Bubble bursting???

[skier]

In response to Bob on property flippers thread--

I hope you aren't betting your life savings on the up, up and up theory. I agree wth pg0178. The demographiscs and prices and inventory don't add up to any more growth. In fact, all the signs point to a nasty fall. Any historical runup in stocks, real estate, bonds, gold, silver, etc. like the current runup in real estate has ALWAYS historically ended in a crash. If you own property, but your life, net worth and living don't depend on these high prices, you will be fine. But, watch out if you're betting the farm.

The market in SoWal isn't just frothy, there is "irrational exuberance" abounding with all of those that don't see the warning signs staring them in the face.

Within 12 months, come back and read these posts by us pessimists (I believe most of us on the pessimistic side are trained financial professionals). I hope you can call me chicken little at that time, but I wouldn't bet on it. 100% appreciation over the course of a year of two is not reasonable. Those that have been in for a couple of years should be okay. those that got in the last 12 to 18 months will get slaughtered if they were counting on flipping at a profit and they don't have the staying power to hold the property (or in the case of some of the developments, heaven forbid that must build a house within 2 to 3 years of purchase).

I remember having these exact same conversations with the stock market Bulls in 1999. They were sure the model had changed forever and that the old ways of looking at the market were no longer valid. They laughed at me for putting my money in money market funds. they weren't laughing in 2000/2001. And, look at the market since the crash. It's basicaly been flat for 5 years. Look at Japan. Stagnant for 20 years after huge runups in real estate and then a crash. The current runup looks too good to be true--so it probably is.

All that said, I still love my home in SoWal.

good luck.

[FoX]

I read this in your other post. You must be doubly pessimistic.


As a financial professional, tell me how much value real estate in SoWal is going to lose in the next 8.5 months?

[Buckhead Rick]

Keep it up Skier, there is nothing like a good panic attack and front page stories in the press to make me feel the real estate market is still fine.

This market had its roots in the 1930's. the children of the depression were the world greatest savers, and they are now making the greatest wealth transfer in history to me (actually to other baby boomers, my Mom and Dad didn't have much), as they die and those baby boomers believe in the Mark Twain quote of " it is not the return ON my money, it is the return OF my money" that I am concerned about. So they invest in T bills and (guess what) real estate.
As I said many months ago, I know nothing about real esate, but as the first baby boomer I cannot think the market on second/retirement homes hit it's top BEFORE I hit 60.
I love the smell of nap... make that panic in the morning. OK what movie is that from?

[Travel2Much]

Hi there--I have been lurking here since after Ivan, but this is my first post. I bought a second house in SoWal last year, and so of course threads like this make me panic. For assorted reasons, I had to buy last year and since I was long term I figured that if I shopped wisely I could avoid the bubble. So, I bought a relatively inexpensive house in the Seacrest area (outrageously expensive by my standards, but inexpensive by SoWal standards), avoided condos, and avoided particularly any property by St. Joe, where there is clearly an outrageous bubble. I still don't know who pays 2.0 million for a "beach house" that is nearly a mile from the beach.

[kurt]

Long term investing is very relaxing.

[BrettMan]

Well said Kurt. That's exactly why I'm switching from a short-term to a long-term view. You have to adjust your style with market conditions and it's definitely time to start thinking long term. From that perspective, nothing on 30-A is a bad deal - even at today's prices - because if you plan on living in it, or renting it (and you can handle any negative cash flow as an investment) over the long term, you'll be in great shape.

Long term being 10+ years...

[kurt]

Last year, long term in SoWal was 6-12 months.

[skier]

Fox,

I hope I am wrong on my predictions. To answer your question about falling prices, it depends on which prices you are talking about. Are you asking about the current prices people are asking and not getting or are you asking about the prices actually paid for property 6 months ago?

I would say if the average home along 30A sold for $750k one year ago, I would bet that within 12 to 18 months the average price will be 20 to 40 percent less than that. For those in the higher end places like watercolor, seaside, etc., I would bet that those currently asking $1000 plus will not be aboe to sell for over $700 per square foot.

Again, I hope I am wrong

[FoX]

Asking prices should be disregarded in a real analysis. As a financial services professional, I would imagine none of them are on your balance sheets.

[skier]

Fox,

If you will notice in my post, I mentioned that the price for homes actually purchased (ie: real cash changed hands if you don't understand that financial concept) 12 months ago will likely go down by 20 to 40% over the next 12 to 18 months. However, that will only be for those that choose to sell and convert back to cash (a difficult financial concept I know). For those that choose to hold after values fall, they might make their initial investment back in the long term. But, as seen in many previous bubble bursts (Japan, Houston, etc) it can take decades to recoup the initial investment.

I did mention that for folks in the higher end communities "asking" prices will not be met and to sell, most will have to lower prices in the short term by 30% plus. Hope this helps explain my comments.

You can argue all you like. Bottom line, no one knows for sure. we are all speculating aobut a bubble or a continued bull market. Time will tell. Lets chat again in 12 months. Hope you didn't invest your nest egg in the market over the last 12 months or so.

[Travel2Much]

Forgive me for chiming in again, here, but I do not understand skier's logic. While I tend to feel there is a bubble going on (and do not have my life savings invested in SoWal), like everywhere in the country, I can't see why houses not in high end communities are predicted to drop 20-40% from LAST YEAR's actually selling prices, but those in high end communties might have to lower prices 30% from THIS YEAR's asking prices (which probably have gone up 40% from last year's asking prices), in the short term at that. There's this house at Seaside that goes up several hundred thousand dollars every quarter, from the advertisement.

I would actually think it might be the other way around or at least equal, since few ordinary people, the bread and butter of real estate markets, can afford anything in the high end communities anymore, so that's where the major speculation by investors, realtors, and builders is. I came real close twice to buying in one of those, but since I was buying for real live personal use couldn't stomach having my neighbors be a limited liability company, a real estate development group, and a local realtor flipping the property. My neighbors/fellow owners in where I eventually bought appear to be real live human beings, and that makes me happy and cozy.

That said, I shall shut up and return to my corner.

[SoWalSally]

Travel - from the attempts at sarcasm in skier's post - me thinks there is either fear of loss at play, or bitterness from being on the outside. If I'm wrong, feel free to bash away.

There are sensible people here I've been listening to for a long time. No one expected the rapid rise of prices to continue forever. "Irrational exuberance" is a tired phrase. Sure some people got caught up with dollar signs and wanted to cash in. And no doubt a few people might have made some questionable moves.

Bubble is another term that is a little out of place in real estate. Bubble is associated with burst. In real estate, balloon might be a better word. As the balloon expands to a larger size, the market has to take a breath.

No one here now is talking much about buying and flipping. They expect some asking prices to become more realistic, and sales prices to grow steadily. If prices were to dip a little in the short term, who's going to really care?

[Paula]

If one buys in SoWal as a quick investment, then this investment is as risky as any other quick investment and requires significant due diligence and the stomach and financial slack to ride whatever happens.

As for me, I'm glad we bought our two little cottages not as investments but as places our family and friends can grow to love and spend time at over several decades. The investment has turned out to be excellent so far and having the rental income doesn't hurt at all. But, I don't know what I would do if I were thinking about SoWal as a short-term investment right now. I'd do a lot of homework first. But I suppose that's what people said 3 years ago, 2 years ago, 1 year ago. We bought our second cottage next door to our first cottage just a little over a year ago for about $65,000 more than we paid for pretty much the same thing 2 years ago. That hurt quite a bit at the time, but the pain has been relieved. It has done very well as an investment already even though we thought the price was high then. But, as with the first cottage, we bought it as a place to enjoy for a long time, so the short-term returns weren't important.

Also, just as a suggestion, rather than buy one big place, it has worked out very well to have two small places next door to each other. If we ran into financial difficulty, we could sell one without losing our "home" in SoWal. If we come down there and don't need both cottages for family/friends, we can just use one and continue to rent out the other.

[OnMackBayou]

Gee, it really is easy to tell the haves, (not me) from the have nots (me). The fact that there is even a message board such as this with so many active contributors, and lurkers (again me) so hyped about the SoWal real estate market tells me one big thing. All of us reading this are also scouring the real estate sections every week, and we're looking on the internet to try and decipher a trend.

I predict that at the first sign of a decrease there will be no shortage of buyers trying to get in on what they consider to be a good deal, and any fall in asking prices will be short lived. Too many people want to live here, for good reason. Where are they going to go?

[kurt]

Gee, it really is easy to tell the haves, (not me) from the have nots (me). The fact that there is even a message board such as this with so many active contributors, and lurkers (again me) so hyped about the SoWal real estate market tells me one big thing. All of us reading this are also scouring the real estate sections every week, and we're looking on the internet to try and decipher a trend.

I predict that at the first sign of a decrease there will be no shortage of buyers trying to get in on what they consider to be a good deal, and any fall in asking prices will be short lived. Too many people want to live here, for good reason. Where are they going to go?

Good post!

Don't be such a lurker.

[Georgian]

Skier,
To be successful in Real Estate you"ll have to forget everything you have read or learned from the equity markets including all those sound bites.

When did California's bubble burst?

On Your comment "Any runup in stocks, real estate,... has ALWAYS ended in a crash"

Perhaps you should read more non-fiction. Or at least visit a different library.

And when the Real Estate market did experience a period of slight decline or low growth where were the interest rates compared to where they are now?

[njackie]

This is a great response and thanks for educating others on the board as to this philosphy!

[beachmouse]

California had a serious real estate crash in the late 80s. It took some areas quite a while to regain pre-crash values.

Florida had a major real estate crash during the Great Depression. If you look at the lending practices then and now, there are some interesting parallels. (though I think the market is in way better shape now than it was then)

[SHELLY]

Does anyone think the present "unattractive" state of the SoWal beaches will slow the market down a bit (or result in price reductions by motivated sellers)?

[chrisv]

Does anyone think the present "unattractive" state of the SoWal beaches will slow the market down a bit (or result in price reductions by motivated sellers)?

I'd say it depends on what is "motivating" them.

Florida also felt a hurtin' from the weak market in the 80's. Look, no locale is immune from a "bubble", but I'll put my waterfront up against any investment of any kind...

[RiverOtter]

Does anyone think the present "unattractive" state of the SoWal beaches will slow the market down a bit (or result in price reductions by motivated sellers)?

Nope, Florida had 4 hurricanes last year and if anything the market got stronger.

[skier]

Dee plane boss, dee plane---Some folks are living on fantasy island in terms of their continued bullishness in face of all the current bearish indicators (see my post under property flippers thread).

Bash away. Sorry that I have offended so many folks. I am only stating my opinion--I assume we are all entitled to them. Not challenging anyones manhood or womanhood.

SoWalSally--I do own a home and actually bought several years ago. So, I should be safe if the market falls. Fortunately, my personally solvency does not depend on the value of this home going up or going down. We love our home and will continue to visit the area often. That said, if someone is willing to offer me a crazy price for my house, I will sell and go back to renting until another opportunity presents itself.

Cheers.

[Wu]

That said, if someone is willing to offer me a crazy price for my house, I will sell and go back to renting until another opportunity presents itself.

Cheers.

Man who is not part of solution is part of problem.

[Travel2Much]

I am not offended, skier, and you have not offended my manhood. I think you would be real surprised how much I know about real estate finance. We actually agree on much. Calling people "crazy" and suggesting that they live in fantasy worlds simply because they want to live in SoWal is a bit odd, particularly for someone whose admittedly overpriced house is in the market to offload on the delusional crazy people.

Now, if people think their property is going to double in a year or two or even three, that's ridiculous. I am glad that things are finally settling down, to get the speculators out of the market, and perhaps the real estate agent market will clean up its act up too. That was one of the things that I found real off-putting when buying here. I would trade 100s of thou in equity simply to have that occur, quite frankly.

The real interesting thing on 30A in the next few years is going to be the build out at Watercolor and at Watersound. I have always seen that as a real hurdle.

The beach in Seacrest/Camp Creek/Watersound was amazing yesterday. Bright green warm water, but crystal clear. Lots of shells, and periodically you would pass little groups of people lazing in their private little beach worlds. Worth every penny I ever earned, in my view, just to be able to be there yesterday.

[OnMackBayou]

Many of us looked long and hard before deciding to buy property here. Most of us were excited to own here before the prices spiked. And I bet we'll really be happy if we're here for the long run.

Real estate prices tend to be very sticky. Once people have it in their heads that their property has a certain value, they tend to resist any downward shift in their thinking.

I believe that is especially true for South Walton. Once this area gets in your DNA it is hard to imagine being anywhere else, and it's obvious many people feel the same way, and are willing to pay a premium to be here.

[pete0735]

As with the stock market of the 90's, when all the news media is talking about the Realestate craze and quick ways to make a fast buck, the party is over. The curent prices at Watercolor and other coastal locations reflects this craze.

Originally St. Joe had reasonable prices on lots, 200K or better. People started buying. Then the "flippers" (day traders) decided to make a living out of this. So when St. Joe recognized that there was money on the table, why not get their hands in the pie and ask 4 times their original plan (similar to IPO's in the 90's)? Well what about the builder? Surely this hipe is big enough that he can carve out a life times worth of earnings in a few short years.

With all these mark ups we need to have a higher selling prices.The end result is the last one holding the pie will get burnt. And in my opinion the overall community will suffer. A run up with a pending crash will slow down overall development and progress. If WaterColor sales slow to a crawl because of high prices, there will be a lot of inventory on the market. With large amounts of inventory, building will slow. If building slows there will be fewer residents to buy the goods to keep the shops and stores thriving. If the area isn't thriving who will want to pay $4K a week to rent a place a mile from the beach? Which the owner needs becasue he paid $1.5M to be a mile from the beach.

I don't believe there to be gloom and doom for the overall realesate market. The increase in average housing although high, is at a much smaller percentage than the rise in coastal property such as Watercolor. Also there are a lot more people buying houses to live in, than to vacation in.

And for those that use the long term approach as a safe haven for irrational purchasing behavior. How did you handle your broker when he recommended stocks such as Lucent at $60 a share, now under $3. Long term view is all relavant to when you got in. If you bought a $250K lot and put a 2500 square foot house on it and your at $1M in cost, congratulations, you are goingto sleep well. If your blinded by pure hype and you got a 800K lot a 1/2 mile from the beach and put a 2100 sq ft house at 1.5M. I'm sorry, I lost money in the stock market as well.

St. Joe please do us a favor. Real the builders in and have them charge a respectable building price. And let's scratch your 4 times mark up. Go to your original plan with a modest increase by phase. And don't let any flippers in the game. How about a contractual clause staing that if you buy a lot, you must build and own for at least 24 months.

I believe in the end you will have a community unlike any other and the forsight to protect Watercolor from price and quality erosion.

[FoX]

St. Joe will sell for what the market will bear. If a buyer is paying cash, so be it. If financed, appraislas are required, which reflect comparable sales. Do you think taht someone paying $1.5 million for a house a mile from the beach is counting on rentals to pay their mortgage?

Classic and timeless beach homes, while prices may seem outrageous to many of us, are much more than numbers on the sheet for those that will end up owning them for many years. And many of them will end up being owned by people who will value them for generations, with wonderful memories that are difficult to put a dollar value on.

There are a lot of folks here that are out of my league, and many more I've yet to see.

Such has been the case with Ono Island, Star Island, Marco Island, Sea Island, Malibu, Hilton Head, The Hamptons, Seaside, Rosemary Beach, and is soon to be the case at WaterColor, WaterSound, Alys Beach, etc . . .

They come, they stay, they buy. They care little whether a couple of folks have flipped their beach home. They care little what the developer or builder made. They want their beach home.

If you are simplifying the real estate market here all the way to the point of comparing it to the stock market, then you just don't get it.

What is your real issue? You lost money in stocks and now you want to watch others suffer?

[OnMackBayou]

Very well put.

When successful experts talk about the stock market, they talk about the fundementals.

The fundementals of SoWal are extraordinary. We are blessed with a location between a beautiful bay and a beautiful beach. That will not change until the next Ice Age, or until global warming takes the beach to Freeport.

[pete0735]

We all know that anyone selling anything, will sell what the market will bear. My opinions are based on the unrealistic value of remote beach property. Not the poreperty in the first few rows, but the high prices further away. It just becomes unrealistic.

This isn't to remove the family value of having a wondferful vacation getaway, where memories are made. It's the realistic opinion of a market that has gotten to fat to quick, Which has many comparisons to the stock market or any investment vehicle that has had a run up. My view is simple, what goes up, will come down. It's only a matter of how far and quick.

I believe a lot of good people try to build their dreams in places like Watercolor. However at these prices dreams may become nightmares.I feel you will find whether someone has more money or not, they care about the value of what their hard earned money was spent on. And if you are someone who keeps the property, lower values have their advantage. A tax bill alone can go from a projection of 10K when purchasing a property to 20K at closing.


So finding this informative board, I thought I'd throw in an opinion.

As for my "issue", I feel blessed. I jumped out of the market before the crash and bought realestate. I am now holding my realestate and now buying stocks again. I'm not a flipper or day trader, just someone who reads the paper. And when I see what everyone is doing, I assume it's to risky for me. Sort of flying under the radar.

[Bob]

Long term investing is very relaxing.

Skier, Remember please that I said long term is up. Long term,long term longtermlongtermlongterm...as said by DeCaprio in "The Aviator". Sure, there may be a correction, as in California,but last I checked, you can't purchase resort property anywhere at 70's,80's,90's prices. And stop comparing SoWal w/ tech stocks and the Japanese. As I told Buckhead Rick, that's like apples and oranges/sushi.

[Seasider]

Most real estate busts are caused by excessive lending practices. My sense is that significant equity is being invested in most of the SoWal single family transactions. Wealthy individuals have been unable to earn adequate yields in either stocks or the bond market, so many have turned to real estate. If you can't make a decent return in the stock market, why not invest in a second home? At least the investment can be enjoyed. If the stock market takes off again, capital will be pulled away from additional real estate investment, but I would not expect a wholesale selloff. I think demographic trends are good for the area and continued improvements in the transportation infrastructure such as the new airport will be positive for values. That being said, PCB condos may be a different story.

[skier]

Bob--

We are not talking apples and oranges here. What makes all these markets that crashed similar is the SPECULATION that created the boom and then the bust. The real estate market runup on the panhandle has been created by a huge amount of speculation. When the speculators eventually have to sell to pay down debt (ie:margin loans of the 90's) or because they can't afford to build a house on the lot they bought solely to flip, the market will tank just like the stock market.

Rampant overspeculation in the real estate market is what will cause the price decreases. I know too many folks that bought 2, 3 and as many as 10 properties. Yes, some of these folks are very wealthy and won't get hurt desperately by a fall. However, many of them financed these purchases through interest only loans and never intend to build or hold the homes/condos long term. They are leveraging themselves to the hilt and with short term rates going up, their interest payments (many are tied to LIBOR and adjustment monthly) are going up, up and away. They are trying to sell or will be soon.

Pete and I agree--if you got in two or three years ago. Your investment is probably safe. But, if you got in recently and you can't afford to take a hit, look out.

[Kim Smith]

Skier,

Did you know interest only, which are connected to LIBOR offer a 3 and 5 year fixed rate?

[skier]

Actually, some lenders will design all kinds of loans including 3, 5, 7, 10 and 15 year interest only loans. However, a large chunk of the interest only market (especially the high end) is taken up by the shorter term loans with adjustment periods of 1, 6 and 12 months. Also, some are tied to LIBOR, some are tied to treasuries and others are tied creatively to other market indices.

[Travel2Much]

Boy, these Watercolor folk really begin to unravel when their overinflated prices go down and their friends discover "hey, maybe this wasn't such a smart idea to buy 10 lots to flip with adjustable interest only loans in a rising interest rate environment". Next time I am at the Watercolor market, I am telling them to offer only decaf.

[RiverOtter]

Boy, these Watercolor folk really begin to unravel when their overinflated prices go down and their friends discover "hey, maybe this wasn't such a smart idea to buy 10 lots to flip with adjustable interest only loans in a rising interest rate environment". Next time I am at the Watercolor market, I am telling them to offer only decaf.

Not arguing for the Watercolor crowd. I don't and won't own anything in there but the interest rates just went down again.

[Travel2Much]

Hmmm, time to refinance my nerdy boring 30 year fixed rate mortgage, maybe.

I will confess to considering buying in Watercolor, although I doubt if I could afford it now (what with doubling prices every six months or so) and to this day have mixed views about my choice. Lots good about the place for my needs, lots bad for my needs. When the salesperson told me I could "get in" to use skier's term, for a modest amount, less than the credit limit on my visa card, together with an interest only loan I was probably the only one ever in their office to say "that's crazy" (two years in the late 1980s where part of my job was helping to pick up the pieces from the S&L debacle makes me gunshy). Plus, I didn't want to get in, I wanted a second house.

Skier's possible doomsday scenario has some reality to it, and I considered it myself when evaluating Watercolor, but unlike tech stocks there is inherent value in built out 30A properties and developments that are attractive to real families. Always has been, always will be. My view has always been that St. Joe has way way too much riding on that property to let skier's endgame scenario happen. But, who knows?

[SHELLY]

Realtors raise prices so they can then drop them at advertise the property as "Price Reduced!" I'm seeing lots more of that lately.

[RiverOtter]

Realtors raise prices so they can then drop them at advertise the property as "Price Reduced!" I'm seeing lots more of that lately.

Is this to make people "feel" like they got a good deal?

[FoX]

Realtors raise prices so they can then drop them at advertise the property as "Price Reduced!" I'm seeing lots more of that lately.

I haven't seen that. I've seen some real price drops and some token ones. A $5k price drop on a $1.25m dollar property is probably a gimmick.

[Bob]

Bob--

We are not talking apples and oranges here. What makes all these markets that crashed similar is the SPECULATION that created the boom and then the bust. The real estate market runup on the panhandle has been created by a huge amount of speculation. When the speculators eventually have to sell to pay down debt (ie:margin loans of the 90's) or because they can't afford to build a house on the lot they bought solely to flip, the market will tank just like the stock market.

Rampant overspeculation in the real estate market is what will cause the price decreases. I know too many folks that bought 2, 3 and as many as 10 properties. Yes, some of these folks are very wealthy and won't get hurt desperately by a fall. However, many of them financed these purchases through interest only loans and never intend to build or hold the homes/condos long term. They are leveraging themselves to the hilt and with short term rates going up, their interest payments (many are tied to LIBOR and adjustment monthly) are going up, up and away. They are trying to sell or will be soon.

Pete and I agree--if you got in two or three years ago. Your investment is probably safe. But, if you got in recently and you can't afford to take a hit, look out.

Skier, You are hyper-ventilating. Inflation is under control, the economy is anything but overheated and 10 year Treasury yields are in the 4.0-4.2 range. This scenario keeps long-term rates low. Well qualified buyers can refi and grab a second teaser rate easily because of recent appreciation. The up, up and away you are refering to is the rise between the teaser rate and current LIBOR Treasury rates, which, by the way, are still LOW..Not everyone is on one month adjustables, many went 3-5 years.

[skier]

Florida Real Estate Bubble

The 1920’s, in America, were a time of great prosperity. Skilled and educated working Americans had jobs providing numerous fringe benefits, paid vacations and pensions. In addition, automobiles were becoming commonplace for the wealthy and middle class allowing cross country travel. This good fortune set the stage for the Florida real estate bubble.

Starting in 1920, many Americans became enamored by the materialistic and prosperous lifestyle of the time. During this time, the stock market was moving forward at an extremely fast pace. Many investors were becoming quite wealthy. Florida became a hot spot for these newly rich people, who didn’t enjoy the cold. Many whole families took vacations to Florida. It was at this point that tourism started booming and land prices were skyrocketing. Many astute investors took notice and started buying Florida real estate. The population in Florida was growing exponentially and housing couldn’t meet the demand. Florida became the “playground of the rich and famous”. Illegal casinos and drinking parlors became widespread in Miami.

At this point, almost anybody could invest in Florida, even without much money. Credit was plentiful and soon everybody in Florida was either a real estate investor or a real estate agent. In 1922, the Miami Herald became the heaviest newspaper in the world as a result of its humongous real estate advertisements. People in the North heard about the real estate prices “doubling and tripling”, causing a snowball effect. Capital was rapidly pumped into the real estate market. Whole golf communities were developed, such as Temple Terrace. Resorts and retirement communities were developed almost overnight. Mansions were sprawling in every area, as were swimming pools. As always, waterfront property was the most desirable. Florida was seen as a veritable Utopia.

Real estate prices quadrupled in less than one year. An elderly man invested $1,700 in property and by 1925 the property was worth over $300,000! It seemed you could do no wrong by just buying any property in Florida and become a millionaire. By 1925, real estate prices had become so exorbitant that buying land wasn’t affordable any longer. New investors failed to arrive and old investors started to sell. Panic arrived, as it always does, and the real estate market crashed. Prices kept moving downwards as heavily indebted investors tried to sell to avoid bankruptcy. In most cases, no buyers arrived, and the investors were bankrupt from the enormous mortgages.

To make matters even worse, a highly destructive hurricane ravaged South Florida in September 1926. The 125 mile an hour winds eventually turned Palm Beach County into swamp lands. After the storm, a huge tidal wave crashed upon the towns of Belle Glade and Moore Haven. Due to these horrible turn of events, over 13,000 homes were destroyed and 415 people died. Additionally, the arrival of the Mediterranean fruit fly obliterated the large citrus industry. It took years for Florida to fully recover, even through the highly prosperous time from 1925 to 1929. Florida was barely affected in the stock market crash of 1929 and the Great Depression, because of its poor financial state from the start.

Market crashes always occur in the same manner. Regardless of the market, the same simple psychological underpinnings are always at work. People who are caught up in a bubble never look back for historical examples. For this folly, they become paupers.

“Those who cannot remember the past are condemned to repeat it.”

[skier]

STILL NOT CONVINCED THERE'S A REAL ESTATE BUBBLE, READ THIS!
by Peter Schiff
Euro Pacific Capital
April 20, 2005


As the debate over the existence of a real estate bubble rages, the most persuasive case in favor continues to be made by those firmly committed to the opposite point of view. Such was the case with several recent articles that should give even the most ardent real estate bulls cause for concern.

A New York Times article of April 17, 2005 entitled "Seeking Nest Eggs Investors Buy Nests," chronicles the recent deals of several New York actual, and wannabe, real estate moguls. Although the figures profiled varied largely in terms of wealth and experience, two threads that united them are their a) confidence that real estate prices have no where to go but up, and b) willingness to accept low rental returns, or even negative cash flows, as trade offs for expected appreciation.

Several individuals admitted to being attracted to real estate because they had either lost money in the stock market, or knew of others who had. What these "investors" fail to realize is that they are making the same foolish mistakes with real estate that they or others made with stocks. Stocks per say are not bad investments. Neither is real estate. It’s over paying for either that makes for a bad investment. In the 1990s investors over-paid for stocks by ignoring the fundamental measurement of a stock’s value, its dividend yield, simply because they expected its price to rise. By ignoring rents, today’s real estate "investors" are making exactly the same mistake.

The following quotes taken directly from the Times article provide more evidence than any academic study could in support of the existence of a real estate bubble:

One investor seeks simply to "cover her monthly costs, even if rents are low" and admits that "if there is a little money left over after mortgage payments, taxes, and other expenses, so much the better, but enhancing cash flow is not the goal." How can cash flow not be the goal of an investor in rental property? The fact that she describes minimal positive cash flow as "so much the better" implies that even negative cash flow is acceptable

A second aspiring tycoon who turned to real estate because "he watched his friends lose money on stocks" and feels "real estate is safer," is happy to buy rental property if he can break even. "I’m not looking for positive cash flow because we both work and have good incomes." His goal is "to get as many apartments as I can, even with a mortgage, and break even-I do not want any negative cash flow-and when my retirement comes, sell everything." Sell to whom? Apparently a greater fool for whom negative cash flow will not be an obstacle.

A third individual boasts about having paid $70,000 for a rental condo last year that is worth $115,000 today. Though she admits to "not making much money in rents," she looks forward to making up the difference in appreciation. She claims to have no interest in selling now but ‘When I’m ready to liquidate I will have the money there, it’s better than the stock market." How does she know the condo is worth $115,000? Is it because a greater fool purchased a similar one at that price? How does that affect her if she is not the one who sold? Remember all those "paper profits" in the stock market? What good are they now to those who did not sell?

The fact that so many novice real estate investors are confidently buying property with nominal or negative cash flow is not completely lost on the New York Times reporter, but even in pointing this out, he provides still more fodder for my argument. One "expert" consulted commented that in the past real estate investors expected annual rental returns of 8% to 10%, and that such a "historical perspective" is actual a negative in today‘s market, as it results in experienced investors passing on properties that investors with "fresh prospective" routinely buy. "They’re not being foolish; they’re looking at it differently than people who have been in the market for a long time." In other words, this time it’s different, a new era. I’ve seen this movie before, and I know how it ends. Remember all the novice stock market day-traders ridiculing Warren Buffet for his failure to grasp the new reality.

A second "expert" remarked that "A break even investment is O.K.," but cautioned others to "never buy a negative return." So even today’s supposed experts see nothing wrong with buying rental property that produces no net rental income.

Similarly, a local magazine in Connecticut recently featured a cover-story titled "Annual Real Estate Market Survey -- How High Can It Go?" in which an expert commented "The only problem with real-estate investing in this area is when you approach it strictly as an investor." In other words, consider the fundamental investment value of the property. "Yes a house in Darien or New Canaan will appreciate, and turn a handsome profit when sold, but the greatest interim benefit comes from actually making your home there rather than renting it out and waiting for the optimal selling point." (Not for my wife and me, who are enjoying the area along with the benefits of cheap rent while waiting for prices to collapse.) Notice how appreciation is seen as given, despite the low rental retunes available at today’s already high prices.

Another agent commented that "Homes have been very difficult to rent. I’ve seen rental listings sit for numerous months." A third added "Even transferees who are coming her for a year or two are buying and then selling after they leave. It’s great to buy a house for investing because the value will increase, but don’t expect to get an enormous amount of rent."

In another article in the same magazine ironically titled "The Realities of Real Estate" a Q and A with a local realtor included the following: Question, "Are condominiums good investments," Answer, "They’re an OK investment, but not as good as a single-family home where you can double or triple every dime you put into it." By that she means that if you spend 25K remodeling your kitchen, expect to get an extra 50K to 75K at resale. Remember the olden days, like 5 years ago, when at best, a remolded kitchen could recoup only about 50% of its cost.

Finally, an article which appeared in the April 10 New York Times, entitled "The Hunt, Becoming a Mogul Slowly," which should have been entitled "A Bankruptcy in the Making," chronicles the real estate deals of a 25 year old New Yorker, who began his investment career at the ripe age of 22, using money borrowed form his proud parents for the down-payment. This young man's advice to those potential investors who might be worried about real estate is "What are you worried about? Take a risk with real estate, its less risky than the stock market." It is! Well he’s 25 years old, so I guess he should know.

The young mogul also advises against shying away from bidding wars. "An apartment is more attractive to me when other people want it. While the price might seem expensive now, it might not be expensive six months to a year form now. We overbid to capture the opportunity." Basically, his real estate wisdom boils down to the following: Don’t worry about the price you pay, just buy, because the price will be higher in six to twelve months.

Meanwhile his success has inspired six of his young, former-renter friends, to follow in his experienced footsteps. Initially, some were put off because "they thought buying was scary or complicated, especially if they weren’t sure they would settle in New York, but that when they saw that I wasn’t completely frazzled and was doing it fairly easily and came out with a profit, they saw it was fairly simple. I made it seem like a very cool thing to do."

I don't think there has ever been a greater "can't lose" consensus than the one which exists among today's real estate "investors." Combine this "irrational exuberance" with unprecedented access to cheep credit, and its no wonder that the Fed has succeeded in creating the "mother of all bubbles." In fact, it's the sheer size of this mega-bubble which makes it so hard to detect, as so many observers are themselves trapped within it. But the simple fact that a 25 year old kid, with three years of experience, is the subject of a series article about real estate investing in The New York Times, itself is perhaps the best anecdotal evidence that today's real estate market is a bubble. When a self-described computer geek, proclaims real estate investing to be cool, you can bet the trend is nearing its end.

[skier]

Y'all like my new profile pic??? :laughing1

[RiverOtter]

Y'all like my new profile pic??? :laughing1

What is it?

[Advance The Man]

Skier, when will the bubble burst? What will happen? How much of a discount will I be able to buy along 30A? Partly joking, partly not. It's easy to say there won't or will be a RE bust. What are the ramifications if there is?

[FoX]

So much for the lighter subjects you were going to tackle. Skier says SoWal will lose 1/2 its value in . . . what was it? 12 months?

I'm beginning to think you are on this board so that you can come back and say "I told you so". And you're the type of poster that if you turn out to be wrong, we'll never hear from you again.

[thumper]

At the risk of over stepping my bounds as a new forum member, I'm going to call this one as I see it:

When Skier was asked some intelligent rebuttal questions in recents threads, asking him to elaborate, he responded with sarcasm and avoided the questions completely. Until then he was helping drive an interesting debate, but he dropped the ball once he was challenged directly. I stopped reading his posts with interest after that, I'm afraid. Started to sound like someone who is baiting for pointless debate.

Skier, we get your point. Yes, there are definitely some over inflated properties out there. Some. Humans are greedy, it's guaranteed to happen in a market like this. I'm glad you are providing food for thought, but please, if you want to retain credibility, have the courtesy to respond to those who have different opinions without resorting to sarcasm.

Respect, Thumper

[Advance The Man]

I keep looking for a real estate expert to discuss the bubble. Everything I've read is from economists or a financial expert. Real Estate is unlike the stock market, it doesn't implode. During a slow down it let's air out slowly and typically stabilizes. I've bought and sold scores of property and scores of stocks. I've lost money in stocks, some more than others. I've never lost a nickel in real estate.

[Beachlover2]

About a month ago - I saw something on CNN about real estate bubble bursting. I wish I could remember more of the figures - but they brought up cases such as California and Boston - where in the past real estate had risen like 300% over a few years - when the bubble burst - values fell 10-15%. Not that I want to lose 10-15% - but if I have increased 300% - then 10-15 doesn't sound so bad. Did anyone else see this that remembers more about it than I do?