Housing Flipper's Flop - Many Are Wiped Out

Discussion in 'Wall St. News' started by ByLoSellHi, Apr 29, 2007.

  1. Apr 29, 9:09 AM EDT

    Associate Press Business Writer


    LAS VEGAS (AP) --
    In the rampant real estate speculation of the Las Vegas valley three years ago, people lined up outside Pulte Homes sales offices overnight as if they were waiting for the release of the latest video game console or hot new movie.

    Having seen his house in an upscale part of suburban Henderson, Nev. jump $200,000 in value in 18 months, Sam Schwartz felt he couldn't miss any part of the boom.

    He spent the night in the parking lot with TV, snacks and drinks, along with about a hundred other people.

    Schwartz intended to buy a new home and then quickly sell it within the year - for a huge profit. Most people waiting were flippers just like him, he said.

    "We had seen real evidence of what was possible in this crazy, inflated market, and we just wanted to get a piece of that investment equity," Schwartz said.

    But when home prices unexpectedly took a backward step, many investors seeking to cash in quickly were left "upside-down," or owing more on their mortgages than what their homes were worth.

    The result was a glut of homes in the marketplace, communities spotted with empty houses and for sale signs - and a foreclosure rate in Nevada that leads the nation as owners unable to sell became saddled with unbearable debt payments.

    Foreclosure filings across the United States rose 47 percent last month from a year ago to 149,150 - one for every 775 households, according to statistics from Realty Trac Inc., a foreclosure listing service. And for the third straight month, Nevada's foreclosure rate led the nation when it rose 220 percent from a year earlier to 4,738 filings, or one in every 183 households.

    In Clark County, which encompasses Las Vegas, one of every 30 homes began the process toward foreclosure last year.

    The day Schwartz reserved his home, the sales staff was raising prices $20,000 after every fifth buyer came inside. The $500,000 house he and his wife were eyeing had shot up to $540,000 by the time they sat down. Somehow, it still seemed like a good deal.

    "Everybody was thinking, 'Hey it's not the end of the world, because the homes across town are selling for $720,000. We have almost $200,000 in equity in the house and it isn't even built yet,'" Schwartz said.

    He and his wife put down $5,000 on a home that would end up costing $560,000 with upgrades.

    While the Schwartzes were able to cancel before closing on a property that suddenly was worth only $490,000 - and recoup their deposit on a legal technicality - others were less fortunate.

    Schwartz, a 44-year-old life coach, said he "narrowly escaped financial disaster." But the effects of the housing crunch would reverberate for years, he said, something he expects to see among the clients he coaches to succeed in their lives and careers.

    "There's going to be a lot of depression, a lot of anger. A lot drinking, gambling, and desperate stuff going on."

    More than other states hit by the mortgage lending crunch, the high foreclosure rate in Nevada, California and Florida was driven by speculation, said Rick Sharga, vice president of marketing for Realty Trac.

    "It was a combustible mix of risky loans and risky real estate deals," he said.

    Russ Valone, the chief executive of research firm MarketPointe Realty Advisors, said speculators in San Diego were putting deposits on downtown condo units under construction, assuming they could sell them at a profit when they were finished.

    "There were guys out there that were rolling the dice just as if they were going to Las Vegas," Valone said.

    When the market slowed, many buyers forfeited their deposits, or let their properties get repossessed by the banks. As a result, the inventory of unoccupied condo units downtown since early 2005 has soared fivefold, he said.

    New home builders are slowing down the pace of new projects in Las Vegas and are giving agents commissions of up to 12 percent and up to $100,000 in upgrades such as pools, granite countertops and appliances.

    "The speculators completely dried up," said Paul Murad, a real estate observer and author of "Manhattanizing Las Vegas."

    In Miami, the rush of condo building and speculative buying has slowed to a crawl, said real estate agent Penni Hurley. Florida's foreclosure filings rose 54 percent from a year ago to 14,303 in March, or one filing for every 511 households.

    "The market was on steroids and now it's going through a much-needed correction," Hurley said.

    With forecasts of a nationwide 1 percent home price decline this year, there's no way to flip for a profit now, said Jay Brinkmann, vice president of research and economics with the Mortgage Bankers Association.

    "One would have to logically assume that (flippers) are no longer in the market," he said.

    But some are still feeling the pain.

    Jason Beaver, a Sunnyvale, Calif.-based Apple Inc. programmer, got caught up in the talk of the hot housing market from friends who bought multiple homes in Las Vegas and made a killing.

    His name was drawn in a buyers' lottery in the Solera subdivision and he put $35,300 down on a $353,000 home in February 2004. The community is restricted to people age 55 or older; the 37-year-old Beaver had no intention of moving in.

    That summer, the housing market began to soften. He nervously put the house on the market for a break-even price the same day escrow closed. He got no offers.

    A tight market had suddenly become flush with resale homes as investors sought to cash out. Pulte was one of several builders to slash new home prices, in some cases by as much as $80,000 in a single day. Beaver and others are suing, but the company has said it was simply reacting to new conditions in an overheated market.

    Beaver has been renting the home out for about a $1,000 a month, despite monthly expenses around $2,000.

    And the supply of available homes is growing.

    In March, the number of resale listings for single family homes, condos and townhouses in the Las Vegas valley grew 30 percent from a year ago to 27,282, according to the Greater Las Vegas Association of Realtors. Sales and the value of homes sold were both down 38 percent from a year ago. About half the homes available have been on the market for more than two months.

    "Two years ago, you'd set a price that looked right and you'd get offers that were $20,000, $30,000, $40,000 over your list price. You have to be more realistic today," said Devin Reiss, president of the Realtors association.

    With Nevada's fast-growing population and an estimated 8,000 net new residents coming to Las Vegas every month, experts predict the glut of housing will be cleared in six months to more than a year.

    State lawmakers are considering a range of bills that clamp down on the easy mortgage lending that helped heat up the market, including making it a crime for lenders to issue mortgages with little or no verification of a borrower's ability to pay.

    "The biggest loan I ever saw, a person bought a $1 million property and only had to come up with $1,000 in cash," said Scott Bice, the state's commissioner of mortgage lending.

    "I don't think anything will ever prevent speculation," he said, but added that new regulations and tighter credit requirements by lenders will eventually return the market to the good old days: "When it takes good credit and money in a transaction to close it."

    For those caught up in the frenzy of a few years ago, the changes come too little, too late.

    Beaver figures he has spent $50,000 on his investment home, and will have to come up with $30,000 more to pay off the mortgage after he sells it at a loss.

    While he's not completely sworn off real estate investing, Beaver said next time he'll try a more traditional approach - to buy and hold for the long term.

    "The fast-growth, make-a-quick-buck real estate investment, I don't think I'll try again," he said.
  2. the question is, what is the best way to exploit the values that will be created should it reach desparate levels? foreclosure homes don't have leverage, you have to pay cash from my understanding. fixing up houses isn't going to work if people can't take out the loans to fix them up.

    plus, real estate cycles are much longer than the stock market cycles. personally, me thinks it will just be super super slow with very little buying and selling, a modest 5%-10% drop in prices, with prices being stagnant rather than a panic sell off. i could see us coming back in 8 years and prices being exactly as they are today. this is my recollection of the real estate market in the 90s. people probably will just be stuck in their homes, unable to move, lessening the activity on the market, but i think the bulk of people will be able to pay their mortages, so no drastic drops will occur.

    this is the worst scenario from a speculator's point of view. i'd rather see panic selling so i could take advantage of the value. one day i'd love to just buy a bunch of land, build a home, and possibly lot it off later.

    another thing is that real estate really is regional to some extent, but based not on geography, but metropolitan versus rural. jim rogers mentioned this and thinks the midwest has some great value. not every area place experienced the huge run up that happened in ny, miami, cali, lv, portland or, dc/md, nj. places, like the midwest and say pennsylvania, ohio, wv, the corn belt, didn't appreciate at all.

    anyway, there's always real estate in the corn belt and living on government ethanol subsidies :p
  3. But wait, every month they keep telling us the bottom is in, that its a great buying opportunity, say it isnt so :p

    These idiots are smocking crack if they think this mess can resolve itself in as little as 6 months.

    Lets do some math here. Since 2005 condo's in down town san diego increased 500%. How long will it take for down town san diego's population to increase 500% so the ratio of population to condo's comes back in line??? Hmmmmmm? 6 months? Excuse me while I laugh myself to death.

    We are so over built its ridiculous. This is wishful thinking.
  4. Chagi


    Guess we'll eventually stop seeing all of these "Flip My House" type TV shows? :)
  5. We aren't really seeing any fallout in the labor market yet. If I were to hope to pick up real estate for cheap then

    1. I'd wait for the labor market go into turmoil, with unemployment rising rapidly
    2. Wait for the point that unemployment appears not on the rise and slowly levels out
    3. Then buy foreclosures for cash

    These processes take years and years. No rush to buy right now. For all we know, we don't even know if an actual housing crash is upon us.
  6. There is clearly a crash in some markets. Some areas have dipped over 40% around here. Thats a crash in something as leveraged as real estate.

    People have to remember, when you buy a 800,000 dollar home with 10K down and it loses 10%, whats the return on your 10K investment??? OUCH
  7. Three options, buy, rent or homeless/live with mom. Rental prices are skyrocketing. Time to buy a house. It's cheaper.

  8. Stupid is as stupid does. I never feel sorry for investors who ignore all the signs and think the money can almost be picked up off the street

    Back in the 90s (after 3+ years of 20%+ returns), polls indicated that most people expected the market to continue to advance 20% a year without end. Somehow, they do not equate market growth with profit growth.

    I feel no pity...
  9. i just bought my first home, real tiny 2 bedroom for $50k :)

    About half a mile from the big college here, will eventually rent it out when i want to upgrade.

    I'm just starting to learn about real estate investing, great time to start to learn now. you can buy cheap educational material from the idiots who are getting their heads taken off here.

    Great time to start watching the price action in your area too. I plan on buying a duplex to rent out in the next recession.
  10. The only people who are saying the real estate market has turned around are the perpetually-optimistic folks in the real estate field. Those clowns never take off their rosy-colored glasses. They're lying because things are bleak and they want to prop up sales. I wonder how many agents have had to change careers in the past year?

    There is no way this downtown is over. If anything, it has barely gotten under way. It's gonna take 8-10 years for the most bloated markets to see prices like 2005 again.
    #10     Apr 29, 2007