This couple (article pasted) made a haphazard $900,000 decision to make an "investment". What would any financial planner say if someone bought $900,000 worth of a particular stock-on margin? The financial insanity and risks are just starting to become apparent. OWP http://www.sacbee.com/content/business/projects/boom/story/13993878p-14827231c.html "On a sun-scorched Saturday 18 months ago, hordes of people lined up for hours outside a sales trailer in a West Sacramento housing development. Now they're lining up to sell. The homes that sold in July 2004 have just been completed, and some owners want out. On one small street..five buyers have put their properties on the market. Three have already dropped their asking prices." "'If I had known a year later that there would be a million homes listed, I might not have bought,' said Lynette Wall, a real estate agent who helped her husband buy an $809,000 home. Now, facing a $6,000 monthly payment on a vacant house, they've put it up for sale. But there are no illusions about a big payoff; she says they're hoping to make 'a little bit of money.'" "A wintry chill has descended on the Sacramento housing market. Sales have slowed, cancellations of new-home purchases have soared, and prices in some areas are edging downward, signaling the end of an epic housing boom." "On a Saturday in July 2004, the line formed outside a sales trailer. John McConnell, an Elk Grove building contractor, waited in line with his real estate agent and future wife, Lynette Wall. Hours later they got inside the trailer and he reserved a two-story, 3,100-square-foot home. The price: $809,000." "McConnell said he and Wall originally planned to live on Woodhaven. By the time construction was completed two months ago, they'd changed their minds. The purchase was now an investment. They listed the property in early October for $885,000. Soon they dropped it to $880,000. They need $860,000 to break even, Wall said, given the closing costs they paid, the $6,000 monthly mortgage payments and a 3 percent commission to the buyer's agent." "Complicating things: competition. Four other homebuyers on the two-block street are trying to sell, including Wall's agent. And the builder is offering discounts on four other Woodhaven homes it hasn't yet sold. All told, one-fourth of the street is for sale. Wall has faith, but acknowledged she's getting uneasy. 'I knew it was going to have to slow down (but) I didn't think we would have so much inventory,' Wall said. 'I'm hoping somebody will offer me a fair deal that'll make me a little bit of money. 'At the time we all thought it was a fairly good deal,' McConnell said."
oneway pockets, those are great posts, good stories to back it up too. I don't wish any ill will on anyone, I am just glad we bargain hunted when we bought our house a couple of years ago
Thanks, this is a great one too. Left as a comment on the message board about the "900k house on margin" I posted above...OWP "Robert Coté said..." "Wall and McConnell need their brains pictured on the side of a milk carton. "Missing, presumed dead." "Let's really do the math. $809,000 in Aug 2005. Taxes to date, $2,000. Payments $18,000. Utilities, upkeep, finish work $4,000. Outstanding Mortgage and/or any downpayment $808,000. Add 3% to all of the above to the buyer's agent. To break even $857,000. Now the mortgage interest and taxes are deductible until AMT kicks in so knock off $4,000 to $853,000 but except for closing costs the difference is taxable so add back in $3,000 to actually $856,000 to break even. Is everyone's head spinning yet? Not to worry, if this stuff were easy everyone could do it. The punchline; that's if it sells immediately. This albatross is eating them literaly out of house and home to the tune of $7,500 per month. $250 per day!" "Compounding their woes is that any potential buyer sees a half dozen other identical properties and will not factor in any potential investment value, indeed can be expected to factor in potential depreciation. It gets worse, the builder is still selling -new- homes. Imagine if you will standing outside the McDonalds with a McDonalds cheeseburger trying to sell it. Tell them it is nearly new, never unwrapped cooked right in this very McDonalds and only priced 10% higher. Then things get even worse. Their agent has a spec house on the same block. Any guesses which has to sell first?" "Let's leave behind the reality and engage in a little speculation. Would anyone argue that this home in this location at this time is losing at least 1/2% per month? That's another $4,000 per month. $130 per day. So who is their customer? Someone who can afford to spend $30,000 in closing costs and $7,500 per month to lose $4,000 per month for the foreseeable future. Actually I lie. They need to find 6 people like this so that the builder and their agent/speculator competition get taken care of first. " and at the same time this news story for this same area... http://abclocal.go.com/kfsn/story?section=state&id=3737985 Real estate agents are now seeing the largest inventory of unsold homes in a decade, with the number of "For Sale" signs doubling in the past six months. Cancellations of new-home purchases soared 260 percent in the third quarter over last year, according to Hanley Wood Market Intelligence. Mortgage rates have risen above 6 percent, while banks are tightening their lending standards, especially on the riskier types of loans that helped fuel the boom. Economists worry that the economic effects of the housing slowdown will be felt across California. "It definitely worries me," said UCLA economist Ryan Ratcliff.
Well .... I really hope that things dont go where I think they are headed ..... I love california and would never wish anything bad on my friends or the state ..... but at the same time my gut has been telling me for about two years - kind of like Bob Brights indicator of a bad trade - that real estate nationwide and particularly in California and a few other places is in a speculative bubble nearing its peak. Unfortunately the speculators are often ordinary middle class people who have either taken on several properties in the belief that appreciation will save them, or have speculated on their primary residence by trading up and taking on risky loans and leverage to do so ... Part of my hedge against all this was to sell most - but not all- of my california real estate investments. The penalty for being wrong is simply a locked in gain.
Is Real Estate a House of Cards? Housing Still Has Sturdy Foundation Does all this mean that the roof will come crashing down on the housing market? No! While many fear rising rates will trigger a disaster for the real estate market, I see a housing market with a firm, concrete foundation. I believe interest rates are near their peak and that any further rise in long-term rates will be modest. And although historically low interest rates largely explain the jump in housing prices, other favorable developments also played a role. Changes in the tax code in 1998, in a best-case scenario, allow up to $500,000 of capital gains to be exempt from federal tax if realized from owner-occupied homes. This exemption gives real estate a tax advantage over other asset classes. Rising household incomes and a competitive mortgage market have also boosted housing prices. But this doesn't mean that recent gains will continue apace. In fact, prices very well may fall in markets where price speculation has been the most intense, such as parts of California and the Northeast. Such softening has already occurred in countries where the housing market was particularly strong and the central bank raised rates to prevent overheating. For example, over the past couple of years the Bank of England has raised short-term rates from 3.5 percent to 4.75 percent, and the Reserve Bank of Australia raised rates to 5.5 percent. Both countries succeeded in cooling down their super-hot housing markets, and prices have leveled off. It's logical to expect the same to happen now that the Fed has raised rates from an extraordinarily low 1 percent in early 2003 to over 4 percent today. ----------- I am shocked there were no housing crashes in jolly old England nor in Australia.
Don't you all think that it will just be area specific Take Arizona for example - 15-25 People are still showing up on fridays for lotteries to get access to the 4 lots that builder is selling every week...
I think, perhaps, you're leaving out an interesting fact on how much debt the average American consumer has versus the average Brit or Aussie. You know the three kinds of lies, right? Lies Damned Lies Statistics
http://money.cnn.com/pf/features/lists/re_growth_forecast/ It's a debate that's been raging for years, and recently that there have been clear signs of a slowdown. It's unlikely, however, that the housing market will come to a screeching halt. To get a clearer picture of how things may play out, FORTUNE turned to Moody's Economy.com and home property-valuation service Fiserv CSW. The researchers crunched numbers on the 100 largest metropolitan regions in the country, and the results of their analysis appear in the table below. Nationally, the overall outlook seems reasonable: 7 percent appreciation for 2006 and flat for 2007. But markets that have seen the greatest appreciation over the past five years appear to be vulnerable. Rank Metro Area State Median home price Projected growth 2006 Projected growth 2007 1 San Antonio TX $129,900 8.30% 7.00% 2 Jacksonville FL $164,700 8.10% 2.50% 3 El Paso TX $107,100 8.10% 7.10% 4 Little Rock-North Little Rock AR $115,700 7.80% 7.20% 5 Baton Rouge LA $133,800 7.60% 3.80% 6 Richmond VA $191,800 7.40% 3.30% 7 Virginia Beach-Norfolk-Newport News VA $193,100 7.30% 1.00% 8 Nashville-Davidson-Newport News TN $157,300 7.10% 6.70% 9 Houston-Sugar Land-Baytown TX $139,800 7.00% 6.60% 10 Memphis TN $147,600 7.00% 6.50% 11 Allentown-Bethlehem-Easton PA $247,400 6.90% 1.20% 12 Oklahoma City OK $116,900 6.90% 6.00% 13 Birmingham-Hoover AL $152,500 6.90% 5.40% 14 Albuquerque NM $166,700 6.50% 6.10% 15 Columbia SC $133,200 6.40% 5.40% 16 Fort Worth-Arlington TX $125,700 6.30% 5.00% 17 Syracuse NY $109,400 6.20% 5.40% 18 Dayton OH $116,500 6.10% 5.60% 19 McAllen-Edinburg-Mission TX $71,000 6.10% 6.20% 20 Salt Lake City UT $165,700 6.10% 3.40% 21 Austin-Round Rock TX $161,800 6.10% 5.00% 22 Tulsa OK $116,600 6.10% 6.20% 23 Pittsburgh PA $113,000 6.00% 5.00% 24 Cincinnati-Middletown OH $146,200 6.00% 6.60% 25 Albany-Schenectady-Troy NY $176,700 6.00% 4.50% 26 Dallas-Plano-Irving TX $155,500 5.90% 6.30% 27 St. Louis MO $134,900 5.80% 4.10% 28 Toledo OH $116,400 5.70% 5.00% 29 Greenville SC $141,300 5.70% 5.00% 30 Sarasota-Bradenton-Venice FL $314,300 5.60% -3.60% 31 Indianapolis IN $121,700 5.60% 5.40% 32 Wichita KS $107,200 5.50% 4.80% 33 Columbus OH $150,700 5.50% 6.00% 34 Akron OH $117,600 5.40% 5.30% 35 Buffalo-Niagara Falls NY $96,400 5.40% 5.30% 36 Knoxville TN $140,100 5.40% 5.20% 37 New Orleans-Metairie-Kenner LA $149,100 5.40% 6.60% 38 Rochester NY $111,200 5.30% 6.80% 39 Raleigh-Cary NC $183,100 5.20% 5.10% 40 Philadelphia PA $199,400 5.10% 0.50% 41 Charlotte-Gastonia-Concord NC $172,800 5.10% 5.50% 42 Louisville KY $134,800 5.00% 4.60% 43 Milwaukee-Waukesha-West Allis WI $210,900 4.80% 2.50% 44 Tampa-St. Petersburg-Clearwater FL $193,700 4.80% -0.50% 45 Greensboro-High Point NC $145,100 4.80% 5.50% 46 Kansas City MO/KS $154,600 4.70% 4.10% 47 Poughkeepsie-Newburgh-Middletown NY $265,000 4.60% 0.80% 48 Youngstown-Warren-Boardman OH $83,400 4.50% 5.30% 49 Gary IN $127,300 4.40% 3.40% 50 Cleveland-Elyria-Mentor OH $142,800 4.30% 5.10% 51 Omaha-Council Bluffs NE $136,100 4.30% 4.10% 52 Lake County, Kenosha County IL/WI $259,100 4.20% 1.90% 53 Atlanta-Sandy Springs-Marietta GA $165,300 4.20% 4.00% 54 Honolulu HI $570,400 4.00% -1.00% 55 Orlando-Kissimmee FL $226,400 3.80% -0.50% 56 Grand Rapids MI $137,300 3.60% 2.90% 57 Fort Lauderdale-Pompano Beach-Deerfield Beach FL $356,600 3.10% -4.50% 58 Springfield MA $197,900 3.00% 1.20% 59 Portland-Beaverton-Vancouver OR/WA $234,600 3.00% -0.70% 60 Baltimore-Towson MD $249,100 2.90% -0.80% 61 Tucson AZ $220,900 2.90% -4.00% 62 Camden NJ $210,800 2.70% 0.80% 63 Denver-Aurora CO $244,800 2.60% 2.50% 64 Wilmington DE $231,000 2.50% 1.70% 65 Seattle-Bellevue-Everett WA $335,500 2.50% 1.00% 66 Tacoma WA $222,700 2.30% 0.60% 67 W. Palm Beach-Boca Raton-Boynton Beach FL $386,200 2.10% -3.90% 68 Phoenix-Mesa-Scottsdale AZ $238,100 2.00% -3.70% 69 Warren-Farmington Hills-Troy MI $196,000 1.90% 0.80% 70 Washington-Arlington-Alexandria DC/VA $404,900 1.80% -3.40% 71 Hartford-West Hartford-East Hartford CT $257,600 1.80% 0.60% 72 Miami-Miami Beach-Kendall FL $343,700 1.80% -5.50% 73 Detroit-Livonia-Dearborn MI $120,100 1.60% 2.00% 74 Newark-Union NJ $407,000 1.50% -1.80% 75 New Haven-Milford CT $280,300 1.40% 0.60% 76 Worcester MA $287,800 1.30% -0.30% 77 Edison NJ $387,900 1.20% -2.90% 78 Chicago-Naperville-Joliet IL $264,900 1.10% 0.20% 79 Cambridge-Newton-Framingham MA $448,800 0.80% 0.00% 80 Minneapolis-St. Paul-Bloomington MN $234,600 0.70% 0.70% 81 Bridgeport-Stamford-Norwalk CT $472,500 0.40% -1.30% 82 New York City-White Plains-Wayne NY/NJ $504,800 0.10% -3.50% 83 San Francisco-San Mateo-Redwood City CA $766,000 0.10% -2.90% 84 Bethesda-Gaithersburg-Frederick MD $444,500 0.00% -0.50% 85 Boston-Quincy MA $422,900 -0.10% -1.40% 86 Essex County MA $380,600 -0.20% -0.70% 87 Stockton CA $423,100 -0.30% -5.90% 88 San Jose-Sunnyvale-Santa Clara CA $720,900 -0.40% -3.90% 89 Oxnard-Thousand Oaks-Ventura CA $480,300 -0.70% -5.00% 90 Oakland-Fremont-Hayward CA $651,300 -0.70% -4.40% 91 Fresno CA $340,800 -0.80% -2.80% 92 Bakersfield CA $286,300 -0.80% -3.00% 93 Providence-Fall River-New Bedford RI/MA $292,800 -1.10% -2.20% 94 Sacramento-Arden-Arcade-Roseville CA $372,900 -1.20% -5.10% 95 Los Angeles-Long Beach-Glendale CA $412,900 -1.60% -6.30% 96 Nassau-Suffolk counties NY $461,300 -2.00% -4.20% 97 Riverside-San Bernardino-Ontario CA $362,800 -2.60% -6.80% 98 Santa Ana-Anaheim-Irvine CA $682,300 -3.10% -6.10% 99 San Diego-Carlsbad-San Marcos CA $598,700 -3.40% -5.70% 100 Las Vegas-Paradise NV $296,000 -7.90% -5.00%
Well, I certainly hope you are right. However my concern is the extreme disconnect that has occured between the cost of housing and wages and compensation in some geographic areas. There is no way easy way to fix this problem: the only logical solution is that prices will re-equilibrate once the speculative momentum leaves the market. Moreover these paper gains have been an important factor in the economy. Once removed, the economy will take a hit - although probably not a serious one since other factors have improved recently. A lot of effort and capital has been poured into real estate over the last 10-15 years rather than into innovation driving the formation of new industries and companies - a further issue in the US economy.
While I am well aware the price of San Diego homes may be dropping or about to drop. Those charts are some of the dumbest charts I have ever seen. Price of homes divided by income. They use the same chart in Florida. Anyone see the fallacious concept. People retire to these places. These are the places people want to live when they cash out. Compare an income to price stat for Florida to Income to Price stat for Detroit seven years ago. Now would anyone with half a brain not expect a "multiple expansion" in Florida as the baby boom starts to cash out up north and move to Florida. In fact that you would expect the Detroit side to contract wouldn't you.