Wednesday, August 23, 2006

From Soft Landing to Hard Landing

Last year at about this time the operative word was "normalized", as in "this real estate expert thinks a more normalized real estate market will materialize next year and prices will only increase 5% per year."

Starting this past March or April, the operative word from economists and experts became "soft landing", as in, "real estate will probably experience a soft landing in 2007."

Over about the past two weeks though, soon after the major home builders finished reporting earnings, the words "hard landing" started to become more common in the press.

This article is from the Wall Street Journal.

"HERNDON, Va. -- For years, real-estate brokers and home builders promised that the soaring property market eventually would glide to a soft landing. These optimists predicted that home prices, which had more than doubled in parts of the country between 2000 and 2005, would continue to rise, but at a more normal pace of 5% or 6% a year.

It isn't working out that way. The rapid deterioration of the market over the past 12 months has caught many homeowners and builders off guard. Some are being forced to cut prices far below what their homes could have fetched a year ago. It's too early to say how hard the landing will be, but at a minimum it will be bumpy for many people who need to sell homes. And the economy as a whole, buoyed in recent years by the housing frenzy, could suffer."

Full article...


Anonymous Anonymous said...

We just returned home from Long Beach Island, where we have vacationed for over 30 years. Although we are at the point in our lives where we would like to buy something, the prices are so out of whack that nobody in their right mind would pay them. An $800,000 fifty year old Cape-Cod? The same house that was $450,000 in 1999 and overpriced then? A cottage that you can really only use for three months a year? Also considering that you can buy a condo in Florida that can be used for nine months during the year for a third of the cost?

The Jersey Shore market is more than a bubble --- it's nuts. Realtors have bought the delusion, because New York City and Philadelphia buyers are also living with the delusion at home.

In my estimation, prices are going to fall 40 - 50% in some areas before this is all over. It ain't going to be pretty when reality comes into focus.

Thursday, August 24, 2006 7:42:00 AM  
Anonymous Anonymous said...

I know, LBI is NUTS. All those duplexes and SFHs that were 'converted' into co-ops or condos? They're going to cause a glut at the lower end of the market. It's going to be quite a spectacle down there in the coming one to three years.

Also, rents have just about maxed out. For the price of a week's ocean block rental, a family could actually travel. Trips to Costa Rica, for instance, were cheaper than a 4br cape in Brighton--and families are starting to realize it. The result: tons of vacancies late in the season. I searched a few realtors' databases. Practically every unit had at least two open weeks per month--that could amount to a loss of 30-50% rental income over a season!

We booked our rental for this coming week about 3-4 weeks ago; I talked the realtor down $600, plus got them to waive the deposit "service" fee (which is a garbage charge, anyhow), and other concessions. Next year, I'm going to book a rental the week before my vacation. Some amazing bargains to be had, if one is patient.


Thursday, August 24, 2006 8:17:00 AM  
Anonymous Anonymous said...

What town was this, what weeks were these and who was the broker, if you don't mind me asking?

Mr. Rant.

Friday, August 25, 2006 5:20:00 PM  
Anonymous Anonymous said...

If you want to know just how crazy the market is on LBI, you need to look at duplexes that have been converted into condominiums! These are two family houses --- not condos in any sense of the word. Who the heck is running the planning commission there? It's a disaster that's been in the making, and is now unfolding. How could a realtor sell that stuff with any self respect?

Saturday, August 26, 2006 12:33:00 AM  
Anonymous Anonymous said...

I understand that the situation in LBI became markedly worse in the early 90's when the planning commissions allowed more building. There had been a moratorium after the 1962 storm. The need for tax dollars by municipalities (and the on-shore) school districts gave the impetus to build. And build they did. McMansions on pilings, two families converted to "condos", tear-downs, in short, anything to suck more tax revenue from the residents of LBI. This disaster has been in the making for years, and is now coming apart.

Wednesday, August 30, 2006 10:02:00 PM  
Anonymous Anonymous said...

I owned a duplex in Brighton Beach for 3 summers, sold it in 2003 after it had appreciated about 75%. At the time I sold, I thought the market had gotten way ahead of itself, but it turns out I was very wrong and should have held on another 2-3 years. I never expected prices to continue spiraling up 20% year after year!

But, I believe these 2006 valuations are unsustainable, and that prices will drop about 40% in the near future. Lot's of factors are lining up to burst this bubble, but to me the biggest problem on LBI is the disconnect between property values and the rents they generate.

I bought my house with a 25% down payment and was able to achieve a positive cash flow (and I'm including *all* my expenses here, not just the mortage) with the rents collected over a 10 week summer. The ratio of property values to rents was something like 12.8. 3 years later when I sold in 2003, the ratio was more like 17, and the new owner probably operated with a small negative cash flow. In 2006 I estimate that same house to have a ratio of more than 22. Anyone buying that house now would be looking at about $25K negative cash flow out of pocket annually.

Now, as long as prices rise 20% every year, a small negative cash flow is not much of a problem. But if the market turns around, and values start dropping, and it takes a year or more to sell it, a beach house will eat you alive.

When the opportunity cost of a beach house exceeds it's potential rental income, it becomes a bad deal. The opportunity cost of a paid up $800K beach house is probably around $50K (not including any tax write offs). This includes $40K income (assuming $800K invested in a 5% CD), plus maybe another $10K to cover taxes, insurance, utilities, maintenance, and improvements. Various tax tactics could improve the financials for an owner, but depreciation for example is a double edged sword (pay me now or pay me later).

This $800K probably buys an oceanside cape that rents for $3000 a week, or $30K for the summer. In other words, you could either rent the place for your vacation the whole summer for $30K, or own it for $50K a year. This is only a good deal if the house appreciates $20K a year.

To me, that's a gamble. The historical data that I have from 1980 through 2000 indicates an average 6% appreciation. A regression to the mean is probably looming soon after 5 years of 20% increases.

Oh yeah, when you rent a beach house, you won't be spending all your time painting, and cleaning, and fixing things, or dealing with tenants. You'll actually be on LBI enjoying the surf!

Friday, September 08, 2006 5:01:00 PM  
Anonymous Anonymous said...

"I bought my house with a 25% down payment and was able to achieve a positive cash flow (and I'm including *all* my expenses about $25K negative cash flow out of pocket annually."

This is someone to listen to.

"To me, that's a gamble. The historical data that I have from 1980 through 2000 indicates an average 6% appreciation. A regression to the mean is probably looming soon after 5 years of 20% increases."

In many cases I would agree, the only factor that I cannot equate for is the Boomer Bubble. Many boomers can afford to own without selling. So the mean may have shifted until someone starts knocking them off.

Time will tell and the prices will come in, for some reason though, I just (IMHO) don't think quality neighborhoods get hurt as much.

Mr. Rant

Friday, September 08, 2006 5:47:00 PM  
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Tuesday, September 12, 2006 5:30:00 PM  

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