now THIS is news.
She changed her name when the pulled 100k out with a HELOC.
I thought Joe was with Mary Jane Boxwine.
Just saw “Fun With Dick & Jane” last night on DVD. The look on Jim Carrey’s face when Tea Leone told him “Jim, since the company closed, prices have dropped by $150,000.00. If we tried to sell the house now, we’d have to pay money” was priceless. Absolute bafflement and incomprehension followed by seething rage. Also one extremely good point raised above. We’ve enjoyed a nice, long run of falling crime. When people are $150k in the hole and have no food and no money, they’re not exactly predictable in their actions. Some of the people in the movie turned to raising crops of an illegal nature, some to porn, some to petty and not-so-petty larceny, etc.
Please keep your hands, feet and personal property inside the car at all times until the ride has come to a complete stop… and enjoy your ride!
Within 3 years of the original, average mortgage rates hit 16% for a 30 year fixed (April 1980). Do you think that could happen again?
thanks for the excuse to rent a silly Jim Carrey movie…I’ll have to watch it now!
This reminds me of the news item from yesterday about the couple who pretended they gave birth to sextuplets to scam money from people to pay their bills?! I love that story…hmmm…how can we make some money to pay for all the crap we bought on creditcards and HELOCs now that we’re about to get foreclosed on? Please, help us buy diapers and formula for our 6 starving little babies…
I’m suspicious about the sale price numbers that are still increasing at a decreasing rate. All of the anecdotal evidence that I’ve been comming across tells me that transactions are occuring at discounts to 2005 prices. Yet the statistics don’t show it. When will MLS officers start going to jail for fraud?
Hopefully very soon - LOL!
Depends on where you are looking, and what numbers. Median price, average price etc are deceptive numbers. In SF Bay Area, prices are not down over 2005 numbers. If at all they are higher. Anything that is priced below market is snapped real fast - like in a couple of days. Anything that has a very high asking price, doesn’t even get any visitors.
In BA, the only numbers that are negative, is number of sales and median price for a NEW house. These are leading indicators. So far so good.
The problem with looking at the median or mean is that they tell you something about the distribution of houses that are on the market. For example, the mean and median could go, not because houses are more expensive, but because the market has shifted to larger, more expensive houses.
The best way (although not easy) is to track equivalent houses. In my neighborhood of equivalent townhouses, the peak asking was $500k and the peak selling was $460. Now the asking price is ranging from $440k to $420k (although I did find someone on Ziprealty that had listed for over $500k only to reduce it to mid-400s within a few weaks).
Northern VA numbers are actually DOWN for the first time, year-over-year. Scroll down and look at the graph in the lower left.
thank you wsj,and as for the speculators who decide to ride it out with 5% down and an arm,the legal profession will be thanking you for years,if not decades….in my area near santa rosa if you are priced 5-10% below august it will sell,but lots of new homes coming on the market and inventory growing very fast of older homes.
OT but related to future flooding in CA:
‘The worst-case scenario, said Strickland, would be a spate of hot spring weather immediately after the passage of the current cycle of storms.(Related to melting of snow pack that is already 150 of normal)
“That would present some real problems,” he said. “Ideally, we’d like to see some dry, moderate weather to give things a chance to dry out.”
That doesn’t bode well for Sac and other towns along the SJV.
Let’s all repeat, “Anyone who buys now is either brain dead or retarded.”
An extension of that would be anyone who buys in the next year is trying to catch a falling knife and will get cut nice and deep.
Prices are set at the margin, and if all that is left in the pricing game are people that will not buy until their price threshold has been hit, then prices will continue to fall. Right now the trend is pointing down, and there will be no reason to buy until the downtrend ends and prices begin to flatten and subsequently reverse direction. Of course a lot depends upon Helicopter Ben and whether he decides to go Weimar on our asses. Of course if that occurs it would be a lot easier pick through the human carnage to round up shock troops to ship off to Iran. Hmmmmm.
Death’s head skulls and black uniforms for everyone!
Don’t think about buying until the articles about America’s record foreclosure rate have been cover stories in Time and Newsweek. I actually thought about selling last Summer, but I like my short commute, my house is OK, and I don’t think I’ll ever see a better mortgage (4.875% 15yr fixed) than the one I have now.
Death’s head skulls and black uniforms for everyone!
SCS:
As an amateur military historian, I’m afraid you are closer to the truth than you might think.
Government at all levels have lost the ability to keep things in check.
Load the gun locker, while you have the chance.
Best to go out fighting than to be dragooned and enslaved.
I wish I could bring up the post from a realtor who said that MLS was a private listing service, and the selling agent could put whatever selling price he wanted on a sold property. This agent had gone to county records and found many properties with recent selling prices up to 20% less than MLS records. Just more ways that RE insiders hope to leave outsiders as the last “bag holder”. And another reason for the price decline delay. Nobody really knows what their own piece of RE is really worth until the last check clears the bank, which may be years later and thoasands of dollars less than their first impression.
Dave:
Most telling was a couple of postings over at Piggington.com.
Check these out with the 3rd type of lie.
LTV means nothing in the new world of piggyback loans.
Combined LTV (CLTV) is crucial.
For a discussion on the topic with NAR see the following links:
http://piggington.com/misinformation_from_the_nar
http://piggington.com/nar_speaks_on_ltv_vs_cltv
Mark Twain has said that there are three types of lies: lies, damn lies and statistics.
Well yes and no. The Trillion dollar question is: who is the bagholder for these piggyback 2nd mortgages? I wouldn’t be shocked if there is a greater than 50% loss of principal on them over the next few years. This will lead to their disappearance from the marketplace, because there is NO interest rate that will cover this kind of risk premium.
That agent was pulling your chain well lets if he said that a bout Los Angeles property. One the local MLS here will fine you two access to public records can be done from the MLS and unless your in some rural part of the country I’m sure it can be done from any MLS. So I doubt that holds water
Dave,
We just closed escrow on the sale of our place and I was very nervous till I saw the funds wired into my bank on Monday. Now I know exactly what my house was worth (a little less than Aug-05′ peak). Folks, it is dead out there in the once hot Southern California market. I feel so lucky to have gotten out this Spring. It was later than I wanted to sell but it took a while to set up the GREAT rental at the beach that we have now so it was worth waiting. I sure feel like I escaped by the hair on my chinny-chin-chin. In 2 months we had mostly agents looking with no buyers (preview only). Stark contrast to last year when we sold (contingent) in 2 days (we ended up not selling in 05 and decided to stick it out a little longer). When we finally got an offer I told my wife…”the first offer is probably our best offer, let’t take it”. We did and I am happy to be out of real estate ownership and into my rental house. Sitting on the cash (bought in 95 so its a bunch) till things sus out.
I really appreciate this blog and some of the other great material that has been written over the last few years regarding the real estate bubble. Read “Financial reckoning Day” a couple years ago, then Talbot’s real estate crash book…finally read Shiller’s Irrational Exuberance Pt 2 late last year. I have been a daily reader of this blog and it helped me make the move that I did. Now I happily watch from the sidelines.
Oc Pete
Congrats Pete and welcome to the sidelines.
OC-Ed
Skip town, eh? I think we’ll be seeing a lot of that when these “investors” simply walk away in the middle of the night.
I hope we can get some pics of the foreclosures for the photo gallery. I remember seeing lots of them in the 1990s. People would strip the suckers to the bare walls, taking fixtures, appliances, everything that was not nailed down. Also punched holes in walls and did other various and sundry other things to express their displeasure at being forced out.
Yea, I saw some real creative stuff it’s amazing how nasty people get when they are getting tossed
Excellent! So long as it is not permanent damage, it will lower the cost to the next owner, Me! My dad, who should be retired by then, is a contractor and we can repair the damages with whatever upgrades *we* want, and not be stuck with some fashion moron’s choices.
>we can repair the damages
I’ve people putting concrete down the toilet…*that* one doesn’t sound so great…
yes tx chic when my gf in 97 got divorced and her house was repoed a la cty sheriff who bought a forclosure down the street from her offered to strip the place of cabinets appliances etc i said to him i dont think thats right to steal property.he informed me everyone does it and its ok.i told him to go to hell and get out.
Apt description.
Saw it many times doin’ REO appraisals in ‘90/’91
Hell hath no fury like a dispossesed homeowner.
This was a great article. The most blunt to date from a “respected” media oulete (at least from what I’ve seen). This and more stories like it make up one of the two things required to pop the bubble. Without it, and ignoring unforseen events in employment levels, the bubble will have a soft landing in my eyes. Two step to a pop:
1) Stories telling investors/flippers to sell now. Hopefully more articles and media coverage to this effect are coming. “Sell now, even at a loss” is good news for bubble believers.
2) Tightening of monetary policy. This could do it on it’s own, but this is progressing slowly and needs the added juice of #1 for the impatient of us.
MLS listing price is price used to figure median sales price not final sales price. Same reasoning behind cell phone companies offering a 299 phone for 99. You pay sales tax on 299 phone not 99 dollar cost of phone. numbers mean different things to different people.
It’s all in
Wow, that’s the jackpot post of the thread IMO. That leaves plenty of fudge factor in those median numbers.
So during the years of bidding wars, NARs statistics did not reflect the fact that many final sales prices where higher than the initial listing prices?
Ben-help us check out this “inconsistency” ??
Regarding flooding in Sacramento. They have no need to fear. The “Flood Remitagator” will stop any water flow with those mighty words, “I’ll Be Back”. Problem solved. (NOT!)
It’s not over until the Sierra snow pack melts.
Mutant Ninja Resource Managers to the rescue! Just prop those levees up and keep on building!
“‘You have to be able to afford to hold your properties”
Yeah like; 1974-1977, 1981-1985, 1991-1995
I found this on another site. I’m curious about this new methodology that these two economists have. You don’t need new methodology, just common sense.
http://cbs2chicago.com/topstories/local_story_101193946.html
CHICAGO Is there a housing bubble? Are Chicago homes over-valued? Or under-valued? Are prices rising so high that people are in danger of being squeezed out of the housing market? The answer is yes, depending on whom you ask. Economists, realtors and lenders are weighing in on the issue, and they are reaching different conclusions. But they all agree that Chicago home prices are increasing and taking a larger chunk of residents’ incomes as they rise. The issue has strong economic implications, some say.
“Since 9/11, the driving force of this economy has been real estate,” said Tracey Taylor, who runs T. L. Taylor Realty on the Near South Side. “When you have this strong of a force, it grabs the attention of the world.”
Mortgage lender Freddie Mac released a report Monday that predicted sales of new and existing homes will decline by 8 percent this year as a result of rising prices and higher mortgage rates that are squeezing out potential buyers. “We’ve seen a gradual rise in mortgage rates in the last six months, and housing is at very high prices in many markets around the nation,” said Frank Nothaft, vice president and chief economist for Freddie Mac. “There’s been a pinch in affordability, and housing has gotten out of reach for many families.”
The report compared the housing markets in the Midwest to the West Coast and concluded that areas that have seen increased job growth have also experienced the biggest hikes in home prices.
Because the job market has not grown as much in the Midwest, home increases have not been as high, Nothaft said. “Prices are going up, but the Midwest tends to have more stable house price appreciation over time, rather than the boom-bust cycles that seem to characterize the two coasts,” he said.
Although the increases may not be as severe as in other markets, economists are debating if home values in the Chicago area are appropriate. Financial consultant firm Global Insight/National City Corp. said that housing in the Chicago metropolitan region was overvalued by more than 20 percent last year. It listed the median home price in the area at $265,000, and ranked Chicago in the middle of the more than 299 metropolitan areas it studied.
But a controversial report released last week by economists at Pomona College in Claremont, Calif., said Chicago’s housing market was undervalued by 17 percent. Gary and Margaret Hwang Smith also said in their report that the housing bubble is a myth for many urban markets. “Most of the country is certainly not in a bubble if you define a bubble as prices far above fundamentals,” Gary Smith said. The authors used a new methodology to gauge housing price inflation that compared the cash flow generated by owning a home to the cost of renting a comparable one. They projected homeowners’ net savings on rent and estimated fees incurred with buying a house, such as closing costs and mortgage rates. “We’re talking about people who want to live in Chicago for the next 40, 50 years or so, and they have to determine will they be happy with the rent they save if they own,” Smith said.
But Dean Baker, a co-director of the Center for Economic and Policy Research in Washington, D.C., disputed the report’s methodology. “Mortgage rates are climbing, and every economist I know is projecting it to go higher,” Baker said. “People are not going to be able to pay out a mortgage considerably higher than this analysis.” Smith said the report’s analysis must be done on an individual basis–and that changing mortgage rates and other factors can change the outcome. “We’re looking at the long-term perspective, we’re not trying to time the market or predict the absolute best time to buy,” he said. “The question is if you’re better off buying or renting in the long-term. If mortgage rates go up, that may reduce the savings, and you may decide you’re better off renting.” Smith’s report does not address affordability, which is one of the biggest issues in the housing debate.
“Affordability is an issue, but it doesn’t have to do with whether you should buy or rent,” Smith said. “If no one can afford expensive stock like Berkshire Hathaway, that doesn’t mean it’s not worth it for those who can.”
Taylor said that although Chicago housing prices have increased, more financing tools that assist buyers are available. While 30-year, fixed-income mortgages were the standard a decade ago, adjustable-rate mortgages and interest-only mortgages help buyers enter the market today, with the assumption that they can pay more as their incomes increase in time. Taylor said buyers are willing to take on these solutions even though they may carry more risk. “I think the overall opinion of most homeowners is that they would rather have a higher value in real estate,” he said.
Bershire Hathaway is not an “expensive” stock. The share price is very high in dollar terms, but it is not high when you evaluate what you get when you buy a share. Lucent Technologies, at $3, is far more “expensive” than Berkshire, at $70,000 a share.
Berskshire is the equivalent of a $1 million house that can be rented for $20,000 a month. Lucent is a $200,000 house that rents for $300, and probably has crackheads for neighbors. Which would you buy, the “expensive” house, or the “cheap” one?
I will be so glad when these clowns crawl back into their holes…
It’s pretty pricey relative to most P&C and reinsurance companies. Buffett is worth a premium, but it’s currently bigger than Progressive’s (by far the best P&C operator in the business).
Last I heard Buffet himself was pronouncing Berkshire to be overpriced. I know it’s comedown some since he said that, but I haven’t heard him say otherwise.
Interesting Read, somewhat dense http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=53196
Good article , thanks for posting it .
the “Extraction of Paper Wealth from Incredibly Appreciated Home Equity on the Aforementioned Rickety Appraisal Mechanism Game.”
RE: Rickety Appraisal Mechanism created by the racketeering Mortgage O sleazes who hire the rubber stamp, number-hitter hacks, and put the honest and ethical appraiser out on the streets.
Solution: Make it a Federal felony to coerce or extort the reporting of value by a duly licensed real estate appraiser.
Got about much chance of this happening as nothin’ ’cause Congress is bought and paid for by the NAR and MBA.
Bend over Joe Taxpayer-The fix is in.
Ben Jones:
Are postings with links to Piggington.com prohibited?
I posted the interesting information on CLTV and NARs anti-bubble reports.
They never got posted under Dave’s MLS comments in this thread.
They are there! Look harder!
I think Dolf de Roos is repositioning himself. After being a real estate mania cheerleader,
“After making a bundle on Las Vegas real estate, investor Gene Burns has his eye on Southern California, and his reasons may not be good news for local homeowners used to riding a wave of appreciation….
Burns, who lives in Las Vegas and has just published his first book, with co-author Dolf de Roos, says his ideas aren’t original.”
ah, yes, the midwest…
I like the quote from that prof in the thread-article :”when prices start to fall, they usually continue to fall for a while..”.
Today finally in the Ann Arbor News the article entitled “Listings rise, house prices fall”. The operative word is *fall*, whee!
small falls, but clear ones..
—————————————–
Listings rise, house prices fall
Average Washtenaw County sale drops over $10,000 since 2005
Wednesday, April 12, 2006
BY STEFANIE MURRAY
News Business Reporter
Does it seem like there are more “for sale” signs popping up in your neighborhood lately? You’re not alone.
There are more homes for sale right now in Washtenaw County than some local Realtors say they can remember in more than 20 years. Meanwhile, sales have been flat.
More than 3,000 homes were listed for sale in the Ann Arbor-area during the first three months of 2006, up from 2,364 a year ago and 1,654 in 2001, the Ann Arbor Area Board of Realtors reported Tuesday. A total of 634 homes sold in the first quarter, up from 627 in the same period of 2005.
The average sale price of a home in the county decreased from $258,499 in 2005 to $247,683 this year. The median sale price dropped from $218,000 to $215,000.
Local real estate agents say the economy deserves the brunt of the blame for the increase in listings. Workers who’ve lost jobs recently or have felt their job security threatened amid Michigan’s tough economic times want to downsize or cash out equity to pay bills.
“There is just so much inventory, it’s just unbelievable,” said Missy Caulk, a Realtor and broker with ReMax Platinum in Ann Arbor. “For buyers it means they have a lot of negotiating room and it means they have more choices,” Caulk said. “For sellers, it basically means the competition is tough and that your house has to be in move-in condition.”
And it has to be priced right. Across all price ranges, buyers are coming in with offers several thousand dollars below asking price - and they’re not always willing to negotiate.
“It’s definitely a buyers market right now, if you can even find a buyer,” said Nelly Wisniewski, broker at Hometown One Inc. in Chelsea. “You really have to be very honest with people and let them know unless you want to sell your property at the bottom-line fair price, expect to have it sit there for six months to a year.”
Total property sales during the first quarter - including vacant land, commercial properties and condos - dropped to 857 units sold from 877 in 2005.
Separately, sales of condos also fell slightly to 123 units sold from 134 a year ago. The median sale price of a condo fell to $164,900 from $180,300
Michigan’s housing market has certainly been much cooler than the rest of the nation.
While mortgage rates are moving up, home sales will stay near historically high levels in 2006, National Association of Realtors Chief Economist David Lereah said Tuesday.
Lereah expects the 30-year fixed-rate mortgage to rise to 6.9 percent by year end. The group forecasts existing home sales to drop 6 percent to 6.65 million units in 2006, down from a record 7.08 million in 2005.
Spring is typically a busy time for home sales, and despite the high number of listings, local agents say they’re busy. Recent warm weather has helped.
“We’ve already seen open house activity picking up,” said Bill Miller, general manager of The Charles Reinhart Co.
Miller said he’s optimistic that some of the bulge in listings has been because people who planned to sell this year heard about the tough market and wanted to get their home out there as soon as possible.
“If there are only so many buyers out there, should you wait?,” Miller said. “There’s really not a reason to wait.”
—————————————-
There are tons of new homes out there too, and more being built all the time. As well as downtown condos projects getting approved despite some reasonable voices here or there wondering whether there is actually any demand for so many new projects.
In MI we never had a huge run-up, just a steady and disconnected-from-fundamentals run-up from like 1998, but now we also have all that darned bad news about the local economy to blame any ’softness’ in RE on. Of course, the *national* economic picture is perfectly rosy ‘
April 9, 2006
After making a bundle on Las Vegas real estate, investor Gene Burns has his eye on Southern California, and his reasons may not be good news for local homeowners used to riding a wave of appreciation.
“I’m planning on buying San Diego property when the market goes through the correction that will start in the summer of 2006,” he said. “I think it will crash in 2007.”
The downturn he sees won’t be spurred by a failed economy, any slowing in the number of people coming here or a sudden burst of new construction, Burns maintained.
“A lot of 32-year-olds bought a house for $800,000 and they just can’t afford it,” he said. “In 2007, their adjustable rate mortgages will start to adjust upward and they won’t be able to find that extra $500, $800, $1,000 a month to make the mortgage.”
Most borrowers aren’t planning ahead and they will be stunned when their mortgage payment rises, Burns said.
“If you ask the average American when their three-year mortgage will correct, they look at you like you’ve asked them to explain the theory of relativity,” Burns said. “Those payments will rise and people don’t have the money for it.”
Burns, who lives in Las Vegas and has just published his first book, with co-author Dolf de Roos, says his ideas aren’t original.
The Wall Street Journal says there’s $1 trillion in adjustable-rate mortgages nationally where the interest rates will rise in the next two years. Burns estimates that between 7 percent and 9 percent of home loans will go into foreclosure.
“The new bankruptcy laws make it harder to walk away, minimum payments for credit cards doubled in January, and mortgage payments are going to go up hard and fast,” Burns said. “You have the perfect storm brewing for people walking away from their homes.”
Yipeeee. I love to see these greedy bastards go broke. Its so much fun to see greedy people lose. It’s a happy day for me.
Jeez - get a life.
Corporate America is next, then lobbyists
“Corporate America” = people with jobs. Are you rooting for people to lose their jobs?
Its a bit of an exaggeration butthere is some truth to the observation that the only people with “honest” jobs are working class people. Why do you think they call it “working class”. They do the jobs “americans won’t do”-W. Do we really believe “americans” don’t want jobs? Answer-No, Americans do not want to be seen as members of a DISRESPECTED class!!!!!!!
Better to use the ATM to maintain appearances than to labor with Manuel.
It seems Hertz is now expecting lots of twisters, hurricanes, mudslides, earthquakes, etc
Dawnal: I don’t think you should spam the SDCIA forum and refer them to this site. We don’t like trolls here, and nor do they.
They’ll just get pissed and come trolling here in turn. You’re not doing anyone any favors. Let them think what they like, and let circumstances decide who’s right.
Good Morning to the early birds..
Here’s an interesting link:
http://heraldtribune.com/apps/pbcs.dll/article?AID=/20060413/BUSINESS/604130618
flmgt….that is a nice breakthrough in print….”The NAR views the report as validation that well-heeled baby boomers are driving second-home sales and will continue to fuel a burgeoning housing market for years.”
I sure don’t agree with the above statement though…Highly leveraged boomers are buying, not well-heeled buyers, and at those high rates they have no disposable income left to help fuel the economy.
“Burns estimates that between 7 percent and 9 percent of home loans will go into foreclosure.”
That’s enough to have a serious impact down in the markets. It’s been an amazing thing to watch this.
Simmsays…
http://www.AmericanInventorSpot.com
AmericanInventorSpot.com
hehehe…Now the “residential home” investment trap has been sprung.
It’s what was bound to happen with the trashing of the Income Approach to Value for residential properties in the appraisal process.
Millions are now gonna find out ignorance is not bliss.
You can run the numbers all you want, but there’s no way the Gross Rent Multipliers of single-family residences purchased over the last 4 years can even remotely reconcile with current valuations.
With the exhorbitant escalation of all expenses inherant to running a single-family rental property, investor’s are financial sinking by the second.
The only real solution is a whole-scale collapse via foreclosure of the speculator segment in residential properties.
Even if speculators walk away, the lenders will be coming after them for six-figure deficiency judgements.
Hell on Earth.
And with the new bankruptcy laws, they’ll be on the hook for their debt, right? Much tougher to ‘walk away’ today than in past RE busts.
“Specuvestors being chased by lenders for evaporated money?”. No - that can’t be!
“But I can’t sell it for $200K now. I was going to flip it for $430K.
Lender - “you signed a loan for $330K and that is what you owe us to walk away”.
But, but, but - you can have the $1045 I am getting in rent. Please forgive my $2500 mo/payment, and when it goes up.
Indeed, this reluctance to sell at a loss helps explain why a slowdown in home sales typically precedes a price decline.”