Bubble bursting???

A short article from the National Review:

http://www.nationalreview.com/kudlow/kudlow200506201040.asp

The Housing Bears Are Wrong Again

"None of this is to argue that low mortgage rates haven?t been a plus in the housing picture. Of course they have. But the imbalance between excess demand over limited supply, resulting from tax factors and land-use restrictions, has made home buying even more profitable in recent years than has been the case in the past. "

As for South Walton, I can see some moderate/modest price drops in the next year or two. But in the end, the amount of land south of the bay is pretty limited, as is the total number of allowed units.

It's Panama City Beach that's in trouble. Major surplus and not scarcity situation coming up when those new buildings start coming online in 2006/07. How many people who would have bought in SoWal end up buying foreclosed condos in PCB instead because it's cheap? In theory, you're probably talking two very different groups of buyers, but when something starts looking dirt cheap compared to SoWal prices, it's tempting to buy low if you're willing to wait for ten years for PCB to redevelop itself and for the market to turn around.

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

I agree. I LIKE to see a counter-point and certainly those predicting a bubble burst are in abundance. However; sarcasm lessens an argument significantly.

Regarding the two articles Skier put out, they seem to correlate crashes and market indicators of stock markets in comparison to a real estate market. Apples and oranges in my opinion. The article on the 20's Miami market was quite interesting and will prode me to reasearch that market some more to see if there are some lessons - thanks for the heads up, 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.?

Are these your words, Skier? If not, please quote your source and author.

I will remind everyone, that during this country's economic downturn following Sept 11, 2001, this area's businesses were booming. We are not the norm. We are the exception. Sure, there is some cause for caution, and buyers should rely on trustworthy folks who know this market. We have come to the point where not every listing is a bargain. However, there are plenty of bargains available right now.

Joe:
Send us to a few MLS listings that you consider bargains, unless, of course, you're bidding for them! I would genuinely appreciate your opinion. I expect, indeed, there are a few bargains...but there's a lot of junk...overpriced junk...on the market currently.
I've been very fortunate with South Walton real estate transactions in the past 24 months...but I declared myself out of the game 4 or 5 months ago. Maybe too soon. Whether or not the bubble bursts will be determined by the strength of the borrowers. It's the loosey-goosey lending practices (which I took full advantage of) that have me concerned. What percentage of the borrowers won't be able to 'tote the note' in the face of the current 'flattening' of the market, plus the approaching time limits for build out in some developments. There are a gah-zillion lots currently in South Walton MLS between $400,000 and $550,000. The folks holding 3, 4, 5 or 6 of those lots might be feeling a little queasy. Also, I'm skeptical that the market for vacation rentals will be able to absorb the available inventory over the next couple of years. After all, lots of folks got in the game with the notion that rentals are assured. We shall see.

Joe:
Send us to a few MLS listings that you consider bargains, unless, of course, you're bidding for them! I would genuinely appreciate your opinion. I expect, indeed, there are a few bargains...but there's a lot of junk...overpriced junk...on the market currently.
I've been very fortunate with South Walton real estate transactions in the past 24 months...but I declared myself out of the game 4 or 5 months ago. Maybe too soon. Whether or not the bubble bursts will be determined by the strength of the borrowers. It's the loosey-goosey lending practices (which I took full advantage of) that have me concerned. What percentage of the borrowers won't be able to 'tote the note' in the face of the current 'flattening' of the market, plus the approaching time limits for build out in some developments. There are a gah-zillion lots currently in South Walton MLS between $400,000 and $550,000. The folks holding 3, 4, 5 or 6 of those lots might be feeling a little queasy. Also, I'm skeptical that the market for vacation rentals will be able to absorb the available inventory over the next couple of years. After all, lots of folks got in the game with the notion that rentals are assured. We shall see.

So, neighbor, does that mean we shouldn't raise our rental prices for next summer? Our place got rented up so fast that we can hardly even use it. So we were considering increasing our rental rates. I mean, if it rents at x dollars per week and fills up in a week, why not tack on another 10-20%?

Things *will* slow down. Those people who have bought recently have discovered that construction costs are too high for them to have any confidence that they can get their money out. I think you know who I'm talking about.

So, neighbor, does that mean we shouldn't raise our rental prices for next summer? Our place got rented up so fast that we can hardly even use it. So we were considering increasing our rental rates. I mean, if it rents at x dollars per week and fills up in a week, why not tack on another 10-20%?

It is all about supply and demand. Remember, we are seeing numerous people, whom we have not seen before, vacationing in this area. These folks are have been vacationing in other Florida areas that were trambled by the Hurricanes of '04, especially the areas between Destin and AL. When those places are rebuilt, we may lose those folks. However, they may find this area much more attractive, and you may keep the renters for life. It is just something to consider.

Are these your words, Skier? If not, please quote your source and author.

Joe,

Those were not my words. Sorry for being unclear on that point. Unfortunately, the author of this article I found on the net did not put his or her name on the site or the article. It did not appear to be copyrighted so I simply did a cut and paste of the article.

What is it?

River,

The picture is of a balloon with a dart about to hit it. A poor attempt at humor :laughing1

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."

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.

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.

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...

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%

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.

I detect a paradox.

bingo

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.

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).

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.

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.

$$$ - fines from the developer/HOA.

For our brothers (and sisters) to the east:

Neighborhood Profile: 32413
Zip Code 32413

Year 2005 Median Loan Amount $213,960
Month May Median Loan to Sales Price Ratio 0.72%
Median Sale Price $298,350
Median Assessed Value $83,112
Median Square Feet 1308
Median Sale Price to Assessed Value Ratio 3.59%
Median Price Per Sq. Ft. $228 Median Number of Beds 3
Number of Sales 22
Median Price Per Bedroom $99,450
Last Recording Date N/A
Price Index 259.43
Change in Price from
Previous Month 40.51%

I detect a paradox.

Par-a-dox
Pronunciation: 'par-&-"d?ks
Function: noun
1: a tenet contrary to received opinion. 2: a statement that is seemingly contradictory or opposed to common sense and yet is perhaps true.
(From Merriam-Webster)

Not sure how you defined paradox in relation to my statements. But, no doubt, they stand true for us. I don't think of my situation as a paradox as much as I do a no lose situation for me and my family.

A sale at a high price reaps a huge windfall--enough to finance lots of cool trips, part of retirement, etc. and allows us to rent a palace in SoWal anytime we like. If it doesn't sell at a high price, we are right back to where we started when we originally bought the house-- a really great home in a great location where I don't have to worry about making reservations, checking in, checking out, hauling bikes on the back of my car, packing clothes, etc. I can just pick up and go to the beach anytime I like.

No lose!! :clap_1:

Comparing square footage costs is difficult. You almost have to look at streets rather than neighborhoods and certainly the entire area for comparisons. Someone may not be willing to pay 1200 a square foot for a house on Indian Woman while the cost may be a deal in Seaside or on the Gulf or Burnt Pine. While demand has been strong in South Walton, it's been even stronger than reported averages in some neighborhoods and communities. I think there are still too many broad generalizations being made about the market. Investers need to think narrower, not broader, and that requires some thought and research which may be a new concept to investors since location hasn't seemed to matter in the last few years.

Par-a-dox
Pronunciation: 'par-&-"d?ks
Function: noun
1: a tenet contrary to received opinion. 2: a statement that is seemingly contradictory or opposed to common sense and yet is perhaps true. 3: a situation in which a poster continually beats a dead horse, upon which he is riding.
(From Merriam-Webster)


I believe he was referring to the fact that your reasons for not selling are in part, precisely what many of us have tried to relay to you as the reason why things might be a little different here.

A house on the north side of Seaside priced at over $1,700/sf went under contract today. It did sit on the market for 65 days though.

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.

For some, the developer may get the lot back at cost to sell to someone else.