Which Type Of Housing Will Lose, Which Will Hold Up?
Several readers want your opinion on this: “How about, which type of housing will lose more value, and which will hold up better?:
1) Condos in established urban centers (NY, SF, Chic, Phil, Boston)?
2) Condos in recreated urban centers (LA, Milwaukee)?
3) Exurban McMansions in developing areas far from the urban core? 4) Older suburban houses in communities reaching 50 years old?
5) Suburban or vacation area condos (Las Vegas, Miami, Glendale)?
“Believe it or not, based on demographics, I have the most hope for condos in recovering urban areas. They aren’t overpriced, and the demographics are in their favor. Demographics are in favor of condos in established markets as well, but the prices there spiked too high.”
“Perhaps it’s Brooklyn bias, but I’m more worried about the suburbs. People aren’t going to choose suburban condos when the real thing is available. The exurban areas, too, will not be attractive when there is value closer in. And the older burbs are reaching the age when city neighborhoods suffered blockbusting, subdivision, and the beginnings of abandonment.”
“I’d say if you want to live in the burbs, you have to go with the blue chip towns — those with good schools, good quality homes, and rail stations in regions that have them. When the bubble is over, that’s what the market will contract to.”
A reply, “I think the price of gas may come into play here. If condos become somewhat reasonable in urban centers, that market will hold up better as people will choose them for commuting purposes.”
Another, “My husband, an architect with a great interest in urban planning, has said for years that the suburbs will eventually be the ghettos. I think with the rising gas prices and the tendency here in CA for multiple/hugely extended families to live in one home (creating density where it was not designed to exist), he may be right sooner than we think.”
Another concurred, “I agree with your husband and have felt that way for years. In Chicago the Cabrini Green housing development is 1 mile from the Oak St Beach, 1 mile from the Board of Trade and the loop. It has always been to valuable a location with quick and easy public transportation to be kept as a public housing facility. In Chicago they have already moved a lot of tenants to Schaumburg, Round Lake etc.”
From Texas, “That’s a great point. They WERE the ghettos in Houston and Dallas in the aftermath of the 89s bust. Some of them still are.”
One said, “IMHO is its going to depend on the state of individual city. Basically if the cities are clean and have a lot to offer, upper income groups will go back. We’ve already read how many retirees are already heading back to some urban areas. Still other cities are too much in a state of deterioration and probably won’t be getting a lot of investment in the near future.”
i know this is simplistic, but i believe all markets and housing types will correct enough to revert back to their long-term historical averages of appreciation. the hottest segments of the last 5 years will lead the decline down in both time and severity - just as they led it up. we are seeing the start of that now.
Blog Theme Song?:
http://tinyurl.com/jr7z3
damn - couldn’t hotlink mp3
“It’s The End Of The World As We Know It (And I Feel Fine)” - R.E.M.
here you go -
http://tinyurl.com/j237r
I redid the words two months ago:
http://exurbannation.blogspot.com/2006/03/theme-song-2007.html
That’s great, it starts with an earthquake, birds and
Mortgages, a housing bubble and David Leareh is not afraid
Eye of a hurricane, listen to your flip churn - world
Serves it’s own needs, dummy serve your own needs. feed
It off a HELOC, grunt, no, strength, climb the property ladder
Start to clatter with fear fight down from the heights. wire
In a fire, representing seven games, a government
For hire and a condo site. left of west and coming in
A hurry with the foreclosures breathing down your neck. team
By team realtors baffled, trumped, tethered cropped
Look at that huge inventory! fine, then. uh oh,
Overflow, population slows, common areas, but it’ll do. save
Yourself, serve yourself. world serves it’s own needs,
Listen to your equity bleed dummy with the rapture and
The revered and the right, right. you vitriolic,
Patriotic, slam, fight, bright light, feeling pretty
Psyched
It’s the end of the world as we know it
It’s the end of the world as we know it
It’s the end of the world as we know it and I feel fine
Six o’clock - tv hour. don’t get caught in co-op
Towers. slash and burn, return, listen to your ARM
Churn. locking in, uniforming, book burning, blood
Letting. every motive escalate. automotive sales decimate
Light a candle, light a votive. step down, step down
Watch your heel crush, crushed, uh-oh, this means no
Fear cavalier. renegade steer clear! a spring pop,
Tournament, a tournament of lies. offer me solutions,
Offer me alternatives and I decline
(chorus)
It’s the end of the world as we know it (it’s time I had some time alone)
It’s the end of the world as we know it (it’s time I had some time alone)
It’s the end of the world as we know it and I feel fine (it’s time I had some time alone)
I feel fine
(repeat chorus)
Whats really creepy is the actual lyrics in one of those stanzas said “don’t get caught in foreign towers”. And this was written in 1987. Even the 1993 WTC truck bomb was years away.
coincidence.
right.
South Florida, Vegas, LA, etc. = Nasdaq of Year 2000
Other Metro Markets = S&P 500 of Year 2000
The corrections will adjust accordingly - not necessarily in the same % terms of the equities markets, but in proportionate terms. Everything reverts back to the historic mean eventually. Excessive returns are always eventually followed by negative returns.
I was thinking “Upside Down” by Donna Summer.
there’s a better rem song
everybody hurts
I don’t worry about a serious downturn in NYC. Wall St. is absolutely booming and the demand to live here is incredible. I have lived here my whole life and in the last 15 years the city has been completely transformed. Even the South Bronx, what was once the worst neighborhood in America, is being gentrified. There’s still plenty of crime, filth, etc. in this city, but so much of it has been cleared away…oh, and renting here really sucks (rentals are crappy and expensive).
Blue chip burbs near the major cities should do OK, too. I can’t imagine a serious correction in Greenwich, CT, for example. There are just too many people making well into seven figures here for prices to fall a lot over the next few years.
true - all that Wall Street money has been/is really the “X” Factor.
…and by “serious downturn”, I mean prices falling more than 20% over the next 2 years.
i think you could easily see a -20% correction in NYC area.
Wall Street is flying high now but it won’t be when the economy tanks. We can see from what is posted at this blog that the housing industry is beginning to crater. As it does so, the all-important consumer will have his ATM taken away. The equity in his home will no longer support the borrowing that has sustained our economy for the past couple of years. With consumption down, the economy will tank and when it does, the stock market tanks. Actually the stock market usually leads the economy down. For those who have taken the time and made the effort to understand the Plunge Protection Team, it is clear that the market is being supported by the PPT. How much longer it can hold off the natural forces is the 64 dollar question but clearly it can’t hold the market up forever. And when it tumbles, it will do so in a most memorable fashion.
Then you will see a major fall-off in housing prices in NY.
nah. stock market crashed in 2000 and home prices kept going up due to “Easy” Alan Greenspan’s rate cuts due to 9-11. i think it’s all tied to interest rates and a “sinking tide sinks all boats - small AND big”.
A. the PPT theory is a complete joke
B. Much of the financial services industry in NYC(M&A, equity underwriting, etc) has little to do with housing or mortgages. In fact, no serious person going to wall st these days aspires to do anything related to MBS because there is little money in it.
C. Significant parts of the real economy are booming right now (energy, healthcare, non-auto industrials) and this has little to do with housing. This should keep banking, underwriting, etc. going for a while.
D. Money keeps gushing into private equity funds, most of which are based in NYC.
Bottom line: housing slowdown will cause a lot of pain throughout the economy, but I don’t think this will cause Wall St. to grind to a halt. There are other sources of strength to support jobs/incomes in the NYC financial services industry. We’ll muddle through….
garcap,
Don’t oversimplify. Yes, Wall Street will keep going, as will most everything else in America. However, the money that has pushed apartments passed a mil won’t be there. Like LA & SF, NYC flies higher when times are good and crash harder when times are bad.
either way, i think those big Wall Street bonuses only have so much impact on the broad housing market.
tj-
I think that often we make the mistake on this blog of oversimplifying by assuming that all real estate everywhere is going to collapse and that we are in for Armageddon. In each market there are mitigating factors. My point is that NYC is very strong now in terms of its local economy, crime rates, political leadership, etc. The spoeculative condo-flipping insanity never hit us here like it did in Florida, CA, NoVA, etc. These things count for a lot in a downturn. Blood-letting? yes……collapse? I don’t think so.
so how do you define Blood-letting? Collapse?
I say -
Blood-letting - 5-15%
Correction - 15-25%
Major Correction - 25-40%
Collapse - 40%+
I think NYC RE prices fall but not by more than 20% over next few years.
garcap,
NYC’s strength is also it’s weakness. As the financial capital, it rises and falls with the overall economy. And fall it will — it’s happened before and it will happen again.
I never said it is not going to fall. In fact I think it will over the next few years, but not by more than 20%. I’ve said this many times on this thread already.
I gotta wonder, when more businesses (like Smith Barney) move out of NYC because of its retarded level of taxes, utility costs, real-estate costs, etc..
NYC tends to peak higher and trough lower than the rest of the country, look at unemployment as an example (IIRC NYC’s unemployment rate is either only now just coming to the national average or is still higher).
Personally, I’m psyched to be out. I can always visit, maybe now I’ll actually go to the Empire State Building before a terrorist knocks it down!
MAybe in weaker neighborhoods where there has been the “price premium compression” that mad tiger talks about below, but in the blue chip areas (NYC and its good suburbs), I doubt it.
LOL. Garcap, I have to call you eyecap on this one. Prices are declining already -and fast. I don’t know when it will stop, but doing the wall st happy dance seems a tad premature, since our own very business savvy mayor has forecast a 10 percent decline in RE prices — for this year alone.
Also seeing the RE economy through the wall st lens ignores the fact that most of the property owned in the city is single-family homes in the (much-larger-than-manhattan) outer boros. And trust me, if we see a major disinfranchisement of that class due to recession/housing bust/national debt explosion, or whatever, it will most certainly affect the fortunes of everyone in the city- even chad and biff down at the exchange.
If NYC prices fall by 20% (as I predicted above), that’s still a lot of pain. The whole point of this topic (Which areas/types of homes fair better in a downturn) is to try to make some distinction across the housing market, and that’s what I’m trying to do. It seems to me that NYC has a stronger economy than many other parts of the country and has not been plagued to the smae degree by RE speculators. That has to count for something when RE in general weakens. Let me put it to you this way: As an investor, would you rather own an over-priced home on the Vegas strip or Central Park South?
One can simply look at the runup in NYC prices relative to incomes and rents to understand that this market is no different from others — it has been plagued by speculation. Flippers have been working the homes and small apt buildings in the outer boros like crazy, as well as all the new condo projects being built here. And co-ops are not immune here either, my friend. Their are plenty of buildings in all boros that either can’t or won’t do enough due diligence to make sure their new owners aren’t mortaged to the hilt.
The point is not which property I’d have, but what kind of mortgage I shoehhorned myself with to get there, and what my investment will look like if prices go flat, as fuel, insurance and taxes climb.
NYC will crash and crash hard.
The record profits of financial firms are all tied into MBS origination & servicing, derivatives, pensions, mutual funds and hedge funds all running on excess liquidity. All of those will take huge hits before 2008.
There’ll be so many bonus-dependent financial types jumping from windows it’ll look like it’s raining bodies on Wall Street.
There is a certain irony in learning that the driver of your cab used to be a high-flying investment banker!
Let’s say wall st never makes earns another dime…does this mean that every trader/banker/hedge fund manager who made millions and millions of dollars every year for the last decade is going to jump out of a window? I don’t think so….
Hey one thing I have seen on wall street is that they make alot in good times but alot of these guys spend most of what they make.
no, their wives do.
true. on Wall Street a common saying is “A $1 Million dollar mortgage? That’s a PUSSY mortgage.” I’m not kidding - the Bond Traders tell each other that!!!!!!
i’ve heard some Wall Street Bond Traders say “A $1M Mortgage? That’s a PU$$Y mortgage.” True story.
You’re pretty arrogant, dude
http://www.businessweek.com/investor/content/may2006/pi20060503_371069.htm
????
It’s a contrary indicator.
And I am a professional trader. Unfortunately one with a bearish point. Costs me money cause I won’t stay long anything long enough to make more than chump change but I do well when the tankage happens
Why do you say I’m arrogant and how is this article relevant?
The point is that private equity money is 2 and 20 money AND locked up…when it flows like it is now, a lot of people make a lot of moeny for a long time even if the returns are bad. It’s the mother of all annuities.
I never said that it was a good time to invest in private equity, but it’s a great time to be a private equity banker and will be for years.
Like it was a good time to be a real estate investor last year.
Can I ask how old you are?
Look, private equity investing is getting long in the tooth, but for the managers of these assets, times have never been so good. They will earn fees on these assets no matter what. If the market is topping out right now, the people who will really get hurt are those clamoring to get in at the top (the pension funds, retail investors, et al.).
Garcap’s very right. It would be very difficult to extract one’s self from a private investment partnership even after the market tanks (and as much money has flowed into private equity in the last few years it will be hard to maintain returns). Yeah the fund managers will have a very difficult time closing the next funds and overlevered ones will get burned, but just as KKR survived the early 1990s (and their Nabisco deal) the managers will continue to survive.
How many established VC firms are no longer operating after the NASDAQ crash?
Once pension money starts pouring into an asset class returns go parabolic and then crash, but pension funds are typically in it for the very long term and will continue to pour in funds in good times and bad.
wall street money can disappear in derivative blow off..those arcane CDOs,CLOs,CDS,ABS/MBS stuff…
This is presumable about 270 trillion dollar market..
US ,after accounting for asset bubbles worldwide, net household assets is about 50 trillion…
Even if assets lose 25-30% that is serious loss…
As strong as NYC may be, there’s no question certain neighborhoods are way overbuilt, like Williamsburg-Greenpoint, Hoboken-Jersey City, and Fort Greene-Park Slope. In these neighborhoods, tons of inventory is gonna be hitting the market just as the sh*t really begins to hit the fan. How do you think massive price declines in these neighborhoods will affect prices in non-overbuilt NYC neighborhoods?
I think that NYC RE is in for some rough sledding, but the job market (and income levels) there remains strong enough to protect the city from a big plunge. Plus, the price/rent ratios are higher in NYC than in other parts of the country.
One rag-head dirty bomb goes off in Mid-Town and NYC is toast.
fair point….
The really great suburbs in NY never go down more than 10% or so - at least in Fairfield and Westchester Counties. Not so sure about LI and NJ, but I’d say there are far more Wall Street types in say Rumson, NJ than Greenwich based on commutability. On the other hand, Wall Street is not immune to massive cutbacks. Don’t expect that party to last forever. In fact, watch for automation to cull a wide swath in the next few years. The Hamptons is already experiencing price declines.
On the SF Peninsula there has been a major compression of the price premium for good locations over marginal ones. Over the last five years some of these premiums have disappeared almost entirely. As the bubble unwinds the marginal areas will be whacked the hardest.
Of course there are a few radioactive areas that no one would touch before or during the bubble. But the bubble had a way of increasing peoples’ tolerance for toxic exposure.
I agree, mad_tiger. 900sf tear-downs along the El Camino Real in San Mateo are going for $800K. Total insanity.
In Arizona some of the better golf course homes may fare slightly better than regular housing, assuming the course stays open and the fees aren’t too high. The far flung commuter communities like Anthem were just a fantasy of the developers and have a very uncertain future, IMO.
i never uderstood that house on a golf course thing. why do i want to be sitting in my pajamas on a Saturday morning eating my breakfast and have some schmo traipsing through my yard looking for his ball? or worse yet hit me or my house with a ball - ALL DAY LONG EVERY DAY!!!
Passing fad. Golf courses will one day revert back to the wild land of which they rose from. Water will be more valuable than gold. Plaid pants and white golf shoes will be found only in museums. Seriously, I can’t think about golf course houses without thinking of the complaints my city started getting a couple of years ago about a homeowner who liked to take his morning pee off his deck. After extensive research I discovered there was no ordinance against it since he was on his own property. We found no covenant restriction either. People always asked for later tee times at that course.
crash1 - your post reminds me of the golf scene in the movie “Falling Down”:
“What the hell you trying to do? Kill me with a golf ball? It’s not enough you got all this land for your little game?
But you had to kill me with a golf ball? You should have children playing here. Family picnics. You should have a petting zoo. . .instead of electric carts for you old men with nothing better to do. Now you’ re gonna die wearing that stupid little hat. How does it feel?”
Dude, this has already happened in NoVA, at an ultra-high-end development called Beacon Hill. Homes are $1.5-2m and they’re on a very upscale golf course that went bankrupt and is now closed.
Beacon Hill??? The same Beacon Hill which was the home of low-income housing projects and massive drug problems? I am SO far from surprised that people don’t want to buy in an area where murders still occur on a regular basis.
That’s funny, crash1. Do ya think the gentleman was trying to tell the golfers to “p–s” off ?
Love the story about the peeing neighbor!
As for ‘passing fad’, well the fad is only about 50 years old by now.
I have noticed condos in my area which butt up against some notable golf property (Muirfield Village, home of the Memorial Tournament) are going on the market at surprisingly affordable rates… the HOA rules must be a beast though. Monthly dues are high, I know that much.
There are retirees that love golf. Some of the more pricey setups in my area are like mini, gated country clubs. One charges half a million just to join! Those houses are way up there.
My favorite part of the Michael Douglas movie “Falling Down” was the scene where ‘D-FENS’ takes his revenge on some particularly obnoxious, wealthy, elderly golfers.
Come on now , alot of people young and old are into golf.
Does this correction mean that every sport that Americans enjoy are going to be taken away ? In fact , baseball was really big during the Grest Depression wasn’t it ? I don’t know ,you might be right ,but I hope not .
The appeal of the golf course is wide open vista. An occasional foursome 30 or 40 yards from your property line is better than other house(s) and occupants.
“In Arizona some of the better golf course homes may fare slightly better than regular housing, assuming the course stays open and the fees aren’t too high.”
A friend bought into a golf course home with huge bay windows providing an expansive view of the groomed lawn. However, he nearly $hit his pants when the first winter heating bill arrived, which was about half of his mortgage payment. Live and learn!
Those huge windows have been very popular the last few years. I’ve often wondered what the bills are like. I read that the maximum percentage of window space on a wall should be around 20%. Some of these rooms are pushing 50%.
Just curious, do the courses close down often? And if they do, what happens to the land if it’s owned by the homeowner’s association? Does everyone get their share of the money made converting the course to lots so as to compensate for the loss in property value based on losing the golf course?
I posed this question to a knowledgeable friend, some months ago. In new subdivisions / developments, there is a marked tendency for the developer to very heavily subsidize the golf course, until the building lots are sold out. When the subsidy stops, the HOA is stuck with raising HOA fees to maintain the club, else they watch it slowly decay. I deduced from that, that an “equity” club, which allows members from outside the development to own equity in the club, probably is the best way to go. Second best is to be in an affluent area that will attract members with fat wallets no matter what.
The golf course is usually owned by a party other than the homeowners . The homeowners get a membership if they want one for a price usually .Maybe there are some golf courses that are actually owned by the surrounding homeowners ,but do you realize how expensive that would be ? ……Very expensive ….
close in DC, cause they burn your money there. j6p thinks the money goes to aids,cancer etc
it goes to bearucrats baby !
we lost 10-15% in 1990-92 then recovered to even money by 95.
i hope the damn liberals don’t take charge of the house in the ‘06 elections.
If they do, they’ll be in a hell of a spot. The days of printing money will soon end as foreigners stop financing our deficits, tax revenues plummet, and dollar devaluation leads to massive inflation due to our dependence on imports.
Count on it. The RE bubble bursting + the bankruptcy bill = bye bye neocons
6 months to go and Nancy “Facelift” Pelosi and Harry Reid have nothing.
The Democrats are a party devoid of optimism, ideas or solutions.
so true, but Bush gave republicans (and especially conservatives) a bad name.
the democrats may win in 06 simply because they are not republicans. what a shame.
I hope the Lingus doesn’t see this thread. He combines the politics of Mao with the sublety of a tourettes sufferer.
that’s hilarious (because it’s so true).
Republicans and Democrats are like two hairy ass checks surrounding the same stinking bunghole: predatory capitalism. Both parties are on the make and on the take, devoid of principles and convictions, motivated solely by the imperative of conning 51% of the sheeple who actually go out and vote into voting for Tweedle Dum rather than Tweedle Dee, thus perpetuating their stranglehold on the levers of power. Their minions, who have never had an original or independent idea in their entire lives, parrot their masters’ bile and claptrap, never once stopping to ask themselves who REALLY got us into this mess (hint: BOTH parties).
To the herd creatures who clutter this board with your inane and clueless drivel about your Republicrat masters: OPEN YOUR EYES and start using your head for something besides a hat rack.
I see you neo-cons are still suffering from delusional fantasies. But that’s ok. Republikkkans gave us these hugh depression causing imbalances that worry so many economists. So what if republikkkans desperately hold on to the power they crave; They’ll merely exacerbate those massive imbalances until the majority middleclass realized that the republican promise of a million dollar lottery ticket really is a lie.
Then end is coming for the flawed economic ideology embraced by neo-cons. They’re just too blind to see it yet.
but we keep winning!!!!!!!!!!!
Guys, come on… take the political rhetoric to housingpanic. There’s nothing wrong with impassioned political debate, but let’s stick to the RE bubble on this blog.
Yeah. It only took 70 years to gain both houses and how many to lose it?
But like you said, you keep winning. Check your wallet then come back.
Okay folks, the party is officially over. The Tourettes sufferer has arrived.
Lingus, does Moveon.org pay you a nickel for every time you post ‘republikkkans’ on the internet?
could the Democrats repeal the HOME SALES TAX EXCLUSION??? What impact would that have on prices???
Desperate neo-cons attacking the messenger. Classic.
diceman- there you go….
Somehow I knew it wouldn’t be fifteen minutes before the Lingus popped up again. Jesus. Keep listening for those black helicopters, you whack job. You’re like every other mouthpiece for those two halfwit parties — tell them to shut up, and they start spouting conspiracy theories about how you’re a secret agent of whichever party they’re mad at. Go down to Hometown Buffet and stuff your face with your heroes Michael Moore and Rush Limbaugh. Anyplace but here — just go away!
But then again, what could be expected from youngsters barely old enough to drink.
Keep spouting off, nutjob.
Desperate youngsters worshipping at the neo-con altar. Pathetic.
I think Lingus hates the right wingers because when Reagan opened the puzzle-house doors and cut all the drooling raving loonies loose onto the streets, Lingus lost his psychotropic drugs, as well as his three hots & a cot.
That’s right, Lingus. We’re all NEO-CONS (whatever that is), and we’re in the bushes outside your house. We’re hiding in the trunk of your car. I know you can hear us. Here loony, loony, loony. We’re getting closer! You’d better hide in the closet! Loony, loony, loony!
And amazingly enough, desperate underaged neo-cons will do and say anything to excuse the complete failure of their fallen hero Shrub. The iraq debacle, the economic mess, and on, and on and on.
Lingus should be triangulating the position of the Haliburton earthquake machine instead of wasting time on this blog. How are we ever going to get the PNAC meeting started if he keeps making outburts?
We’re right outside your door now, us 15 year old NEO-CONS. We’re moments from breaking in. We’re going to tie you up and take away your lithium! Can you hear us rustling in your bushes, you stark raving f*cking lunatic?
But everything is doing just fine. Mission accomplished. Free koolaid at the altar. Step right up.
I hope your invisible shadow people break in and beat your wrinkled piehole with your own cane, you crotchety old sack of Geritol.
Man, That sting of posting has to be the funniest thing I’ve read since I’ve been visiting this blog.
So what? The Democrats will raise taxes and kill the Stock Market. They will finish the pop of the housing bubble and make all you loosers on this blog happy. Then we can kick them out again in ‘08. Oh by the way ,your new neighbors from Juarez (20 per house)won’t speak English and they will all be on welfare and suck up all your medical and social security. When they steal your car and dog don’t worry, they are good little illiterate Democrats.
It’s so easy to deflect and make wild predictions in the midst of the train wreck created by the party you worship.
Back in the koolaid line my friend.
I will lift a line from The Economist:
the political choices Americans have are between Republican incompetence and Democrat incoherence.
Pick you poison.
Americans are diehard fans of these two groups of hustlers. Look no further than assclowns like The Lingus to see how deep the madness runs.
“Patrick Kennedy in 2008″!!!
Desperate Republicans; “Lets give everyone a $100 gas rebate”.
Sad, pathetic and devoid of any solutions or ideas.
Bernie Sanders? Is that you?
how ’bout them clippers?
Just got my recent issue of Fortune in the mail. On the cover, in big bold letters: “Real Estate Survival Guide”, with a bright red banner that reads, “Trouble Ahead. Dead Zones, Danger Zones, and Safe Havens”
It will be interesting some day to see the history of the bubble as told through magazine covers: the infamous Time Magazine cover, the Economist, and now Fortune. Something tells me we’ll see quite a few more over the next couple years.
they were late on ENRON! I remember getting my issue of Fortune ranking Enron #7 of best run companies or something. nice research! BTW - I rented “Smartest Guys in the Room” DVD and will be watching it tonight!
People like Jim Chanos and Off Wall Street were all over Enron way way before anyone thought there was anything wrong. Why don’t you ask that crowd how they’re betting vis a vis the RE and lending/financial complex
As I sit here at my desk, I am monitoring the “activity” at the first open house of my neighbor/flipper across the street with his new realtor. His house has been on the market since Thanksgiving and is now relisted with about an 8% reduction. The guy across the street from him is rapidly tearing thru a “renovation” obviously designed to bag some of that dumm Clownifornia money we all keep hearing about . . .
By golly, there’s no one there but the realtor! Oops! Hasn’t been a single visitor in two hours.
Jim Chanos: Real Estate Headed Lower?
Jerry O’Connor, a professional real estate investor with 40
years of experience, continued the bearish theme. “Is real
estate overpriced?” he asked rhetorically. “Yes,” was his
unequivocal answer.
O’Connor believes the U.S. housing market peaked – finally
– in July 2005. The U.K. is a year ahead of us, O’Connor
believes. If we follow the pattern set so far in the U.K.,
we can expect to see a flattening in home values, a build-
up in inventory, a slowdown in retail sales. We shall see.
In the world of commercial real estate, O’Connor offered a
similarly bearish view. Real estate equities have ballooned
from $380 million 1991 to $8.7 billion. As rates have
fallen, real estate valuations have skyrocketed. As a
result, the cash yield on real estate looks pricey compared
to the yields available in the bond market.
So-called “positive spread investing,” the lifeblood of a
REIT, has almost disappeared. Spread investing is
profitable when the financing rates on real estate are
lower than the cash yield on the properties. But this
positive spread has nearly vanished, which means that the
appeal of leveraged investment in commercial real estate
has also nearly vanished.
Meanwhile, many real estate investment trusts (REITs) are
grossly overvalued, says O’Connor. Net Asset Values on
REITs have risen 80% since 2003 – far above the long-term
rate of appreciation. Looking at price-earnings premium,
REITs carry a 40% premium to the S&P 500. This compared to
a discount of 65% in 2000. Clearly, REITs no longer offer a
compelling value. Indeed, they look expensive.
Insiders seem to know this. REIT insider sellers
outnumbered buyers by a whopping 173 to 1 in the 2nd
quarter.
O’Connor’s advice: sell REITS. What to do now? Look for a
margin of safety in quality companies and don’t be afraid
to hold cash.
Hmmm…O’Connor sounds like a faithful Capital & Crisis
reader.
http://the-rude-awakening.com/RAissues/2005/Nov/11-02-05.html#THE_NEXT_ENRON
There was a house in my neighborhood with a triplex behind it (no yard whatsoever). The flier in front advertised that all were rented, for a total income annual income of $51K. Asking price $950K.
That’s a 5.3% cap rate NOT COUNTING taxes, maintenance, and vacancy. Let’s call it at MOST 4%. That’s lower than bank CDs. Who would pay that? Why? How?
any links to Chano’s dated Enron prediction?
“never mistake luck for skill.”
You’ll see when you watch the movie.
I’m also sitting at my desk looking across the street at an open house. That one’s been vacant since Christmas. It’s not a bad house-just way overpriced. One couple pulled up in front, walked around the house once and then got back in their car and drove away in a record 3 or 4 minutes. The sales person chased them all the way back to the car. Man, the crazy things I do for entertainment.
I’ve been watching the same thing from my house in Helotes. Great entertainment. BTW, I was in Galveston back in the mid 70s then moved to Austin, went to UT Law and practiced there. I remember from this blog that you lived in Cedar Park….pained by the clean-cut.
Did that garcap guy actually get away with that thing about “wives” spending all the money???
Did that garcap guy actually get away with that thing about “wives” spending all the money???
______________
Yes, he did.
Also in the mailbox today: a Brookfield Homes flier advertising discounts on homes in our development. “Save $90,000 on Every Home!” “Need time to sell your home? We’ll pay the first 6 months mortgage!”
Wow - time to look into shorting Brookfield Homes!
John, doesn’t that freak you out a bit? It is in your development.
Well, we all know about the Japanese model in which all housing lost value over fifteen years, ending up below 1980 prices when all was said and done. Here’s a good recent article: http://shop.ceps.be/BookDetail.php?item_id=1295m (adobe format free, printed version costs). Note in particular Figure 5 which places US and Japanese real housing values in juxtaposition. The U.S. is approximately 40% over long-term average value, and almost precisely where Japan was when their long decline began. The article goes on to point out that in the UK and Austrialia these values have reached 100%, so on that basis it supposes that the crisis might not occur yet, or if it does, it might not be debilitating. Other charts, however, show that this is the fourth major cyclical boom in the West, so some decline is expected in any rational reading or conclusion. Personally, I think you can sustain a relatively mild, long-term decline from a +40% overvaluation, but a 100% overvaluation may have much more severe consequences when it does unwind.
I would also point out that urbanization is a real threat in a serious or prolonged economic downturn. This was not possible in Japan since it is a high-density island, but this certainly occurred in the U.S. Great Depression and the sheer number of abandoned and unworked farms fed the Dust Bowl effect, which crippled the occupied and working farms, and exacerbated the problems. The effects of over-urbanization can vary historically, and include much higher crime rate, chronic unemployment and loss of wage power, but the most interesting example I find there is a contemporary urbanization phenomenon occurring in Europe. Small villages and farms are being abandoned as people seek urban centers. Once the migration to the cities begins, schools close and children are bussed around, businesses leave and go to larger centers, and deliveries become more expensive making it more and more difficult to remain au provence. This has progressed to the point where wolf packs (!) have been spotted extending their territory into formerly exclusive human domains. Germany: http://thescotsman.scotsman.com/international.cfm?id=302702002
Spain: http://www.iberianature.com/material/wolf.html
Italy: http://www.beyond.fr/fauna/wolf.html I saw an article a while back about France, but I can’t find it offhand. Anyway, I think it’s fascinating to think that, given sufficient defaults with builders, builders may default on their purchases of land, land development may cease for all practical intents and purposes, and theoretically, enough land may revert to natural states for wolves, etc. to re-establish themselves in other places. Indeed, far-flung “subdivisions” which have been advertised as being “only” thirty miles from the nearest urban center might regress or be abandoned if fuel prices remain high and wages remain stagnant.
Have environmentalists won?
The demographic trend is actually outmigration from the big cities. New York, Boston, San Fran, and other cities have lost population these past few years. This is especially true for the 25-35 age bracket.
Price competition is fierce these days, especially in light of outsourcing. In my neck of the woods a lot of big businesses are leaving the Boston area for cheaper locales (most of them not out of the country). Big cities have advantages with convenience and proximity, but are at a disadvantage when it comes to price / cost of doing business. I believe that the population will continue to diffuse until an equilibrium between cost and convenience is reached.
“Believe it or not, based on demographics, I have the most hope for condos in recovering urban areas. They aren’t overpriced, and the demographics are in their favor.
Let’s see how long it takes for those “recovering urban areas” to turn bad (and the condo-owning yuppies to flee back to suburbia with their tails between their legs) once we spiral into a deep recession.
Anyone stupid enough to think the coming implosion of the gigantic debt pyramid our economic “prosperity” has been floating on won’t take down the stock market with it, will soon learn the hard way the systemic nature of the onrushing global financial crisis.
yup. too many condos were purchased by speculators hoping to flip them. we are watching musical chairs in slow motion. it’s 2 minutes to midnight and everything is about to turn into “pumpkins and mice”.
Think of what inner-city riots will do for urban condo values. Nothing like gunfire and burning cars to liven up a neighborhood.
The inner city is usually where the social services are located, and this is what tends to act as a ceiling for values there. However, San Jose, CA has a former east coast woman on their redevelopment board, and they have since approved many of these gated condo developments that remind me of the film Soylent Green. These places look lifeless from the outside with the exception of the random chubby yuppie taking their lap dog out for a quick piss in the shrubs. Funny to watch them hurry off to the safety of an electronic gate if they see a negro a block away.
That’s a near-perfect summary of San Jose.
50% of the S&P 500 earnings are based on financial concerns. GE and GM don’t built for profit, they finance for profit. Reminds me of the Fisher Brothers who built auto bodies in 1929 but made all of their money making loans for Wall St margin.
50% seems way high to me given allocation % of holdings -
Equity Sector Diversification as of 03/31/2006
S&P 500 Index
Consumer Discretionary 10.20%
Consumer Staples 9.30%
Energy 9.60%
Financials 21.00%
Health Care 12.90%
Industrials 11.50%
Information Technology 16.00%
Materials 3.10%
Telecommunication Services 3.30%
Utilities 3.20%
the systemic nature of the onrushing global financial crisis.
aka cascade failure
OT, I was in Manhattan Beach today and there were open house signs everywhere. I was at a stop light on PCH and there were 5 different Open House signs on one corner and I also saw some across the street. Mucho inventory.
OT as well, but I can’t resist. Around 1:00 this afternoon I saw someone, must have been a realtor, who was popping the balloons of an open house sign and tearing it out of the ground to throw in their car. Their sign? A little early in the day to be so frustrated. Some competitor’s? Seemed likely from the circumstances. Which houses will sell? The ones with the unethical realtors who will do anything - ANYTHING - to get the house sold.
I just came back from the South Bay yesterday. I am definitely noticing more open house/for sale signs. More price reductions too. Everything is still over-priced but at least there seems to be a sense of normalcy returning to the market.
Pictures!!!!!
Yeah, I know I should have used my new camera phone
Tower condos in Las Vegas! Followed shortly by everything else in Las Vegas.
LVLandlord stated recently:
…there are lots of jobs in Las Vegas that are unrelated to construction or gambling.
BZZZZZZZ. Wrong Answer #2. The Nevada Workforce Informer has official March 2006 employment statistics for Clark County:
Total Employment: 907.5K
Leisure & Hospitality: 270.1K
Professional & Business Services: 109.7K
Construction: 108.2K
Retail: 95.7K
Government: 93.2K
Education & Health: 60.1K
Financial Activities: 51.9K
Transportation: 30.4K
Manufacturing: 25.7K
Other: 25.3K
Wholesale: 23.1K
Information: 10.4K
Utilities: 3.3K
Mining: 0.4K
It’s damned obvious that all significant employment outside casinos & construction is there simply to provide services to casinos & construction and the people they employ (plus retirees). The only potential export is manufactured durable goods (17K), which employs less than 2% of the Clark County workforce… and again, those are mostly gaming machines!
Okay, LVLandlord… want to go for strike #3?
sounds like a house of cards waiting to fall in LV.
10% gobormint= gross
I would not under estimate the cost of gas on those areas without mass transit on those suburbs furthest from the city cores/job cores.
Its one thing to trade the time spent commuting in traffice in order to afford a bigger/better/new house, but as the point is reached where it costs more and more in gasoline, those smaller/older/used houses closer in will become more and more attractive.
I agree skip. Especially in areas like SoCal’s Inland Empire where most of the residents still drive to metro LA for their jobs. Many people commuting from there have 3-4 hours/day commutes. These are the areas that will get hit the hardest, just like the last time around.
The luxury condos being converted (from closed hotels/casinos) in downtown Reno!
Rising gas prices are not going to turn the suburbs into some desolate scene from Mad Max. We’ll adjust to the rising costs and also devise workarounds such as alternate fuels. The good suburbs - those with the great schools will fare better than most areas. Cities come with a lot of problems and the suburbs provide a good compromise including proximity to cities.
On ABC early morning news, they always talk to this guy, Declan, in the UK for the headlines there. Some time last week he reported that the UK was trying out “telecommuting day” in an attempt at conservation. I believe they said the government was hoping to encourage employers to have a certain proportion of employees telecommuting at least several days of the week. No word regarding how it went. Maybe I can get info on a BBC site. But I thought it was an interesting attempt at leadership thru this energy situation. And if it took hold, it would be a factor in shaping urban/sub/exurban migration.
It would be interesting to know the cost of heating/cooling a ones to a comfort level (assuming employees are generally responsible enough to adjust their thermostats to a non-comfort level while they’re away during business hours). Compare this cost to commuting to and from the office. Of course this is going to vary considerably be country and region.
Oops.. Correction…
It would be interesting to know the cost of heating/cooling a home to a comfort level (assuming employees are generally responsible enough to adjust their thermostats to a non-comfort level while they’re away during business hours). Compare this cost to commuting to and from the office. Of course this is going to vary considerably by country and region.
Portland, Mainer:
Depends on where you are. If you are in any area with significant illegal immigraton, the suburbs are most definitely in danger of becoming slums, especially considering gas prices.
novasold
I think there will be a flight to quality in smaller condo’s & homes. People are going to start realizing that 2,000 sq/ft of high quality design in a good area beats 4,000 sq/ft mcmansions any day. This will be especially true as more boomers seek out the perfect place to enjoy their retirements. They are not going to want huge houses, but they are going to want very high quality construction.
Just west of harbor fwy in dwtn LA they are doing massive urban teardown/redevelopment, also known as the grand ave project/bunker hill. This is a rehabilitation of a really rotten section of Dwtn which they hope to eventually build a hugh mixed-used condo/retail megacomplex. After the bubble collapse I see good Bargains in condo units in and near downtown LA as there are still lots of negatives in innor city core, E.G, hugh homeless population, no parkland, unrehabilitated immigrant-packed ghettos and deteriorated old industrial areas surrounding central city.
“How about, which type of housing will lose more value, and which will hold up better?:
) Condos in recreated urban centers (LA, Milwaukee)?
Dwtn Long beach(cal) is seeing massive hi-rise condo/mixed use developments right along the old waterfront south of ocean blvd. LB has attempted time and again to revive and spruce up their aging inner city and on surface it looks dazzling with the new rainbow harborwalk, aquarium of pacific and the convention center/shorelime village ect. Problem is lack of traffic and enough interested buyers for the condos. Living right next to the port of long beach with all the port-pollution, and surrounded by run-down slums plus insufficient local high-paying jobs will result in Condo bargains in DwTN LB during the coming RE bubble-pop. My choice for Blue-chip suburb=Huntington Beach in OC.
Funny you should mention LB. The crown jewel of Ocean Blvd is the Villa Riviera. Go to craigslist and put Los Angeles and search “all housing” for the name “Villa Riviera.” There are two 296 sq ft studios without a kitchen selling for $250k each. I was so amazed, I went to realtor.com and found two more, one for $350k and one for $370k. WTF!!!!!
Ben, I can see how some retirees are so eaten up with golf that a home on the fairway would be paradise. Similarly for me it would be a patio that faces the timing trap at Firebird Raceway. Now that would be COOL! AAah AAah AAah AAah! (ala Tim ‘Tyler’ Allen)
How many condos in downtown SanDiego
I was at a party at one of the new condos in downtown San Diego across from the stadium. The only neighbor was the unit above both sides and below empty. Looking out from one window I could count at least 6 cranes and a couple other buildings almost complete. I heard he paid 700K for the 1100 sqft. 2bed w/small den and also purchased one directly across the street and an investment and now there worth 800k to 900k.? But from my view and reading about SD inventories downtown has gone condo crazy. Also, looking at another building across the street I didn’t see a lot of lights on, most were dark. He was pretty upbeat about the whole downtown condo craze and even wanted another and I didn’t have the hart to question his reasoning or ask why, I just said “go for it”.
When we left we walked past several homeless and a few questionable characters there were a game so we had to park blocks away.
How many condos are being built and are they really 700k-900k.
San Diego condos will be one of the worst hit anywhere I believe. I’m in North Park and there are about 400 units still to come online.
Should be nice and cheap in a two/three years, but the HOA fees may be out of control with a high vacancy percentage.
That’s all fine — the Dream of having the Suburbanites move back into the major cities….well, if you GAVE me the finest house in Detroit, I wouldn’t move there. Too dangerous, too ghetto. Chicago, SF, or some other towns ? Completely different. Maybe in 50 more years Detroit will ultimately be habitable, but there are too many killings each Thurs - Sun to make me want to live there, much less the taxes, parks you can’t walk in for fear of getting held up, slow police and ambulance response times, neighborhood feuds and crack houses and hos, and whateva….
Condos will crash the hardest. When your neighbor leaves the faucet running and the bathtub overflows, the water drips into and rots your walls and ceilings. With condos, you never really own your place, you share common areas.
The type of housing that will lose the most are places that have massive inventory gluts of homes or condos that cannot be absorbed or affordable by the local economy in a reasonable amount of time .
I agree that housing prices will remain high in New York. Unfortuantely, “high” is down at least 1/3 from where we are now.
Kind of like the stock market after the bubble burst. When it hit bottom, based on PEs, stock prices were STILL high.
A lot of people think the burbs are going to become ghettos, but I disagree. While it could happen, it likely won’t. For starters, if I move to any major urban area condo, I save very little in gas money. Taxes are usually higher as well. In my city, Indy, one welfare class riot would likely cause a lot of condo and older home rehab folks to flee the city. In fact, you see a lot of young home owners with older homes they gutted trying to get out. They live there for a few years, have no desire to send their kids to ghetto public schools and can’t pay for private. The end result is the selling of these homes every three years to more ‘metro’ young adults and professionals.
In Indy, you are still better off in the burbs, even with gas so high. I think you would see better cars with better mpg before you would see throngs of middle and upper class flocking back to the urban cities and displacing ghetto folks to the burbs.
A few blissninnie liberals have filed a lawsuit claiming HUD should do more to put more Section 8 Turd World ghettos in the burbs. Claiming that the urban areas where most of these places are located have poor schools and high crime. Of course in all PC-fairness, we can’t point out the obvious which is that the fast majority of these folks are the cause of the crime and poor schools.
My 2 cents.
Those that will hold up best (IMO in my area):
**Condos in established urban centers (center city Philly, main line, etc.).
**Suburban or vacation area condos (Jersey shore).
Those that will hold up less than the above-mentioned (but not the worst):
**Exurban McMansions in developing areas far from the urban core.
Those that will lose the most value:
**Condos in suburbs.
**Older suburban houses in communities reaching 50 years old.
Why do I think this (besides wishful thinking)? Historically, those who have bought the center city/main line condos and the shore houses have had money. I think the areas where the most money lives will fare best.
The McMansions far outside the urban core are usually reserved for the lower-upper or upper-middle class. I think they’ll lose value to some degree, but we’re still talking about people with a fair amount of money.
The biggest value losses, again IMO, will be condos and older SFH in the suburbs. I think those are the homes that people are stretching most to get into around here. I could be wrong.