Real Estate: Fundamentals

T

The Kin

The Real Estate debate rolls on regarding whether or not we're in a bubble. I have always maintained that we're currently not in a bubble with the exception of some markets, mainly California. Others believe that Real Estate is the new tech and it's only a matter of time before prices implode.

Many of the arguments made thus far have been technical analysis, such as overlays of Nasdaq and Real Estate Prices. But there is one important factor which has been ignored by both sides of the debate: the fundamentals.

Unlike tech, Real Estate still has a positive cash flow. I would like to offer a personal example which excludes appreciation. It is possible to purchase a single family home or condo in Florida and lease it out at a monthly rate equal to ~130% of a 5.25% 15-year mortgage and other fees with a initial 10% downpayment. Utilities are billed seperate and other fees such as common areas are included. Also with tax savings such as interest expense, it takes care of a portion of the property taxes and insurance.

So even if there is no further appreciation, I will still own the home in less than 15-years. If rents were to fall, I can afford to lower mine by ~27% before I breakeven on a monthly basis, but I will still own the home within 15-years. If rents were to fall significantly, and I had to lower mine by more than ~27% in order to find a tenant, only then will I have to tap a reserve fund but it won't be that bad as I will have some tax benefits.

Now, having said this, I do believe a bubble exists in some markets. These are the ones I stay away from. Where speculators rely on appreciation to borrow more to purchase more. Or simply flip properties to other speculators after holding for 6 months. Where variable and I/O mortgages are common place with their teasear introductory rates.

I strictly look at rents in a given area and find out how large a downpayment is needed in order for the average rent to easily cover a 15 and 30-year fixed mortgages. If the downpayment is above say 15% of the price of the home, I believe it to be in a bubble and go look for some other market to invest into.

Believe it or not: money still can be made in Real Estate and for that reason I believe Real Estate prices to continue to appreciate. While I don't consider appreciation in my purchasing calculations. It does play a major factor in determining when it's time to sell.
 
There have been articles written that support both the bull and the bear case for real estate.

Some of the arguments for the bear case:
1) majority of population cannot afford to buy a home
2) wage raise not commensurate to increase in home prices
3) household debt level at historic high
4) rising interest rate environment
5) cheaper to rent
6) rental income cannot justify current home prices
7) 30% (or more?) of home buyers are speculators.
8) No downpayment, interest only loans.
9) Possible slow down in the economy
10) Current account deficit, budget deficit, trade deficit.

Investors who base their decisions on fundamentals and who are bearish on property:
Buffett (I think)
Bill Rodgers
 
Bottom line is prices could fall a lot. Will they and when is almost impossible to know. But can they fall a lot? YES. Will they? Don't know. Will it be a disaster for economy if they fall a lot? Yes. That is the important thing to understand.

Risk and stakes are higher than ever before.

My house could fall 25% and i would still have a profit on my purchase from just 3 years ago. But What about the guys buying houses all this year. What happens to average family if their latest purchase fell 25%. Bankruptcy and Foreclosure likely result for many.
 
Quote from longtermpunt:


6) rental income cannot justify current home prices
More...


This one seems like the crusher to me. I mean most people at least down here are speculating. Leveraging themselves in order to tap into the upward trend. If and when that trend decides to even nudge most of the mom and pop speculators will be forced to rent cheaper than their nut or try hitting the bid on a market that went from liquid to illiquid...who knows how far down prices need to go before they start snapping them back up....some will go upside down on their loan...
 
http://www.signonsandiego.com/news/business/20050513-9999-1b13housing.html

San Diego County housing market decelerates

Median prices rose at slowest rate in 5 years last month
By Roger M. Showley
UNION-TRIBUNE STAFF WRITER
May 13, 2005

San Diego County's housing market continued cooling off last month, with median home prices rising at their slowest level in five years, locally based DataQuick Information Systems reported yesterday.

The data were released on the same day that real estate agents, meeting in Washington, heard their top economist single out San Diego as being among the nation's most over-valued markets.

The county's overall median price in April was $484,000, up 10.3 percent from a year ago and the lowest year-over-year increase for any month since the 10.1 percent increase recorded in January 2000. The median was $7,000 higher than in March and $45,000 higher than in April 2004.

Single-family resale homes, representing about half the market, rose to a record of $540,000, but they were up only 11.3 percent from a year earlier, the lowest rise since the months following Sept. 11, 2001, when the terrorist attacks briefly unsettled consumer confidence.

Resale condos also hit a record, $395,000, up $15,000 from March and 16.5 percent from a year ago. The new housing median was down 2.5 percent from a year ago and off $7,000 from March – pulled down by the prevalence of low-priced condo conversions which are included with newly built houses and condos.

The median represents the halfway point of all sales with half above and half below that figure. Individual neighborhoods and properties can vary widely from the median due to size, age, location and other factors.

Sales totaled 5,345 last month, up from March as is typical in the spring but down 12.3 percent from the frenzied activity of April 2004, when prices rose 21.7 percent year over year.

DataQuick analyst John Karevoll said he gets more calls about San Diego from East Coast financiers than for any other market he monitors. They ask about loan-to-value ratios, default rates, adjustable-rate-mortgage usage and other factors.

"We're being watched," Karevoll said. "We're under the magnifying glass."

While a big correction or price slump does not appear imminent, Karevoll said appreciation likely will drop into the single digits this summer.

"We're closer to the pain-point," he said. "We're clearly much closer to a point at which buyers are going to shrug their shoulders and turn around and walk away. Many more are doing that now than did a year ago. I definitely think it has to do with the high cost."

That's the attitude of Paul Schroder, 43, an architect who lives with his wife, Mary Ann, in Singing Hills in East County. They thought of moving last winter to San Diego's Kensington neighborhood to be closer to work downtown but didn't like the selection of homes on the market at the time.

"I'm a little concerned because everybody thinks there may be a bubble," Schroder said. "I think there is. We're already seeing all this craziness going on, so we're on hold and trying to see what happens in the next six to eight months, if it continues strong or something really dramatic happens."


Median at $500,000
The San Diego Association of Realtors, meanwhile, reported that its median price for April stood at $500,000, 9 percent higher than a year earlier, and the typical resale home or condo took 49 days to sell, compared with 26 days a year ago.
As another indicator of market activity, the number of homes for sale on the local multiple listing service stood at 9,996, three times what it was a year ago but below the recent high of 10,830 reported last October.

David Lereah, chief economist at the National Association of Realtors, addressed members at their mid-year legislative conference in Washington, D.C., yesterday and tried to reassure brokers and agents that a bubble was not in the offing.

Rising inflation, federal deficits, trade deficits and a slowing economy point to fewer sales, less construction, slower-rising prices and higher interest rates next year, Lereah said, but the good news is that rates haven't risen as fast as earlier thought.

As he was speaking, Freddie Mac reported 30-year, fixed-rate mortgages rose for the first time in six weeks to 5.77 percent from 5.75 percent last week, but they remained, as Lereah put it, near their historic lows for the last 40 years.

However, all is not rosy everywhere, Lereah said, and real estate could soften in areas with declining jobs and population, strong runups in prices, sharp rises in inventories and a quick departure of speculators.

In a slide presentation on regions that are often singled out as being at risk, he included San Diego in a list of the nation's five most overvalued markets, placing it second after San Francisco and ahead of Los Angeles, New York and Honolulu.

And, as if to underscore that dubious honor, the California Association of Realtors' monthly affordability report for March saw San Diego County again sink to its lowest level ever. The association said the affordability rate for the county was 10 percent, which is the percentage of households earning enough money, $137,758, to buy the median-priced home with a 20 percent down payment on a 30-year, fixed-rate loan. Santa Barbara and the Northern California Wine Country had the lowest affordability level of 9 percent.


Optimism persists
Anne Throckmorton, former president of the San Diego Association of Realtors, said from Washington that most real estate professionals remain optimistic.
"We went around our group, asking about each state's market areas, and there wasn't one area where the market was down," she said. "At the very least, it was flat and going up. It was a very ebullient attitude."

Back home, University of San Diego economist Alan Gin was preparing to address a local gathering on the real estate outlook and say that a bursting bubble was unlikely.

"What I think would be necessary for the bubble to be popped is an event," he said. "In the '90s, we had General Dynamics and aerospace go out of town, but I don't see that this time around. You'd have to take several (military) base closures or Qualcomm going out to have that equivalent."

The base-closure scenario could unfold as early as today if the Pentagon releases its proposed list of installations to shut down. However, Defense Secretary Donald Rumsfeld said yesterday he will recommend fewer closures than earlier planned.

Rex Downing, a 26-year San Diego real estate veteran who is working with architect Schroder on a possible home purchase, said the market seems normal to him but "buyers are shakin' in their boots."


Buyers show concern
"They're coming at the market with pessimism, cynicism, negative expectations," Downing said. "When they occasionally walk into a house that is well priced, then they get excited. But, boy, are they ready to be disappointed."
Alan Fine, another veteran real estate watcher who runs the San Diego Real Estate Club to help buyers and sellers get their bearings, said he is concerned with the spreading use of "optional ARMs," a loan with a fixed payment that doesn't cover all interest costs and can lead to increased, rather than decreased loan balances – what the industry calls negative amortization.

"People are naive to think that the market keeps going up," Fine said, "just like how they got caught in the stock market. There is a day when things correct. People have seen real estate go up in San Diego for the last 10 years and a lot of them think there's no end to it."
 
Do any of you read Fortune magazine? There was an interesting piece I think last month about Toll Brothers. Specifically how they have branched out all over the country, and how they keep raising prices weekly, as much as the market allows.

I believe the large builders are all doing this, and the average American is getting sucked in just like the dot com mania. Remember that? Most people LOST money, convinced that the internet would change everything. This is the same thing. Prices will fall, anyone buying this year will be sucking wind, it is a fact. Interest rates will go up, and real estate prices are very similar to bonds.
There was a piece in the paper here locally about how prices have gone up 16% nationally in the last year. Can you say sucker? :D
 
C'mon! We're going back to the same BS being posted in all the other Real Estate threads.

Look at the fundamentals -- actual numbers -- and not opinions.

There is a huge, HUGE, difference between Real Estate and Tech. For one, Real Estate is profitable with real positive cash flows month after month. Tech had mammoth losses month after month and would just keep issuing new shares to stay afloat. There was no justification for the prices.

Even if prices were to fall 10% today, so what? They can't be expected to go up forever. However it's still possible to rent out that property and get someone else to pay the mortgage.
 
http://www.nctimes.com/articles/2005/04/21/business/news/12_32_334_20_05.txt

Study indicates rents virtually stagnant in San Diego County

By: BRADLEY J. FIKES - Staff Writer

Average rents in larger apartment complexes in San Diego County scarcely budged during the last year, according to a survey from RealFacts, a San Francisco-based research firm.

The average rent for all types of units rose to $1,222 in the first quarter of 2005 from $1,190 in same quarter of 2004, an increase of 2.7 percent. However, the national inflation rate for 2004 was also 2.7 percent, according to the U.S. Department of Labor. The average rent was $1,141 in the first quarter of 2003, equating to an increase of 4.3 percent between that time and the first quarter of 2004.

RealFacts's survey covers only apartment complexes with at least 100 units.

San Diego's situation is typical of that throughout the western United States, according to the survey. There is "no sign of any impetus for rental growth: good news for renters and bad news for owners of apartment buildings," the survey stated.

The survey lists two reasons for the nearly flat rental rates. One is that few new apartments are being built. Because newer units tend to be more expensive, they pull up the average rates. Two, occupancy rates are not high enough to allow landlords to raise rental rates very much.

From 2003 to 2004, a net 1,122 units were added to the county's total supply of apartments, the survey stated, rising to a total of 97,021. RealFacts's survey covers only apartment complexes with at least 100 units.

San Diego's average occupancy rates have remained nearly flat over the last two years, according to the survey. As a rule of thumb, landlords consider occupancy rates above 95 percent to be a tight market, below that a slack market. In the first quarter of 2005, average occupancy was 94.4 percent.

In the first quarter of 2003, rental occupancy was 94.5 percent, rising to 95.5 percent in the third quarter. Rates then declined to 94.0 percent by the second quarter of 2004, and then began rising slightly.

The current low single-digit rent increases are much less than San Diego County renters incurred just a few years ago. Average rent increased from $746 in 1997 to $823 in 1998, an annual rise of 10.3 percent. In 1999, the average increased to $897 for a 9 percent rise. For 2000, the average was $985 for an increase of 9.8 percent.

From then on, the rate of increase steadily declined, to 7.8 percent in 2001, 5.6 percent in 2002 and 3.6 percent in 2003. The slowdown coincides with the recession that began in 2001. But even though the economy has since recovered, rent rates have held steady when adjusted for inflation.
 
Quote from The Kin:

The Real Estate debate rolls on regarding whether or not we're in a bubble. I have always maintained that we're currently not in a bubble with the exception of some markets, mainly California. Others believe that Real Estate is the new tech and it's only a matter of time before prices implode.

Many of the arguments made thus far have been technical analysis, such as overlays of Nasdaq and Real Estate Prices. But there is one important factor which has been ignored by both sides of the debate: the fundamentals.

Unlike tech, Real Estate still has a positive cash flow. I would like to offer a personal example which excludes appreciation. It is possible to purchase a single family home or condo in Florida and lease it out at a monthly rate equal to ~130% of a 5.25% 15-year mortgage and other fees with a initial 10% downpayment. Utilities are billed seperate and other fees such as common areas are included. Also with tax savings such as interest expense, it takes care of a portion of the property taxes and insurance.

So even if there is no further appreciation, I will still own the home in less than 15-years. If rents were to fall, I can afford to lower mine by ~27% before I breakeven on a monthly basis, but I will still own the home within 15-years. If rents were to fall significantly, and I had to lower mine by more than ~27% in order to find a tenant, only then will I have to tap a reserve fund but it won't be that bad as I will have some tax benefits.

Now, having said this, I do believe a bubble exists in some markets. These are the ones I stay away from. Where speculators rely on appreciation to borrow more to purchase more. Or simply flip properties to other speculators after holding for 6 months. Where variable and I/O mortgages are common place with their teasear introductory rates.

I strictly look at rents in a given area and find out how large a downpayment is needed in order for the average rent to easily cover a 15 and 30-year fixed mortgages. If the downpayment is above say 15% of the price of the home, I believe it to be in a bubble and go look for some other market to invest into.

Believe it or not: money still can be made in Real Estate and for that reason I believe Real Estate prices to continue to appreciate. While I don't consider appreciation in my purchasing calculations. It does play a major factor in determining when it's time to sell.
More...

maybe you could give us some actual figures. i ran some numbers based on my state. here is what i come up with:
200k 15 year mortage amortization at 5.25% =$1607 per month
taxes $2400 divided by 12 =$200
maint lowball it at $50 per month = $50
total $1857
so just to cover expenses you need 1857 per month. are you saying you can get 130% of the mortage amount on a single family home in florida? you cant get anywhere near that here. at best you could get $1200 to rent a 200k home here. wont even come close to cash flow.
 
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