Bubble bursting???

Discussion in 'Real Estate' started by skier, Jun 17, 2005.

  1. Bob

    Bob SoWal Insider

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    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.
     
  2. skier

    skier Beach Lover

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    Florida Real Estate Bubble :bang:

    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.?
     
  3. skier

    skier Beach Lover

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    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. Its 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 stocks value, its dividend yield, simply because they expected its price to rise. By ignoring rents, todays 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. "Im 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 Im ready to liquidate I will have the money there, its 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 todays market, as it results in experienced investors passing on properties that investors with "fresh prospective" routinely buy. "Theyre not being foolish; theyre looking at it differently than people who have been in the market for a long time." In other words, this time its different, a new era. Ive 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 todays 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 todays already high prices.

    Another agent commented that "Homes have been very difficult to rent. Ive 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. Its great to buy a house for investing because the value will increase, but dont 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, "Theyre 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 hes 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: Dont 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 werent sure they would settle in New York, but that when they saw that I wasnt 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.
     
  4. skier

    skier Beach Lover

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    Y'all like my new profile pic??? :laughing1
     
  5. RiverOtter

    RiverOtter got any pics?

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    :confused: What is it?
     
  6. Advance The Man

    Advance The Man Beach Lover

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    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?
     
  7. FoX

    FoX Beach Fanatic

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    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. :roll:
     
  8. thumper

    thumper Beach Comber

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    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
     
  9. Advance The Man

    Advance The Man Beach Lover

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    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.
     
  10. Beachlover2

    Beachlover2 Beach Fanatic

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    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?
     
  11. Buckhead Rick

    Buckhead Rick Beach Lover

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    Current Barron's mag. has three interesting articles. One by a Yale prof who says the R/E bubble is nationwide and we could see a drop of 50%, latter he says it could be only 2.6%-that's why he is at Yale and I'm not, he covers all bases.
    Two, Alan Albelson writes that he feels all the popular mags are right this time in calling for a bubble burst, though he admits they have never been before.
    Last, Ryan Beck & co. stock analyst boosts her target price on JOE to $92, because of the projected 80% population increase in the next 10 years. Maybe they'll all be right, I sure do not know.
     
  12. beachmouse

    beachmouse Beach Fanatic

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    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.
     
  13. Philip_Atlanta

    Philip_Atlanta Beach Lover

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    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.
     
  14. Smiling JOe

    Smiling JOe SoWal Expert

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

    Smiling JOe SoWal Expert

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    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.
     
  16. GVM

    GVM Beach Lover

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    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.
     
  17. phdphay

    phdphay Beach Fanatic

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    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.
     
  18. Smiling JOe

    Smiling JOe SoWal Expert

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    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.
     
  19. skier

    skier Beach Lover

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    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.
     
  20. skier

    skier Beach Lover

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    River,

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

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