Wildwood Update
I'm more familiar with Monmouth and Northern Ocean County compared to the "Philadelphia" part of the Jersey Shore further south. Here is an update from Wildwood though.
snip...
[Rising interest rates, overvalued real estate and inventory excess has exacerbated the problem.
"The market has died in the last several months," Esher said. "People are afraid of a recession. They're afraid for inflation. The (Federal Reserve) counters by raising interest rates. And sales are down."
Some 2,000 units are for sale, according to Bruce Smith, president of the Greater Wildwood Hotel & Motel Association.]
posted by Little_Silvered at 9:05 PM
13 Comments:
"Rents don't support the costs of these buildings, said Carl Fischer of Entrust-CAMA, a Spring House, Pa., firm that administers real estate investments for retirement plans."
Interesting thing about rents, if you can make money on a shore property it is either a) an undiscovered area or b) a riskier bet.
Riskier? Yes, because the market for people willing to buy and rent out has looked this over and find risks that outweigh the return.
When I have looked at properties, either commercial or residential, the one telling feature is return. If the return is high, something is wrong. Rarely do you get a chance to buy a good return with little risk.
Now I don't believe that buying a property with a negative cash flow is a sound idea, don't get me wrong, I am only describing what I have seen over 10+ years of looking and investing.
The telling number is how much as a percentage of purchase prices is either your return or your carry on the property.
If the Wildwood area went from a return or almost no carry to a carry and now is at a historic high carry, clearly some reversion to the mean will occur. How this occurs is the question.
Will prices drift lower while rents drift higher, or will it be a sonic boom? The question is who owns the properties and what will they do!
Mr. Rant.
In my experience, most of the investors in the south Jersey beach areas were willing to carry negative cash flow properties as long as the price appreciation was there. So what if you lost $25k/yr carrying a house if it appreciated $50k-$100k/yr. But what happens when the appreciation shrivels up and goes away? Now those same investors are losing $25k/yr for the forseeable future. They are going to have to drop selling prices in order to get out of bad investments.
When will we see dramatic > 20% declines in realized transactional prices on a year over year basis in Wildwood?
Using 2005 as a preceived short term peak in pricing, when, how great and how long will a decline exist.
1) When
2) Ultimate percentage pullback from 2005 peak
3) Term of retracement before price increases.
Any predictions?
Mr. Rant
I am very familiar with the Wildwood Crest area, especially the units in the high priced Seapointe complex and nearby. The inventory growth in this area has been significant. Listings stay on the market for many months and even a year or more. Very few units have sold in the past 4 months. However, sellers have resisted dropping prices from outrageaous levels.
In my opinion unless sellers become much more realistic, inventory will continue to grow. I have been looking at units on beach block that are listed at $600-$900K, and all are probably overpriced by 10-20%. Realtors claim that sellers are calling the shots about list prices. I feel that the realtors are doing all a disservice by taking listings that they know are significantly overpriced, and they will never be able to sell at those inflated prices.
If a seller truly wants to sell, I feel list prices will start to drop by about 5-10% in the late fall or early winter when sales are typically very slow at the shore. Even at those reduced list prices, most listings will be overpriced by another 5-10%. The only way to buy property in this area before the next round of price reductions is to make a low ball offer of 10-20% lower than the current list. However be prepared for sellers to get insulted at such low offers. Currently these sellers and some Wildwood realtors are living in a fantasy world.
I am also very familiar with the Wildwoods. There are way more than 2000 units for sale. Some 8 unit complexes only list one unit. Many units just let their listings expire during the summer to be relisted in the fall.
People are listing their properties strictly based on potential. Nobody cares about cash flow. There are a number of new 25 story projects in the works that will never work, yet until the market collapses, developers will continue to hold the land without development.
What is completely crazy is the amount of new construction that continues to be developed. They are still breaking ground on new projects every day. It's almost like they are in complete denial.
When I look at a listing price in the Wildwoods, I immediately take 30% off to find the real value. That's for beachfront
Wildwood: Heart of Confederate New Jersey
http://fourfour.typepad.com/fourfour/2006/07/a_confederacy_o.html
He's right there is only so much shoreline. But the market can not support 500k condos over a mile from the beach.
Prices at the shore dropped 20-40% from '89-'94. But this time is different, because God isn't making more coastline... Pffffft. As IF!
The fundamentals presage a bloodletting--second home mortgages will be the drag that pulls the whole market sector down.
Winter '07 is the false bottom. After that, hold onto your hats.
So is it written, so shall it be.
I too have been closely watching the market in Wildwood Crest for the past year. The inventory is sky high and new condos and townhomes are still going up. Bank commitments I suppose. The list prices of these homes are still through the roof. A positive cash flow can only be had if the prices drop 30-40%. RE agents LOL when you mention the importance of a cash flow. If the appreciation is over, the asking prices for these homes MUST fall into line. In the end the numbers must work.
there is something to be said about negative cash flow with Depreciation all this translates into tax loss carry forward.I had a tax loss carry forward of over 300k over 15 years when I sold my rental house I had a profit of over 600k after subtracting my taxloss i wound up paying less than 45k in fed tax
Steve, every dollar you lost saved .15 in taxes, right? You got your 15% long term cap gains Fed tax bill reduced from $90k to $45k. You saved $45k in taxes, but lost $300k in ongoing expenses over the years. I guess if you hold an asset for 15 years, it's likely to be higher than when you bought it. But congrats on your profit nonetheless.
I don't get it.
You had a house that you bought that over 15 years couldn't raise the rents enough to cover the initial mortgage? You lost 20,000 a year after rental income?
It is actually worse than all that, because the net present value of 300K over 15 years is much greater than 300K.
Doesn't make sense.
Did you also use it X weeks out of the summer? If so, what did you give up in rental income?
I am not picking on you, but I guess there is a disconnect here.
Mr. Rant.
depreciation probably accounted for most of his losses over the years and eventually most of his capital gains.
Post a Comment
<< Home