There Is Nothing New Under The Sun
What has been will be again, what has been done will be done again; there is nothing new under the sun. Ecclesiastes 1:8-10
Ponder that for a moment before you read the following:
Homeowners have grown accustomed to a world of aggressive mortgage brokers, realtors, and bankers. It is hard to imagine a future world in which “For Sale” signs stand on lawns for years rather than days, where instead of multiple offers above the asking price, you are faced with taking numerous discounts to your asking price, where you need to serve lunch at your open house just to get brokers to come over and look, and where banks have retrenched with new lending policies that include asking questions like what did this property sell for 10 years ago. If bankers retrench, and we assure you that this is what they do for a living (just ask any farmer in the Midwest), then all the formulas you know for lending and pricing go out the window. There will be no comparables in the neighborhood because nothing will be selling. Bankers will have to go back to very realistic valuations, probably based on square footage and historical pricing. Valuations will further be damaged by banks’ own activity as they dump foreclosed properties on the market at huge discounts to the mortgage amount. Banks really do not want to hold bad loans on their books, because it only reminds them of managerial errors of the past. They are infamous for buying high and selling low when it comes to foreclosures.
Unfortunately, their aggressive selling will only exacerbate an already weak property market. To homeowners this means that whatever rosy assumptions they had about refinancing, taking money out in the form of a second mortgage equity loan, or selling at a high price to a buyer financed by aggressive bank formulas will all basically evaporate at the same time. When an entire market’s sense of value is based solely on current “market” values, then be prepared for a wild ride when those market prices come under attack from a less aggressive banking sector.
But you know this already now, so what’s my point?
The above is an excerpt from the book The Coming Crash In The Housing Market, by John Talbott. Copyright 2003.
2003?!! 5 Years ago? Yep. I bought this book the same day it hit the shelves at Borders in downtown San Diego. I was in the beginning stages of building our investment real estate company and I knew the only way our company was going to survive this was by telling our clients what was really going on and to teach them to invest wisely and we still do that to this very day.
Some say we are in scary times, but if you look back to the last real estate cycle you will see that many millionaires were made during times like these. My recommendation is to give us a call and get a free consultation on how best to take advantage of the current marketplace.
Jeremy Quinn
YAERD.org Advisory Board Member
jeremy[at]yaerd.org
Gas Price Effect on Real Estate
During the real estate boom when gas was still affordable the effect on real estate was that developers would go to outlying suburban areas and the buyers followed. A common phrase real estate agents and their buyers used was “drive until you qualify”. Today though with escalating gas prices this phrase is beginning to be second guessed by buyers, the trade off of lower home prices in outlying areas is less attractive as each mile of the commute now becomes incrementally more expensive.
What does this mean for real estate investors? The trend will be a shift back to the down town and urban core. Developers will be looking at infill projects to take advantage of this trend. The buyers who bought homes in speculative outlying areas , which are also the areas that will take the longest to recover, are now feeling the squeeze of seemingly paying and arm and leg for their commutes.
When you look at the micro markets and the urban core vs outlying suburban areas the data shows that the urban core’s have been less effected than the outlying areas. The pressure on outlying areas with the over supplies will result in more foreclosures. These former home owners will also fuel rental demand in urban areas as they will be forced to rent closer to work in order to save money.
Based on the gas effect trend, one of the opportunities for real estate investors to take advantage of is to hold or acquire rental units near job centers, urban cores and public transportation, as we are already seeing an increased demand for quality rentals in these areas.
Robert Stec
YAERD.org Advisory Board Member
Back To The Future?
While I believe history never exactly repeats itself because some of the variables change, a lot of what’s going on has happened before. To prove my point, let’s jump in the Delorean with Marty and Doc. Let’s set the date to August 17, 1981 so we can read this article that was in the New York Times (by Ben Stein).
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HOUSING BOOM GOES BUST IN LOS ANGELES
A word to the wise: The great Los Angeles housing boom is over. The real estate price explosion in southern California, which sparked a national boom still continuing elsewhere, has stopped. The bubble that everyone said could never burst has burst. All over Los Angeles and Orange County, home buyers can buy a property for less than it would have cost a year ago, although there are exceptions. Buyers who can pay cash can almost steal houses and real estate. The days when ordinary citizens got rich from buying houses are gone, at least for the time being and at least in southern California.
But what a bubble it was. In the 10 years from 1970 to 1980, the price of the average house in Beverly Hills went up by a factor of almost seven. The average house in West Los Angeles, a region of by no means opulent homes, rose by almost six times. Houses in Malibu routinely doubled in value every year in the late 70’s. By the end of the decade, newspapers advertisted ‘’starter houses,” for families who had never owned before, in remote desert suburbs starting at $200,000.
Any lucky person who got in on the boom in the early 70’s saw his paper profit reach about 30 times his down payment by 1980. People who had never earned more than $40,000 suddenly found that they were millionaires just from that little house with a pool in Pacific Palisades. Ronald Reagan is said to have paid $29,000 in the early 50’s for a house in Pacific Palisades that is now for sale for $1.7 million and cannot be sold, which is the whole story.
The boom went on for such a long time because the economics were right. All through the 70’s the cost of owning a house in the better neighborhoods of Los Angeles was negative. That is, the cost of servicing the mortgage plus taxes was less, usually far less, than the increase in the price of the house. Figure it out: mortgages were less than 10 percent for almost all of that decade, under 7 percent if you count the tax features, and houses were increasing in value all over the West Side of Los Angeles by a good 20 percent a year on a compounded basis. The banks, savings and loan institutions and and the economy generally were paying families to live in the better neighborhoods of Los Angeles. The economics of housing inflation were such that for a long period, lenders made mortgage loans at rates substantially below the appreciation of the houses they were loaned upon and in some years, noticeably below even the trend line for inflation. This cheap credit fueled the takeoff of the boom. As prices rose to stratospheric levels, the price history itself fed the boom. Real estate agents assured buyers that however high prices were, they would go even higher.
Wives went to work. Second mortgages were drawn up. People would do anything to get in on the boom, which looked as if it would never end. Even when prices got so high that ordinary citizens could no longer afford to get in, rich people came from all over the country and the world to get in on the one true never-ending bubble.
Even when mortgage interest rates shot up to 13 and 14 percent, the houses were still going up 20 percent a year, so who cared? The end came when Paul A. Volcker, the chairman of the Federal Reserve Board, decided he was going to fight inflation in a major way. By relentless pressure, the mortgage rates were driven up to 18 percent. Sounds came out of Washington that a new Administration meant business about keeping money tight for a long time and bringing down inflation. Little by little, the idea circulated that maybe if interest rates stayed high for a long time, housing would no longer be such a great buy. After all, if an investor can get 18 percent on his money with no risk, why should he take a chance on real estate, which is already very high, which costs money out of pocket and is historically not a very good investment when disinflation sets in?
Once it was admitted that it might just be possible that real estate would not go up forever, the essential spirit of prepetuity that every bubble needs was gone. Buyers became fewer and more choosy. Houses that once sold in a week stood unsold for a year. As demand fell, prices stopped rising, then began to fall. Although some surveys show a very slight price rise in the last few months, brokers say that any determined buyer can buy a house anywhere except the Malibu Beach Colony for less than it would have cost last year.
Once prices stopped zooming up, the spiral reinforced itself. A house with a stable price costs its buyer plenty with an 18 percent mortgage. Instead of making money for him, it is costing him almost a fifth of its price each year. Suddenly, certificates of deposit and bonds look awfully good and real estate looks awfully bad. Suddenly buyers decide to stay with their old houses and their rentals. Demand declines and prices slide a little more. Families who thought they were rich from their houses find that they simply cannot sell except at an immense discount. And the air goes out of the bubble.
Of course, Los Angeles is still a desirable place to live, the economy is still relatively strong and no one seriously contemplates a major crash. And, of course, all bubbles, in every commodity, whether it is land or stock or gold on tulips, always end some time. No matter how sure people are that their particular rocket will always go up and never come down, it always happens. A word to the wise.
Jeremy Quinn
YAERD.org Advisory Board Member
jeremy[at]yaerd.org
561-210-5636
The Good, the Bad & the Ugly on the Nation’s Housing Market
Let’s start with the good about the national real estate market. According to an annual report on the state of the nation’s housing markets from the Joint Center for Housing Studies of Harvard University is optimistic about medium- to long-term prospects, estimating that unless there’s a serious, prolonged economic decline or a marked cutback in immigration, the nation will gain 14.4 million new households between 2010 and 2020, compared with 12.6 million between 1995 and 2005. That type of population growth translates to increased demand for housing and certain to swing the cycle back upwards in time. 
Now the Bad & the Ugly - the reality is in the short term the current housing slump is far from over and is shaping up to be the worst in decades.
How bad is the down cycle we are in? (The Ugly) The Harvard report noted that sales of existing homes fell 13 percent in 2007 to 4.9 million, and sales of new homes were down 26 percent to 776,000, the lowest level since 1996. The 500,000 unsold new single-family homes available in early 2008 was down from a mid-2006 peak of more than 570,000, but the slower rate of sales translates into an 11 month supply — an overhang not seen since the 1970s. A supply of more than six months is considered a buyer’s market.
Is the glass half full or half empty? Well that depends on which side of the fence you are on, If your a developer sitting with standing inventory in the wrong market you may feel your glass isn’t just half empty it’s bone dry. Even if you are a developer who followed leading indicators and cut production early or moved into stronger markets with better fundamentals you may feel that due to the current credit crisis your glass is at best half empty.
Same thing if you’re an investor who jumped late into a sellers market and threw fundamentals out the window and followed the incentives, media and hype in 2005 to option arm hell. If however you are investor who did not buy into the speculation understood fundamentals and leading indicators, you are now on the sidelines with opportunities abound and some low lying fruit ready for picking, just be sure to pick your markets and micro markets carefully and stick to the fundamentals.
Robert Stec
YAERD.org Advisory Board Member
YAERD.org is looking for real estate professionals to write about their local markets and have their articles published on the Blog of our top ranked Investment Real Estate site. Collaborate with the YAERD.org community and help us learn about the Good the Bad and The Ugly of your local markets. We want to know where the problems are and over supplies in your markets are as well as where the real opportunities are in the micro markets of your local area. Send an Article Proposal to freeinfo[at]YAERD.org
What does the Press know about Real Estate Cycles?
With all the press written about real estate I remain astounded to hear very little specific discussion about real estate economics & market cycles – the simple fact is that in a given market and for a given asset class valuations go up and valuations go down over time. This is the way it has always been, and will always continue to be.
I agree with those who suggest that it’s for the most part foolish to try and predict precisely when changes in the cycle will occur, but you can absolutely track the data and the leading indicators market by market so one can note the changes and trends as they’re happening.
A big part of my future posts for the YAERD.org blog will be to track real estate market data, analyze it thoughtfully, and hopefully help investors make better decisions. I am also from time to time going to call out some of the so called real estate economic gurus out there as well as help you avoid the economic hit men (more on that topic later) that routinely take advantage of the public. What makes me qualified to do so you may ask? Well I am not sure I am any more or less qualified than some of the media pundits trying to interpret data, some times correctly but more often that not I see these media experts giving very misguided analysis.
In terms of my qualification, I do have an undergraduate degree in Economics and have done some post graduate work in the field. In and of itself, that doesn’t amount to a hill of beans but combined with my experience working with developers and investors in markets throughout the U.S and internationally I do at least have a unique perspective and hope to periodically offer my two cents on these topics.
Robert Stec
YAERD.org Advisory Board Member
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