Hedge Funds and Risky Mortgages

I saw a story the other day that really solidified my belief that the housing market is going to get much worse before it gets better. The story, which now I can't seem to locate, was about how a few hedge funds are buying tranches of sub-prime mortgages and simultaneously shorting the equity of the company that sold them the mortgage.

The strategy of the hedge fund is to scrutinize the mortagages in the tranche for technical violations (ie. insufficient documentation, collateral etc.) and then "put" the mortgage back to the seller. Putting the mortgage back to the seller will cause the seller to take a writedown on the mortgage, which if done enough times, causes earnings to decrease and the stock price to fall. Since the hedge fund is short the equity of the mortgage seller, the fund profits when the stock goes down.

Now imagine a sub-prime lender like New Century getting a few mortgages put back to it by an aggressive hedge fund or two. Do you think they are going to write future mortgages with the same lacking standards that they might have 6 months or a year ago? I don't think so.


[By Mark Trumbull | Staff writer of The Christian Science Monitor
A great shift toward adjustable mortgages helped push America's housing boom into high gear. Now, as the boom unwinds, the riskier side of those mortgages is coming home to roost.

The ultimate impact of all those "teaser" interest rates, the "no money down" mortgages, and exotic loans where homeowners' debt can rise over time will be muted somewhat, economists say, because it will be spread over the rest of this decade.

But that doesn't necessarily mean the mortgage shakeout will be easy. And for many individual borrowers, finance experts say, the sad result will be foreclosure.]

Full article...

Pending Home Sales Due Monday

[BOSTON (MarketWatch) -- Banc of America Securities said Friday it expects pending home sales to decline between 3% and 4% in August from the previous month after its monthly survey of real estate agents revealed disappointing traffic trends.

"Lower pending contracts in August should lead to weaker existing closings in September and October, as contracts precede closings by 30 to 60 days," wrote analyst Daniel Oppenheim in a research note.

"The continued decline in sales activity will result in an increase in the months supply of homes for sale and put further pressure on home prices," he predicted.]

Full article....

Realtors With Little to Do

I think one of the reasons asking prices on many places are still out of touch with reality is because there are still too many Realtors willing to entertain many home owners delusions of fabulous wealth. Basically, if 3 out of 4 Realtors tell a potential customer their asking price is too high, then the customer is likely going to list with the 1 Realtor who says to list higher.

Eventually, and as we maybe seeing already in New York, the 1 Realtor that recomends a higher price never gets the sale and quits the realty business leaving the three remaining sensible Realtors to explain to homeowners why their asking price is too high.


"Veteran real estate broker Deanne Esses, who plies her trade as a senior vice president at one of the city's biggest firms, Bellmarc Realty, said eight people in her Upper East Side office on Madison Avenue are leaving their jobs for alternative careers. Those eight represent 20% of the office's sales staff of 40."

Full article...

4764 Homes on the MLS for Eastern Monmouth

Last week the count was 4772.

Maybe inventory levels are going to stabilize here.

It does not look like sales are going to improve anytime soon though. Mortgage applications were down 4.9% this week even though interest rates are now lower than they were only a few months ago.

I'm pretty confident that no amount of Fed "loosening", should that even occur, will keep home prices from moving lower over the next 6 to 12 months.

"Higher-priced markets are seeing larger declines,"

From the NY Post

Snip...

[In New York City, where the median price for a home at the end of June was $474,000, a steeper drop in home values is expected.

"Higher-priced markets are seeing larger declines," Lawrence Yun, an economist with the National Association of Realtors told The Post. "People just cannot afford them because they've risen so much in places like New York."

Already, local real estate brokers say, the glittering new condo developments springing up around the city are seeing a sales slowdown, and are considering shifting gears to become rental towers.]

Full article....

Meanwhile, In Ho-Ho-Kus

snip...

[North Jersey real estate agents say that with more houses on the market, buyers are negotiating more aggressively, and many sellers have cut their asking prices.

"There have been a lot of price adjustments," said Robert Abbott of Abbott & Caserta Realtors in Ho-Ho-Kus. His office, in fact, is planning a "sale" Oct. 15 and 16. Sellers will be asked to lower their prices by 3 percent to 8 percent for two days only, to create a sense of urgency among buyers. The last time the office ran such a promotion was in the mid-1990s, Abbott said.]

Full article...

Everyone Will Know What a Credit Default Swap is Soon

Fleckenstein references an article in Grant's Interest Rate Observer that was published last week. The article gave a good explanation why sub-prime mortgage companies are still able to sell the mortgages they originated, despite concerns the default rate is about to move higher. This Fleck article provides some decent perspective but misses the main question, which is why are people still buying sub-prime mortgages? The over simplifed answer is that the buyer of the mortgage can also now buy insurance (protection in market speak) against a mortgage default, thereby lowering the mortgage buyers overall risk profile. The protection is in the form of a derivative called a credit default swap (CDS). Basically, mortgage buyers still expect defaults, but they are able to offset the risk of default by buying a CDS. (The CDS market did not exist more than 5 years ago, which is why sub-prime lenders still have a market to sell their high risk in to.)


By Bill Fleckenstein

[The eyes tend to glaze over at the mention of "collateralized debt obligations" (CDOs) and "credit default swaps" (CDSs).

It's understandable. These financial instruments -- the glue that has held together the speculation in housing finance and the housing ATM -- have proved somewhat incomprehensible, even to the professionals. That's why I referred to them as "financial dark matter" in my column two weeks ago. (Special thanks to my friend Jim Grant for having gotten me up to speed on this subject in his past two issues of Grant's Interest Rate Observer.]

Full article

Dead Cat Bounce

From the DJ wire - no link

1:56 p.m.: Home builders are seeing their shares rally Monday, and many who cover the industry are saying today's numbers from the National Association of Realtors indicate the market may have bottomed. "We disagree," said Bob Hynes, senior market analyst at IFR Markets, a division of Thomson Financial. "This is not the first time we have heard an industry group claim that the market has bottomed. It is also the umpteenth time we have heard that shares are attractively priced."

He pointed out that shares for every one of the 12 home builders IFR follows were trading higher. Pulte Homes was up 2.3%, while KB Home and Toll Brothers each added 1.6%. All three are trading above the 52-week lows they hit in June -- when "there were many more people than now claiming that the housing downturn would be brief," Mr. Hynes wrote in a note to clients warning of a "dead-cat bounce" in the home-builder shares. "Since that time, most home builders have reduced their earnings guidance (some of them multiple times), and the major players are predicting poor conditions well into next year," he wrote.

"Irrational" mortgage bond prices polarize market

"NEW YORK (Reuters) - Buyers in the $565 billion market for so-called sub-prime mortgage bonds are clamoring for the high-yield securities, even though experts increasingly warn that pricing has reached "irrational" levels.

Rising delinquencies and forecasts of a deepening deterioration in housing have prompted big investors, including hedge funds, to bet against the securities since late 2005. But prices on bonds backed by loans to riskier borrowers have remained stubbornly high -- longer than many analysts expected -- as yield-hungry investors insist that built-in loss protections are adequate.

"The sub-prime home equity market is in the midst of a giant tug of war," said Tom Zimmerman, an analyst at UBS Securities LLC in New York. The market "is on the border line."

Full article...

Yes, It's Different Here

The unique places that are "different" than other places will probably fall the hardest, since they were also bid up the highest. Also, it's hard to believe, that in this point in the cycle, and with all of the media attention the bubble has been getting, an economist would imply that real estate in his area is not susceptible to price decreases. This guy almost sounds exactly like homebuilder Bob Toll circa spring 2005.



snip...

"In southern New Jersey, an increase in distressed homeowners is even less likely.

RealtyTrac's figures for the region show that foreclosures in Atlantic County actually fell 19 percent from the first to second quarters of this year. In Cape May County, the drop was 18 percent, in Cumberland County 48 percent, and in Ocean County the decline was 37 percent.

Economist Richard Perniciaro, director of the Center for Regional and Business Research at Atlantic Cape Community College, said strong demand for housing in the region is keeping the market in better shape than most.

"The people who are buying are people who have been coming here all their lives and they didn't look anywhere else," he said. "So we have a pretty sure flow of demand, and that will only get bigger as the boomers retire. New Jersey might have the most Baby Boomers of any state."

Home prices in the region were up 15 percent in the second quarter, a smaller increase but still an increase, he said."

Full article...

Prices Ease on the Left Coast

There seem to be plenty of bubble related articles out of California the past few days. I think many bubble bloggers, including myself, predicted last summer that the third quarter of 2006 would be the first to show year-over-year price decreases.It looks like those predictions are coming true in a few areas around the country.

snip...

"When Suzanne and George DeLeon started house-hunting in Santa Cruz County five months ago, the houses they liked were selling fast. Of the top 10 houses on their favorites list, at least five were already sold or pending.

The Lodi couple, who have two kids, ages 6 and 5, visited more than 100 homes from Boulder Creek to Rio del Mar. Their agent, Santa Cruz resident Amba Jane Kumar, spent so much time in their mini-van she felt like she was a part of the family.

The couple found they had to drop the price on their Central Valley home and acre of land from $650,000 to less than $550,000 to lure buyers. Similarly, a house they saw in Scotts Valley, initially priced at $869,000, was eventually reduced to $795,000.

Full article...

Long Island Report

Snip...


[As homes in Giamarino's price range glut the market, it's no wonder he and other sellers are looking to woo homebuyers with pricey gimmicks. Some slash the price, but others throw in furniture, plasma televisions and even cars or vacations.

"People need incentives to make the move," said Giamarino, 58, who owns a small car dealership in Amityville. "I think if you move into a house and you're not struggling with payments for 12 months, it's just another idea to help."

The concept isn't entirely new. Indeed, Giamarino got the idea from sellers in the South, particularly in Florida, where he owns other property, he said. But a sampling of Long Island real estate agents, mortgage bankers, attorneys and accountants had never heard of the incentive being offered here.]

Full article..

Eastern Monmouth MLS at 4772

Inventory keeps growing.

This was posted in the comment section by Ocean City buff.

"This blog may be focused on the northern portion of the Jersey Shore, but listings in Ocean City (by far the finest shore destination in the state, heck the whole east coast) has risen every month throughout 2006. My realtor tells me that listings in this former Methodist campground hit about 1,300 in January (which he considered high at the time)and are now more than 1,800. That represents about 10 percent of all residential properties on the island."

Builder Confidence Slips

September 18, 2006 - Reflecting increasing builder concerns about conditions in the market for new single-family homes, the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) declined for an eighth consecutive month to a level of 30 in September. This amounted to a three-point drop from an upwardly revised 33 reading in August, and is the lowest level the index has reached since February of 1991.

“Builders are adopting an increasingly cautious attitude in their near-term outlook for new-home sales,” said NAHB Chief Economist David Seiders. “They’re experiencing falling sales, rising sales cancellations, and increasing inventories of unsold units. And although many builders are offering substantial incentives to bolster sales and limit cancellations, many potential buyers now are waiting on the sidelines to see how the market shakes out before proceeding with a home purchase.

Full article...

Realtors Call it Quits

From Reuters

"By Julie Haviv

NEW YORK (Reuters) - They are jumping ship or receiving the pink slip. America's real estate agents and mortgage lenders, that is.

Now that the glory days of the most recent U.S. housing market are over, its deterioration is taking a toll on employees who profited from its record-breaking five-year run.

With home sales slumping and loan demand diminishing, layoff announcements and resignations have become increasingly common, evidence that the sector's slump is broad.

Carmen Cook, a veteran real estate broker, saw the writing on the wall and decided to retire earlier this year."

"The market changed and my job became more difficult," she said. "I was working just as hard and the income wasn't coming in."

Full article...

Locals Know its the Beach

I found this cartoon here. Growing up at the Shore, I never referred to the beach as the Shore. To me, the beach was close enough that it was referred to as the beach. There was no "Shore" because you were already there. I can imagine though, a kid from Caldwell telling his friends that he spends summers at the Shore, since the Shore encompases a much broader area than just a single beach.

Also, you can always tell a local from a "benny" by the way they pronounce "Avon-by-the-sea." Locals know it's a soft "a"; not a hard "a" like the cosmetics company.

Report From the Trenches

Here is an interesting post from a real estate club message board in San Diego.



I am quite new to real estate investing. It would seem that I know 1/10 about RE investing as many of the regular contributors to this board and even less than the "experts."

Sometimes, however, I think that the "experts" should just spend one week in my office observing the financial profiles of our refinance applicants. I believe their outlook would be much different.

Most people simply cannot believe the profiles that we see.

Read the full post here.

Adjusting Price Expectations at the Shore

Here is another excerpt from the Asbury Park Press real estate series of articles that was published yesterday.

snip...

[The real estate market has changed a lot in the past year. The number of available homes is up and the days when sellers could stick a "for sale" sign on the lawn and name their price are gone, at least for now.

"Prices from last year are not what they are this year," said Iris Lurie, broker/owner of Century 21 Mack-Morris Iris Lurie in Marlboro.

Lurie's office worked with the Warrens on selling their home in Marlboro, where they have lived for 36 years. They recommended the Warrens cut their price to find buyers, and when they did, a buyer emerged quickly.

"We listed it higher, thinking that was the correct price," Hildy Warren said. "The market was telling us differently."]

Full article...

Extensive Real Estate Coverage from the APP

The Asbury Park Press has an extensive real estate section today.

My favorite story in today’s APP is the one about the 24 year old who bought a townhouse in Brick but needs his girlfriend and roommate to help pay his mortgage and taxes. The guy is a perfect example of someone who absolutely does not need to own real estate and who never should have received a loan, or loans in this case, to begin with.

“Michael Knapp was eager to be the first person in his family to buy a home, but first he had to make a few concessions.

He settled for a townhouse, because he couldn't find a single-family home for less than $200,000 that didn't require a complete overhaul. He extended part of his mortgage from 30 years to 40 years. He needed roommates to help pay the mortgage, and so recruited his girlfriend, Trish Maas, and his friend, Jason Reineke, to join him.”

Full article…

The redbankgreen blog is has some commentary as well.

The Wall Street Journal at the Shore

This excerpt is from a larger article that was in yesterday’s Wall Street Journal. In the article Terri Cullen, who writes the Fiscally Fit column describes the efforts of her sister to find a house somewhere in Monmouth County (somewhere along the bay shore I would guess.) I

“My younger sister Melissa and her husband Joe are ready to move.

Today the couple live in an apartment in New Jersey just across the Hudson River from Manhattan. At 33, Melissa's had it with city life, tired of dragging bags of groceries up steep flights of stairs, frustrating hunts for a parking space and worrying about having her new car stolen or broken into.

And they know what they want: a three-bedroom, single-family home near us in Monmouth County, N.J. Melissa wants to move closer so our families can spend more time together. Joe lived in the area as a child, and he's eager to return.

But our neck of the woods has seen some of the steepest home-price increases in the nation over the last several years. In the second quarter of 2006, the median price for a single-family home in our region was $393,600, more than double the median of $188,200 in 2000, according to the National Association of Realtors.”

Snip…

“One agent on our tour encouraged Melissa to look at homes "in the $270s or $280s" -- well out of her price range -- and make lowball offers. Think that wouldn't work? We encountered a husband and wife going the "for sale by owner" route, with an asking price of $315,000. While his wife pointed out the home's features to my sister, the husband gave me a wink and whispered, "Don't let that $315 scare you, we're extremely negotiable."

After our exhausting open-house blitz, Melissa asked for my thoughts. Though I'm too young to have experienced the 1980s real-estate market implosion, something told me that things are going to get a lot worse for sellers before they get better. To get an expert's take, I asked Robert J. Shiller, a Yale economics professor, for his insight on where the East Coast real-estate market may be headed.”


Full article…

You might need a subscription to see the full article.

Realtor Naiveté

Some of the comment sections on the bubble blog message boards can be pretty brutal towards Realtors. I don’t have any specific experience with Realtors that would lead me to believe any one that I have met were knowingly being dishonest and most that I have met have been mostly frank, especially in the past six months, in describing the slowdown in sales.

Despite the generally favorable experiences I have had with local Realtors, I can’t help but think that about 99% of the time they don’t know what they don’t know. Many Realtors in this market are fixated on the apparently “unique” geographical location of the Shore relative to NYC, or lack of land to build on in the area. (Never mind that Realtor’s in Darien or Short Hills say the same thing to their customers.) What they don’t understand, and I don’t expect them to, is that if, in their opinion, prices rose in Monmouth County because it is close to NYC and the beach, and had until recently been undiscovered, then prices should have remained stable in Sarasota, Florida or Fairfax, Virginia, or Needles, California, or any other town that is not close to NYC and the beach. Most, if not all of the increase in Shore house prices was not due to anything unique about the area. Instead, the increase in prices in this area has been due to the same detatchment from fundamental factors that caused a run-up in prices in areas that very few people would ever want to live.

Inventories Move Up After Pause

The number of houses for sale on the MLS for Eastern Monmouth us now at 4739.

In the week before and after Labor Day, it looked like inventories would finally stop growing. However, and as pointed out by regular reader Lyndsey, the decline in inventories only reflected end of month de-listings and subsequent re-listings.

I’m pretty sure that inventory increases in late Summer and early Fall are not normal. Now that the mainstream media is trumpeting the housing bubble regularly (about 18 months after the blogs pointed out there was a bubble) I would not be surprised if some house owners decided to list their house sooner than they had planned, given what’s coming.

Betting You Default

From the NY Post

"A New York hedge fund is betting big time what apartment-obsessed New Yorkers have been whispering about for months: that the real estate boom is over.

In July, Paulson Credit Opportunities Funds raised $147 million in equity and promptly put it to work on a leveraged $1.8 billion bet that home owners are going to have a very difficult time paying their mortgages."

Full article...

Hoboken Project Hits Hard Times

This story is kind of interesting. The "Velocity" is one of a number of large residential condo projects in and around Hoboken. Apparently the developer is rumored to be in financial trouble and the prospects for completion of the project look dim.

Futures Market Points to Lower Prices

From the NY Sun


[Depending on what you read or watch on television — and it's all over the news — the housing market is either stalling, slumping, or falling. Or, as veteran investment adviser Martin Weiss of the Safe Money Report of Jupiter, Fla., put it last week, "crumbling."

So what's new? In brief, judging from a newly created futures contract, a new shocker could be on the way for the nation's 75.6 million homeowner households — actual price declines from the purchase price.]

Full article...

St. Joe to Exit Home-Building Business

This story is late breaking. It looks like a pretty aggresive move by St. Joe, one of the largest land owners in Florida. Maybe they'll get back to making paper.

"NEW YORK, Sept 7 (Reuters) - St. Joe Co. (JOE.N: Quote, Profile, Research), which operates primarily in the Florida panhandle, said on Thursday it will exit the home-building business and focus on operating its land holdings in the state.

The move underscores the severity of the downturn of the U.S. housing market, where once-hot markets such as Florida are being particularly hard hit, said JMP Securities analyst Alex Barron."

Full story...

Homebuilders Have a Bad Day

Not shown in this article, Beazer homes, one of the largest builders, is seeing cancellation rates of 50%.


"Three of the nation's biggest home builders issued downbeat news about the housing market Wednesday, warning that buyers' increasing wariness could affect their businesses more severely than previously thought.

Citing weaker-than-expected demand, Los Angeles-based KB Home cut its full-year profit forecast for the second time in three months. Separately, Red Bluff, N.J.-based Hovnanian Enterprises Inc. said quarterly profit dropped 36%."

Red Bluff, Red Bank, whatever, we know what the LA Times met.

Full story...

What Will Happen When the Bubble Bursts

A depressing article from Prudent Bear

snip...

"The fragility and risk associated with housing gains is very serious. The Office of Federal Housing Enterprise Oversight (OFHEO) releases a housing price index (HPI) for every quarter. In the 21 most recent quarters (Q12001-Q12006), the mean annual increase measured each quarter was 9.32%. In the 21 proceeding quarters the mean quarterly increase was 4.8%. Thus, as economic growth and labor earnings growth cooled, housing price appreciation rates doubled. In the last 5 years the average house has increased in price by 57%. Over the same period real GDP growth was 15%. The most optimistic White House Estimate of real after tax compensation increased by 8%. Unreal estate price increases are just that. Brace yourself for a dose of reality that will fall heavy on the shoulders of those least able to bare the load."

Full article...

4668 Listings on the MLS for Eastern Monmouth

Two weeks ago there were 4707. It looks like inventories are finally starting to come off the recent highs.

Spring Lake: Come Visit Our Realtors

In between rain showers, I visited the main street in Spring Lake last week. The main thing that you notice in town is the large number of real estate offices. The town is inundated with offices from well known names like Weichert to no name shops that just opened in the recent boom. One candy shop owner, that was clearly annoyed with all the realtors in town said that the town placed a limit on how many agencies can set up shop in town. The proliferation of so many real estate agent offices has clearly crowded out more interesting shops and businesses that might actually attract people not interested in buying property.

(I would add that many banks are also guilty of dulling up downtown areas. Although most people probably like the convenience of their own branch in a particular area, no one visits Broad Street in Red Bank or the main thorough-fair in Madison and Chatham because there is a Chase branch next to a Commerce branch next to a BOA next to a Wachovia.)

More “For Sale/For Rent” Signs

Driving around the Shore this past week I noticed more “For Sale/For Rent” signs. I have come to conclude that “For Sale/For Rent” really means “house won’t sell, will not negotiate.” If you really want to advertise you are an “investor” who bit off more than you can chew, then by all means put that sign in the front yard of your house.

Observations About LBI from a Reader

This was posted in the comment section. Someone suggested it deserves its own post and they are right.



Anonymous said...
Just got back from a week on LBI--my 30th or so in 35 years since I was in a stroller.

Weather was a mixed bag: mostly bad, some good, some strange--we left this morning in a sandstorm; the sand drifted up into the streets, totally obliterating the fences, and covering the bench that adorns the end of each street. Trudging to the water's edge, I could hear Maurice Jarrre's theme music from Lawrence of Arabia in my head: "I must get to Aqaba!"

What follows is a mixture of conjecture, rant, and bewilderment. (With maybe a soupcon of commonsense unintentionally thrown in the mix.)

Observations:

*Hundreds and hundreds (maybe thousands) of houses with for sale signs--lots with "Reduced!" plackards affixed.
*Hundreds (or, again, thousands) more houses with For Rent signs--and rentals were slow this season, by at least one agent's reckoning. I was able to negotiate a significant reduction in rent for my second-from-beach Cape Cod in Brighton when I started looking in July.
*Retailers said that a crappy end to August and Labor Day weekend caps one of the worst seasons in memory. One guy at a long-standing business said that vacationers over the last few years have "short arms and deep pockets"; they are increasingly forced to choose between rents and "amenities."
*Stores were in weeks two and three of their end-of-season sales.
*Fantasy Island STILL doesn't get it: Open the damn rides at 2:pm, instead of 5. My kids were driving me nerts--but the pizza place at Bay Village is still top-drawer.
*The vibe down there has changed--simply the consequence of people paying more and expecting more. I don't claim to speak for the masses, and I still love the place, but if the wife or I want to buy Lilly Pulitzer togs or JP Tod loafers, we'll go to Southampton, Bayhead or brush up on my Thurston Howell, III lockjaw and go back to Chatam, MA. Three story McMar-a-Lagos festooned with vinyl Victoriana and built on the former sites of capes and two-bedroom bungaloes does not a Malibu make--LBI is, despite the massive influx of funny money, just not a fashionable summer resort, at least not south of the causeway. (And only in isolated sections north of it at that. Though I gotta say that Barnegat Light looks better now than it did ten years ago.)
*The former Brighton Manor motel, a cheesy little dump where I used to rent a Sat. night to extend my vacation another day, is now efficency condos, priced at $199k/unit (down from $240k at initial offering). The barely renovated rooms are maybe 180-200 sf, with teeny kitchenettes (microwave, sink, fridgelet, but no stove). If the owners cut the number of units in half, made each a two story floor-thru, and charged $219k, maybe it'd be worth a look. But for now, the bubble has a name, and it's Brighton Manor Condos on LB Blvd (Near the ACME!). In fact, if I had to create a picture of the bubble, it'd be the lovely sea-foam green accented former motor lodge perched behind signs in the parking lot screaming, "OPEN HOUSE! REDUCED!! LIMITED TIME OFFER!!!" signs in the parking lot. My guess is, the last unit will be sold for under 100k--maybe $79k. It'll be a date that will live in infamy...
*Mustache Bill's diner in Barenegat Light has incredible fries and really good white chowder.
* Surf was crappy. Glad I didn't finally break down and buy a board.
*It's still a swell place. I admire/envy the folks who bought before the Bubble. And I'll show no Schadenfreude for those who end up losing their shirts. LBI is a place that can make Mr Spock irrational. It's a shame prices got so out of wack, and that a lot of people are gonna get hurt when they return to Earth.


By way of digression: The tatty cape I rented for $2500/week was listed for $1.2 mil. It was nicely redecorated with Ikea/Target stuff, but the systems were a disaster--e.g., 15 amp fuse box. The realtor calls it a tear-down--I'd rather buy a lot and not have to deal with demolition. I took one look at the place and decided that it was a "flipper." A quick check with the neighbor confirmed my suspicion: A couple once owned the place for a long time as a summer cottage; they put little work into it. The present owner bought in early '05; he paid in "the high eights."

The new owners prolly decided to rent it while it's on the market. Big mistake. The remnants of T.S. Ernesto exposed the place's weaknesses: The owners put in cheap-o window a/c units, but didn't caulk--result: horizontal rains caused extensive water damage to floors and newly-painted/restored sheetrock ceilings. The winds blew roof shingles off. Inside, the furniture was in unsafe/shabby condition, etc. Owners probably don't know sweet f-a about renting--there was no cleaning equipment, just an electric broom, and no mop--which meant that wife and I were using bedspreads to stanch the bleeding.

(Yeah, I should have checked it out in person, but I didn't think it was necessary--I mean, screw me for taking the word of the agency from which I had rented for the past ten years [the rental agent whom I worked with this summer is a middle-aged "sales associate" who in a year's time likely will be back to doing whatever it was he did before he put on his realtor's jacket]. Before this year, I used to deal with the broker, an upstanding [for real estate] woman named Sharon, who now owns the place.)

Other tid-bits: This place (our rental) had a spotty rental history this summer--there were lots of open weeks as late as mid-July. Now the owner has to either do repairs from T.S. Ernesto and hope the place lasts out the fall (rainy) season and winter. To pay for it, he can put in an insurance claim and hope to sell before he has to renew his policy, which will, naturally skyrocket in price.

Either way, this guy probably sank $25 grand into "renovating" the house, and might be carrying a big mortgage, or at least losing principle on a cash purchase when he could be getting a minimum of 5% gain elsewhere. He may have gotten $20-24k in rental income this summer, less the agent's 10%--and, with the peeling paint and stained, possibly water damaged sheetrock, there is NO way people can inhabit the place this week. Great investment--what he loses per unit, he'll make up in volume...

There must be dozens or even hundreds more like this owner on LBI. My gut says that after all is said and done, he'll be lucky to get in the high sixes, low sevens. And the neighbor who filled me in on the owner's story was a discernably, yet discretely, amused by this owner's folly--it's gotten to the point where even long-timers (ESPECIALLY long-timers) want the madness to end. Greed is so unsexy.

So, how was your summer?

-Jamey

5:08 PM