housing crash

Real estate is a segmented market. It's just like stocks. Value stocks did very well in 2000-2002, during the biggest bear market since the great depression. If you sold out your low PE stocks then, you missed on some nice appreciation. Equally, cheap real estate in the US will still do ok unless you get a full blown recession or rates skyrocket to 8%, 9% or so. In 2000, the risk was in the sectors where the clueless hot money was - tech, dot coms etc. Today in real estate, the risk is in the same ultra-speculative areas.

So I would stay clear of the areas with a preponderance of uneducated neophyte short-term hot money speculators. These guys have no staying power, shallow pockets, imagine pepetual blue sky prospects, and have no contingency plan for falling prices. They are the type that pumps prices too high, too fast - and then when it turns sour, do an about-face and sell in a frenzied panic. Areas with clueless newbies queuing for hours and buying expensive condos on a 4 minute deadline whilst signing up to the agent's junk-finance scheme are the ones where you could easily see 20%, 30% falls in prices that will just wipe people out. What do you think happens to a high-rise where half the buyers are overextended speculators all looking to rent and then flip in a year's time, if that? There are simply not enough renters prepared to pay $2k a month for an apartment in most of these areas. However, a lot of the rest of the country is just a normal market, selling at reasonable multiples of average earnings. A 10% overvaluation in these areas is no big deal, and will likely just see prices tread water for a year or two as rates rise, before going back to normal single digit annual appreciation in line with streadily rising building costs and incomes. You should still be able to make good investments there, either by building, doing individual deals, renovating, buying off-plan, or some other tried and tested method of adding genuine value.

To play the short side in real estate, I would be looking for RE stocks exposed to overheated markets like California, Miami etc where there is a lot of flipping. Firms specialising in 2nd homes and condos in this area will IMO be particularly vulnerable. Local developers, REITs, brokers and finance houses in the hot markets are the places to look for short side opportunities.

Perhaps you can hedge your bets by finding similar firms in the cheaper less glamorous markets, and place a spread trade going long the dull market and short the hot one. In fact I might as well go ahead and start digging up individual stocks to see if I can place this kind of trade. That way it doesn't really matter if the market goes on for another year, you will be hedged against the overall market - all you need is for the bubblettes to cool down, and the cheap areas to stay more steady. Overall though, I can see a lot of these flippers going bankrupt in no time. If someone can figure out the best way to play the collapse of these guys, let me know!
 
IMO the U.S. housing market is way overbought, speculators are buying houses blind 'knowing' that they'll turn a quick profit and people have been doing it for a while. Sounds like a lot of people will be holding the bag when int rates go up, which they invariably always will. Anyone that knows anything about real estate investing knows that housing prices and interest rates are inversely related. When int rates are low, prices climb, when interest rates increase consistently real housing prices fall. Real estate is still one of the best LONG TERM investments around, just like stocks. Although to many people are buying real estate like stocks at the top of the dotcom boom. I have a feeling that a lot of would be investors/speculators in real estate are going to get stuck with depreciating properties. Demand will slowly cease as int rates keep increasing, Greenspan even made recent remarks that it should be obvious to everyone that int rates are going to keep rising (hint hint). This market will pop, question is, when? To bad you couldn't ride the short side of the realestate market on the way down
 
Quote from OldTrader:


With the numbers you mention obviously there is no reason to invest in a condo as a rental. Alot of times condos are tough to pencil out anyway because of the association fee.

I'd be a little careful with the P/E concept as it applies to real estate though. Condos, single family homes, etc are primarily used as owner occupied real estate. People tend to make more emotional types of decisions in these areas....ie, there are advantages and benefits to ownership of these types of real estate that cannot be expressed by comparing the unit to a rental.

In fact, there are areas of California that have had those types of numbers (and worse) for years and years.
More...

Yields are still useful valuation tools, even for majority owner-occupied stuff. Maybe not for $10 million mansions or Scottish castles, but an apartment in a downtown metropolitan area is a much more natural rental unit than a single family home in the suburbs, for example. There is certainly a large enough rental market, and a large enough buy-to-let landlord market, to make yields a meaningful signal.

Regarding the implications of negative cashflow, it is not so much the absolute level of rental return, but rather the level relative to past levels. If Chicago condos typically have this level of negative cashflow, e.g. if the same situation applied in 1996, 1999, 2001, then it's no big deal. However, if cashflow has steadily deteriorated over the last few years or so, then this is clearly a sign of the units becoming progressively worse value over time.

So my advice to Pabst would be go to your local agents, valuers, and banks and ask them for data going back 10, 20 years or so for rents and capital values. Plot the yields & cashflow on the financing available at the time, and see what the average, maximum, and minimum cashflow was over this time. You can then compare to present day and get an idea of value.
 
Quote from Cutten:

Yields are still useful valuation tools, even for majority owner-occupied stuff. Maybe not for $10 million mansions or Scottish castles, but an apartment in a downtown metropolitan area is a much more natural rental unit than a single family home in the suburbs, for example. There is certainly a large enough rental market, and a large enough buy-to-let landlord market, to make yields a meaningful signal.

Regarding the implications of negative cashflow, it is not so much the absolute level of rental return, but rather the level relative to past levels. If Chicago condos typically have this level of negative cashflow, e.g. if the same situation applied in 1996, 1999, 2001, then it's no big deal. However, if cashflow has steadily deteriorated over the last few years or so, then this is clearly a sign of the units becoming progressively worse value over time.

So my advice to Pabst would be go to your local agents, valuers, and banks and ask them for data going back 10, 20 years or so for rents and capital values. Plot the yields & cashflow on the financing available at the time, and see what the average, maximum, and minimum cashflow was over this time. You can then compare to present day and get an idea of value.
More...

Cutten:

The way I learned to buy property was with the idea that you "make your profit going into the deal".

What this has always meant to me is that I don't bank on appreciation, rent increases, etc etc.

I buy the situation as it is under market, so that my profit is already assurred the minute the ink is dry on the contract.

I mention this because this technique is different than the stock market. In the stock market we attempt to predict where stocks are headed. In real estate I have never done this....I have simply bought at ample discounts that my profit was assurred the moment I bought the property.

In order to buy under market in the real estate business you have to find a seller who is motivated due to various factors. For instance, let's say he can't make the payments on the property and is about to lose it. Or, perhaps the property needs signficant fix up, and therefore cannot be sold in its current condition to a retail buyer with a bank loan. You have to buy properties that cannot be sold in their current condition, or cannot be sold quickly enough to get the seller out of a problem. You are a cash buyer for these discounted circumstances.

If you do this, you don't need an up market to make money in real estate.

When I value a property I value it based on what I can sell it for tomorrow without any question. If I'm buying a property to rent out, I won't buy it unless it pays positive cash flow after all expenses. In other words, I make my profit going into the deal.

OldTrader
 
Investors Fueling Home-Sales Heat

Source: Chicago Tribune
Publication date: 2005-02-27
Feb. 27--On Valentine's Day the first of about 600 hopefuls began to line up for a three-day vigil outside the sales tent of a Boynton Beach, Fla., developer, where they hoped to nail a condo.

Among them were a couple of stand-ins for real estate agent Peter Celnicker, whose investor clients were clamoring for the units. Celnicker was elated when they snagged two -- priced at $390,000 and $465,000 -- and plopped down two $15,000 certified checks to reserve the unbuilt units.

"Fabulous deal," the Delray Beach agent pronounced. "Fabulous."

Two days later a woman who had not fared so fabulously offered Celnicker's clients $50,000 per reservation at the sold-out development. Celnicker says they turned her down flat, with the expectation of flipping their deals for sweet profits down the road.

Flipping is the practice of buying properties for resale, an investment strategy that has become wildly popular in Chicago and across the country. Disappointed with the stock market and dazzled by double-digit property-appreciation rates, amateur investors -- apparently of every income stripe -- are investing in real estate in droves.

They are snapping up everything from condo conversions in Chicago suburbs to new three-bedroom ranch homes in the Arizona desert. Ordinary people, armed with bargain mortgages, pooled family savings and cashed-out home equity, are buying for investment at levels that are starting to worry economic analysts.

Their numbers are hard to track, but by one count investors bought nearly 8.5 percent of all the homes sold in last year's record market, according to Loan Performance, a California housing data firm.

In 2000, the company estimated, investor buyers were 5.8 percent of the market.

Chicago-area investors were less active, but only slightly so, with a 6.1 percent share of 2004 home sales. That's up from 4.7 percent of all loans in 2000. In some areas and certain housing categories, however, investor participation may account for as much as 25 percent.

Their effects on escalating home prices -- not to mention what might happen to such deals in a real estate "bubble" -- are beginning to be noticed.

In December Federal Reserve officials warned that they were concerned about speculative demand affecting housing prices and said they were watching some regions' activity closely.

"There are a couple of areas that look really scary, in terms of their share of the market," David Seiders, chief economist of the National Association of Home Builders, said of investors in the national picture. Seiders added, however, that investor activity in this region seems to be in balance.

"I think for the Midwest, we're on an even keel," agrees Erik Doersching, vice president of Tracy Cross & Associates, a Schaumburg firm that tracks home building data. "Especially compared to whatever else is happening elsewhere."

Last year speculators went into overdrive in Las Vegas, Phoenix, many parts of California and southern Florida, buying perhaps 15 percent or more of homes sold. In those areas people who were buying a home as a residence complained loudly that they were being pushed out of the market.

Besides driving up housing prices and assessments, a flood of investor-owned houses can depress prices when a market loses its sizzle. If price-appreciation rates slow -- or worse, decline -- speculators have more freedom to cut their asking price, sell quickly and get out. Left behind are occupant homeowners, who often must realize a certain profit to buy their next house.

In Phoenix, area home builders have announced that speculators are no longer welcome.

"We were seeing other markets where there were tremendous influxes of investors, particularly Las Vegas," explains Susan Williams, a spokeswoman for Element Homes, a Phoenix homebuilder.

"They'd come in and buy 10 or 20 homes, and flip them or rent them out. In some subdivisions up to 60 percent of the owners were investors, which was leaving the regular homeowners in an uncomfortable situation. The market became flooded with rentals."

When Phoenix began to become a magnet for out-of-state investors Williams' company and many other builders in Phoenix, as well as several in California, started requiring buyers to promise that the homes would be their primary or secondary residences for at least a year.

In south Florida such restrictions are generally non-existent.

"We're seeing three times as many buyers as there are units--300- and 400-unit buildings sell out in a weekend," explains Jack McCabe, a Deerfield Beach, Fla., development consultant, who says exuberant investors create artificial demand.

"In my very, very conservative estimate, 40 percent of these sales are speculator-driven, and in some projects it's as high as 80 percent."

Although Chicago real estate agents and developers say the market here is much less heated than Miami or Las Vegas, many say they have seen a surge since last fall in downtown activity, where a record 10,000 new condo units are planned for delivery in 2005, according to Gail Lissner of Appraisal Research Counselors, which gathers data on residential construction.

Lissner says 2004's downtown sales boom in Chicago (6,300 units sold, an 80 percent increase from 2003) has local developers optimistic about the units in the pipeline.

"But one of my major concerns is what role [speculators are] playing in inflating the true demand in the market," she said. "I'd say a good 25 percent of these sales could be to speculators."

Lissner says Chicago has seen such levels of speculation before and survived them without any negative economic repercussions. Investors were at least as active as today's speculators in the 1970s--an era that came to be known as "condomania" because of the large numbers of rentals that were being converted to ownership in the city, she says.

"But what killed condomania was a huge run-up of interest rates, not overbuilding," Lissner said.

Today some local developers court investor interest, Lissner says. At least one, however, shuns them.

"Speculators are also our competition [when they resell] while I still may be trying to sell in my building," explains Alan Lev, president of the Belgravia Group, a Chicago-area developer whose sales contracts require buyers to live in its buildings. "Besides, our construction lenders are starting to look at [investor buyers] and say those are not good sales."

Overall, the speculation picture is muddy because there is no single definition of "investor." For example, vacation homes count as investments in some databases, not others. Parents who buy condos to house their college-student children may not be trackable. Many investments are bought by landlords for the long term.

Or they're consumers who see bricks and mortar as an alternative to stock market nosedives and wimpy returns on bank CDs.

Sonya Travis, of Chicago, has bought a series of homes since 1998, residing in each for a couple of years until the price appreciated. Then she moved on to -- and into -- her next two-year investment stint. Each time, appreciation has averaged 25 percent.

Travis lives and invests in the South Loop, which has been prime flipping territory for years.

"Sometimes it can be a challenge to sell units, because there's so much other inventory on the market here," she said.

But just as accountants-turned-day traders learned that high-flying stocks can tank, real estate also holds its risks.

"Some do get burned," warns Chicago real estate agent Pamela Holt, who has worked with Travis on several purchases. "Some of them are fairly unprepared for the reality of what could happen if you buy the wrong thing."

Travis isn't worried. Though some of her investments have taken longer to resell than planned and she has one rental unit that has caused some stress, she intends to keep going.

"I'll keep investing this way until I'm where I have my dream home, then I'll stay put," said Travis, who works in marketing for a Chicago manufacturer. "But I'll probably keep investing after that."

-----

To see more of the Chicago Tribune, or to subscribe to the newspaper, go to http://www.chicagotribune.com.

(c) 2005, Chicago Tribune. Distributed by Knight Ridder/Tribune Business News
 
I made my living day trading at the height of the stock market bubble and during its meltdown.

Now I make my living "selling picks and shovels" to the new age real estate gold rush participants in Florida. I also build spec homes.

When the real estate market cools I will most likely move to the next frenzy........................I enjoy being where the action is. With a conservative risk management approach I am able to limit the downside when things do turn.

Who knows when the frenzy in over heated cities will end? Will it be in 1 year or 5? I do not know the answer to these questions but one thing I know for sure; when it does I will have alot more money than I did before. :cool:
 
Home Equity "Hedging" Investment Program Now Before SEC

by Kenneth R. Harney

Feeling nervous about rocketing home price appreciation rates in dozens of markets around the country? Are you worried -- just a little -- that your home equity holdings might begin to decline if mortgage interest rates heat up?

Well then get ready to hedge your home equity with a new breed of financial instruments expected to be unveiled within the next few months. The federal Securities and Exchange Commission currently is reviewing an "S-1" filing by a high-powered housing market analytics firm called Macro Securities Research LLC. The securities registration outlines the operation of a new market of home equity hedge vehicles indexed to home price movements.

The Chicago Mercantile Exchange confirms that it is also working with Macro Securities on a new futures contract trading instrument tied to home price indexes. Macro is the brainchild of two founders of Case Shiller Weiss of Cambridge, Mass., the firm that developed the home price index technology used by the federal government, Fannie Mae, Freddie Mac and top mortgage lenders to gauge resale home values. Case Shiller Weiss, now owned by financial markets giant, Fiserv, Inc., also developed the "CASA" automated valuation model that is widely used by lenders to evaluate properties online, rather than undertaking costlier traditional appraisals.

Yale economics professor Robert Shiller and longtime associate Allan Weiss have teamed up with Wall Street hedge fund and derivatives veteran Samuel R. Masucci, III to design the new "MACRO" investment vehicle for individuals and institutions. It is expected to be offered to individual homeowners in 2005 by stock brokers and other securities dealers, assuming it gets the go-ahead from the SEC.

Here's how it might work: Say you own a home in the Los Angeles area that has benefited stunningly from the past three years of housing price hyperinflation. With retirement just over the horizon, you are worried that the LA market might correct itself -- as it did dramatically in the early 1990s -- pushing your home equity holdings lower than they are today.

Under the Macro Securities plan, you'd be able to buy a "Down-MACRO" -- a hedging device that essentially is a "short" position on Los Angeles housing prices. Your Down-MACRO on LA would be matched with an "Up-MACRO" -- probably purchased by a large institutional investor that is hedging its own portfolio with a "long" position on LA housing prices.

The MACRO certificates are expected to be traded on the American Stock Exchange, according to the SEC filing. If your "short" position or bet on prices proves to be correct, you would be compensated for your paper home equity loss by funds paid by the purchaser of the "Up-MACRO." If your bet is incorrect and LA prices continued to rise, the funds you invested to purchase the Down-MACRO would pay off the investor who bought the Up-MACRO. Of course, on paper you should be fine -- after all, you didn't lose the home equity you thought you might.

Details on pricing and structuring of the MACROs won't be publicly available until the securities are offered to the public, probably sometime in the first half of 2005, according to Masucci. The existence of housing price-indexed hedge vehicles in the form of MACROs is likely to stimulate a variety of innovations in the mortgage and housing fields, he said in an interview. Already under development are home equity insurance coverage plans that would be offered by insurance companies to their homeowner clients, and would be pegged to MACRO securities. Masucci said home mortgage lenders also have expressed interest in using MACROs to hedge against collateral risk -- declining property values. With housing price risk hedged, according to Masucci, lenders could offer discounted mortgage rates, and might not need to charge for private mortgage insurance on low-downpayment loans.

The Chicago Mercantile Exchange housing price-indexed futures contracts program, when operational, is expected to allow investors to trade contracts tied to homes -- the nation's largest asset class -- just as they trade futures tied to interest rates, stock prices and other indexed assets.

http://realtytimes.com/rtcpages/20041220_hedging.htm
 
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