Real Estate death spiral - how best to profit?

Discussion in 'Economics' started by Cutten, Oct 28, 2006.

  1. Cutten


    In mid 2000 when it was obvious that dotcoms were entering a secular bear market the likes of which had not been seen in a generation, I drew up a list of the few dotcoms I thought would be "blue chip" survivors. My plan was to wait for the ultimate lows after the tech crash, and pick up these companies for peanuts when they were down 90%+ from their highs. My list included Amazon, Yahoo, Ebay etc. Most of the companies on the list indeed became genuinely cheap in the late 2001-2002 period, although one or two (e.g. Ebay) held up much more than I expected. Unfortunately I slacked off on the investment of my work, since my daytrading was making far more money for very low risk due to the insane volatility of that period. Although I did buy some of those stocks, I never put down the serious size bets that could have netted a fortune over the next 3-4 years, and I ended up selling way too soon. The idea was spot on but the implementation and follow-through was lacking.

    Fast forward to late 2006, and premium US real estate (e.g. prime California, Miami beachfront etc) is currently experiencing the early stages of a once in a generation secular bear market. It is my conviction that prime properties that were at the forefront of the real estate bull market, will fall 50% and possibly 75-80% in the most extreme cases. The quesiton then is how best to profit from this?

    Let's look ahead, say 3 years out. Imagine the bear view is proven correct - real estate is in the doldrums after the worst bear market since the early 90s or even the Great Depression. Prime lots lie empty for 6-12 months or even more. Bids of 20-30% below asking prices are standard practise. More marginal lots don't even get a single enquiry all year. Foreclosures are rampant. In that environment, what should one do? Wouldn't this be a once in a lifetime opportunity to acquire prime real estate at incredible bargain prices? Where, and what, would you be looking to buy, if you had sufficient spare cash lying around?

    As for the stockmarket sectors affected - homebuilders are already way way off their highs. However, the same was true of tech stocks at the end of 2000. Techs fell massively, 80-99% depending on the stock, yet they also had several periods of 30%+ rallies during the 3 year bear market. I would imagine homebuilders could follow a similar pattern. The market is pricing in a major housing slowdown. It is not pricing in an out and out collapse. So, if people feel the worries are overblown, and we get a decent homebuilder rally, that could offer an ideal opportunity to short and/or buy long-dated puts to play for a further collapse. The key thing to remember is that all lengthy bear markets have sucker rallies - one must anticipate this and use it to put on new short-side exposure, rather than get blindsided, or even worse, assume it heralds the end of the bear.

    Any thoughts?
  2. The only time that I ever saw prime properties drop in price was when loan interest rates topped 8%. I was offered ocean front lots for $12,000.00. Only one problem. I didn't have the cash to buy one. :D
  3. monee


    Make sure you are in the best financial shape possible to buy properties after prices have been beaten down.

    This would mean check your credit and if you have any unpaid bills or judgements on your credit report clean them up.

    Wait awhile and make sure they are removed or marked paid for bills and satisfied for judgements.

    Call the creditors to get them removed once they are paid if they still remain on there.

    Call the credit bureaus and start the procedure to get them removed if they are paid and still remain on your credit report or if any mistaken negative information exists on your credit history.

    If you have any car loans and the cars value is still decent sell the car pay off the loan and buy a used car.

    The car loan will make you qualify for a lower mortgage.

    If you have any closed credit card accounts with a balance pay them off .... they will kill your FICO score.

    We shall see what happens to the Real Estate mkt

    I'm curious to see what happens with rents.
    I read somewhere Manhattan apartment rents have gone up 15% in the last year.

    If rents do go up while the prices of homes are dropping what does this mean for apartment building prices.
  4. monee


    Oceanfront lots for 12k?

    Curious as to the state and the year.
  5. North carolina outer banks. Year about late 1970's. At the time they previously had been selling for 25 to 30K. Banks didn't lend money on ocean front lots. You needed cash to buy one.
  6. October Surprise: No Bottom in Housing
    in Economy | Markets | Real Estate
    Barron's Alan Abelson cites research by Merrill Lynch's David Rosenberg regarding the recent "stabilization" in Housing. It turns out that the only thing which is stabilizing is inventory -- but at extremely high levels.

    To get inventory numbers down to a balance between supply and demand requires a 10% drop in home prices (and hence, more sales), and a 20-25% drop in new Home Starts.

    Here are the details:

    "In truth, the big October Surprise that the conspiratorial crew anticipated so anxiously is that there was no October Surprise. Unless you count the really punk showing of the economy in the third quarter disclosed last week, with GDP limping to a 1.6% annual gain, the worst performance since the first quarter of 2003, when the recovery from recession was still trying to find its legs. Even with its demonstrated ineptitude, though, it's hard to see the administration conspiring to engineer 1.6% growth.

    Merrill Lynch's David Rosenberg nailed the GDP figure when the consensus among the soothsayers on the Street ran to 2.3% and some of the more exuberant types were forecasting 3%.

    The incredibly shrinking housing market is unmistakably beginning to exert a vicious drag on the economy as a whole. And that's despite the uptick in the housing stocks, buoyed by talk that the sharp decline in home sales is beginning to bottom out. The talk, it should be noted, comes from analysts desperate to see some signs of life in their group and realtors who are starting to worry about meeting their next mortgage payments. (They couldn't help themselves: They weren't able to resist the lure of adjustable-rate mortgages.)

    We imagine neither bunch drew much comfort from the news that prices of existing homes in September suffered their biggest fall in 35 years. October, we're afraid, has been more of the sae.

    For his part, David Rosenberg isn't buying the notion of a bottom in housing. He points out that existing house sales last month sank to their lowest level since January '04 and over the past six months have plunged at a 20% annual rate. Only seven times in the past four decades have prices absorbed that sort of pounding and, significantly, in five of those instance, the economy really took it on the chin.

    At best, David says without enormous conviction, the inventory of unsold homes and condos up for resale may be stabilizing -- but at awesomely high levels. At last tally, backlogs of houses for sale weighed in at 7.1 months for single- family homes and 8.6 months for condos, a striking 60% higher than the level a year ago. And he points out that if "the inventory situation was truly a good- news story, then home prices wouldn't still be falling." Sounds eminently logical to us...

    To judge by past housing cycles, to get to a reasonable balance between supply and demand, he believes, will require at least a 10% drop in home sales and prices and 20%-25% fewer housing starts. Declines of that magnitude, he reckons, would nick the consumer's balance sheet by something between $2.2 trillion and $4.5 trillion. That's "t" as in trillion.

    Pretty gruesome prospect. And no small reason why we see a recession looming next year." (emphasis added)

    One last tidbit -- Rosenberg also makes the obvservation that the vast majority of the 10 million households that bought an existing home since June 2005 are now underwater on their purchases.

    What are the repurcussions of this? If you can afford to stay put, then none. Make your payments, and you will eventually be fine.

    In the event of a sale, they take a small hit, perhaps losing some (or all) of what they put down to make the purchase. If they did a no money down, they may not be able to sell the house themselves, as they won't be able to transfer title with a post-sale balance on the existing mortgage. That only happens if a house sells for less than the mortgage price.

    The real problem is with those 37% or so of buyers who used variable APRs and/or the Interest Only (I/O) mortgages. As the market value of the asset comes down, they may not have sufficient equity in the property to do a refinance or a conversion from I/O or APR to a traditional 30 year fixed.

    Both of the above examples are why we are seeing an ongoing increase in foreclosures.

    Pretty gruesome, indeed.
  7. jmccain


    If you want to make money in real estate NOW then the easiest way is to travel back in time anywhere between 2000-2005 (that's 5 years of prime money making opportunity), buy some nice rental property and then wait for rents to rise as interest rates do.

    But seriously, you could always get a foreclosure (hope your a handy person though), if you can make it cashflow, but the time for flipping is gone for now. You'll have to hold on to it for awhile, however finding renters should get easier since everyone is affraid of buying right now.
  8. nkhoi


    zow! who would have though microstratergy makes such a come back

    Date Open High Low Close Volume Adj Close
    27-Oct-06 115.00 122.32 114.60 120.19 659,800 120.19
    8-Aug-02 5.86 6.65 5.85 6.57 116,700 6.57
    7-Aug-02 5.49 5.98 5.40 5.85 132,100 5.85
    6-Aug-02 5.30 5.50 5.26 5.50 118,000 5.50
    5-Aug-02 5.24 5.50 5.06 5.27 123,100 5.27
    2-Aug-02 6.29 6.32 4.76 5.48 218,400 5.48
    1-Aug-02 6.89 7.00 6.30 6.37 179,300 6.37
    31-Jul-02 5.75 7.10 5.49 6.75 335,300 6.75
    31-Jul-02 1 : 10 Stock Split
    30-Jul-02 0.48 0.50 0.45 0.48 125,200 4.80
    29-Jul-02 0.47 0.49 0.44 0.48 49,500 4.80
    26-Jul-02 0.45 0.48 0.44 0.45 37,800 4.50

    could real estate match this kind of return?
  9. MaxLD


    The opportunities are certainly there. I was able to sell a property this spring, before the meltdown began. There was no "flipping" involved though. It turned out to be a 2 year long project (doing it ALL myself). I consider myself lucky to have gotten out while I could still command my asking price. I'm VERY hesitant to try something like that again just now. The thought of having a renter undoing all of my hard work gives me a chill.

    Prices here in N California seem to found a about 8% from their highs. My realtor friends tell me that sales are picking up. This is the time of year when things tend to taper off seasonally so I take this as a positive. I think I'll stand by the sidelines and continue to watch for now.
  10. [27-Oct-06 115.00 122.32 114.60 120.19 659,800 120.19
    8-Aug-02 5.86 6.65 5.85 6.57 116,700 6.57
    7-Aug-02 5.49 5.98 5.40 5.85 132,100 5.85
    6-Aug-02 5.30 5.50 5.26 5.50 118,000 5.50
    5-Aug-02 5.24 5.50 5.06 5.27 123,100 5.27
    2-Aug-02 6.29 6.32 4.76 5.48 218,400 5.48
    1-Aug-02 6.89 7.00 6.30 6.37 179,300 6.37
    31-Jul-02 5.75 7.10 5.49 6.75 335,300 6.75
    31-Jul-02 1 : 10 Stock Split
    30-Jul-02 0.48 0.50 0.45 0.48 125,200 4.80
    29-Jul-02 0.47 0.49 0.44 0.48 49,500 4.80
    26-Jul-02 0.45 0.48 0.44 0.45 37,800 4.50

    could real estate match this kind of return? [/B][/QUOTE]

    Bubbles aren't that hard to make. We have had 2 huge ones in the last 6 years in the U.S. alone. Just wait until this RE bubble reaches capitulation and then despondency. Watch for the central bank to open up money supply .Then start buying. Borrow all you can get with truths and lies. Buy some more. Then get out when your brother in law starts bragging about his dealings.
    #10     Oct 28, 2006