Bubble bursting???

[Smiling JOe]

Skier, since the bubble is about to pop, why are you asking a high price for your property instead of getting out while the money is good and buying your house back later at a cheaper price? That is what I would do if I "knew" the "bubble was bursting."

 

[pete0735]

In reality I think it is quite simple, but I can only speak from Watercolor experience. Is a 50% reduction possible? I'm not sure but I wouldn't be surprised. If you bought a lot for 225K 3 years ago, it now has a "paper" value of 800K. That's over 3 times. Now let's say there is a 50% drop, you didn't lose money, however your gain is shy of double. Not a bad return in 3 years.

The problem is never a fair or premium value, it's the unrealistic price that is put on SoWAl land. Not beach front but down the road. That was a 225K lot in 2002, Today it's 800K. With builder prices you may not be able to put a house on your over inflated land and pay your over inflated tax bill.

For those who believe it can only go up, ask yourself would you have bought at 2005 prices?

Now on to rents, can't figure this one out. I vacation in Florida and Hilton Head and can get a house or condo on the beach for 2K to 5K. At WaterColor I can get one a 1/2 mile from the beach for 4K. Doesn't sound right. However everyone I bump into is either renting for vacation becasue their building in Watercolor or are interested in buying becasue of the hype but haven't done anything yet because of the prices. Now I admit this is not an actual survey, it's just folks I've bumped into.

I plan on treading lightly, but if you bought your lot at 2002 prices and want to double your money look me up. But if your looking at 3 times, can't help you there.

 

[skier]

Good question--

Here is my answer--

1. I will pay a significant amount of long term capital gains tax reducing the amount I have to reinvest (I don't qualify for 1031 exchange).

2. There are fairly significant closing costs both on the selling, buying and borrowing sides.

3. The amount of time involved in selling then buying again is significant, especially if you are coming from afar.

4. We looked for a long time and finally decided to build because we couldn't find a resale home we really liked. If I knew I could repurchase my current house, this might be an option.

5. I bought long enough ago that prices would have to fall over 50%, and stay there, for me to be in the red.

6. I can afford the home we have even if things go south and interest rates rise.

7. We REALLY like our home and the area.

For all of those reasons, I am only going to sell if I can get a price that makes it worth it to sell. I'll then take the money and build another home sometime down the road.

If I don't sell, no big deal. We didn't buy the home as an investment. We bought it as a place for us and our kids to build memories. But, if we get lucky (I did not buy the house thinking prices would skyrocket) and the house commands a large enough price, I'll take the money and go on some really nice memory building vacations off the interest I will earn on the gain. For me, I see no real downside either way.

 

[BrettMan]

Skier - there are two points in your earlier post that bother me and I have to respond to:

1 - "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."

What?! Dividend yield is NOT the only way to measure a stock's value. In fact, an awful lot of stocks don't even pay dividends! I'd say most investors do and should continue buying stock because they expect it to rise in price. That's kinda the point. P/E ratios, expected earnings, industry growth, etc. are all very valid reasons to invest in a stock. The same ideas apply to real estate.

2 - "How can cash flow not be the goal of an investor in rental property?"

Well, here's the deal. If someone really wants to invest in rentals and is willing to float a negative cash flow, it can, and probably will be, a great investment as long as they are in it for the long-term. The monthly cash flow might be negative at first, but over time, rents will rise and your mortgage will not (assuming 30 yr fixed - which is what you should be doing for long term investing at today's rates). At some point, the rent will catch up with the mortgage payment, and the value of the home will go up as well. Using the rule of 72 and assuming a modest average annual appreciation of 6%, you can expect the value to double about every 12 years, so if you hold the property for 24 yrs, it should be wourth four times what you paid and somewhere along the line your cash flow probably went positive (again, because of rising rents). Not to mention all the tax benefits along the way.

Obviously, none of this applies if you are only looking at the short-term. But be careful with blanket statements like the ones above. You'll just lose credibility...

Having said all of that - I do think real estate prices are high, and we will see some corrections in specific markets. I don't think the sky is falling. The only ones that need to worry are the folks that just got in and are not going to be able to hold on long enough for prices to come back. Of course, how long that takes is anyone's guess. It could be next year, or it could be a decade from now. I think it's closer to the former...

 

[OnMackBayou]

This was on the real estate page of AOL tonight. Do not know the source other than the page is "Powered by RealtyTrac".

Neighborhood Profile: 32459
Zip Code 32459

Year 2005 Median Loan Amount $276,000
Month May Median Loan to Sales Price Ratio 0.47%
Median Sale Price $585,000
Median Assessed Value $129,666
Median Square Feet 1970
Median Sale Price to Assessed Value Ratio 4.51%
Median Price Per Sq. Ft. $297
Median Number of Beds N/A
Number of Sales 11
Median Price Per Bedroom N/A
Last Recording Date N/A
Price Index 363.35
Change in Price from
Previous Month 38.04%

 

[Kurt]

Good question--

Here is my answer--

1. I will pay a significant amount of long term capital gains tax reducing the amount I have to reinvest (I don't qualify for 1031 exchange).

2. There are fairly significant closing costs both on the selling, buying and borrowing sides.

3. The amount of time involved in selling then buying again is significant, especially if you are coming from afar.

4. We looked for a long time and finally decided to build because we couldn't find a resale home we really liked. If I knew I could repurchase my current house, this might be an option.

5. I bought long enough ago that prices would have to fall over 50%, and stay there, for me to be in the red.

6. I can afford the home we have even if things go south and interest rates rise.

7. We REALLY like our home and the area.

For all of those reasons, I am only going to sell if I can get a price that makes it worth it to sell. I'll then take the money and build another home sometime down the road.

If I don't sell, no big deal. We didn't buy the home as an investment. We bought it as a place for us and our kids to build memories. But, if we get lucky (I did not buy the house thinking prices would skyrocket) and the house commands a large enough price, I'll take the money and go on some really nice memory building vacations off the interest I will earn on the gain. For me, I see no real downside either way.

I detect a paradox.

 

[Bob]

I detect a paradox.

bingo

 

[FoX]

In the absence of a substantial cash flow, a good rental is one that shows no net gain on paper at the end of the year, if that makes sense for your overall picture. A negative cash flow might be desired.

It is often desireable to enter into a situation that might have zero or negative flow, in order to acquire a desired property which is expected to increase in value, and/or feature rents that will rise in good measure.

There are many property owners in SoWal, who easily afford to buy property with a substantial amount down (if not all cash), and have rents only cover a portion of expenses.

 

[Philip_Atlanta]

This was on the real estate page of AOL tonight. Do not know the source other than the page is "Powered by RealtyTrac".

Neighborhood Profile: 32459
Zip Code 32459

Year 2005 Median Loan Amount $276,000
Month May Median Loan to Sales Price Ratio 0.47%
Median Sale Price $585,000
Median Assessed Value $129,666
Median Square Feet 1970
Median Sale Price to Assessed Value Ratio 4.51%
Median Price Per Sq. Ft. $297
Median Number of Beds N/A
Number of Sales 11
Median Price Per Bedroom N/A
Last Recording Date N/A
Price Index 363.35
Change in Price from
Previous Month 38.04%

I find the "Median Loan to Sales Price Ratio" a very interesting number - 47% (a sample of 11 sales, I know ).

I've always assumed that one of the major drivers of investment/2nd homes is those individuals moving cash from the markets to real estate. This 47% would support that happening. Thus, a predictor of the future would be watching the ratio and watching the ebb and flow of money pouring in and out of the markets.

What do you guys think? Where can we get this stat in a broader sense (tracking it's history would be interesting).

 

[SHELLY]

What actually is the consequences for people holding vacant lots and who don't build a home in the time specified? Is the punishment tar and feathers or just a sharp smack on the snoot with a rolled up newspaper.