007, Your friend has guts. All you need is for the FED to stop propping up T Bills and you can't close. But it is a good scheme because the deposit is tied to qualifying. You are playing the very top of the market and you must be nimble. Woe to those who don't see it and foolishly close. The danger lies in the builder doing the lending. Because you will qualify with the builder because he is loaning Bond money (someone else's money). Then you lose your deposit if you smartly back out. Like a stock option. Not too bad a risk to reward. But overall, when you read about scams and too high appraisals that is the end of the game. There is no need for those things in a healthy market. IMO, the only way to balance the nation's books is to raise taxes very high (won't happen) or tax the people on their assets in a round about way and reduce liabilities like mortgage and credit card debt. Since most of the nation's private assets lie in RE equity, it makes sense the books will get balanced by applying that equity to the debt. An indirect tax. I would assume mortgage and credit card debt must be reduced thru bankruptcies. This involves understanding the need for balanced books and a knowledge of double entry accounting. There is no free lunch. The books must be balanced. Please understand I'm reaching a little here because my double entry knowledge is from awhile back. I do understand that the result of assets to liabilities must be close to 0 to be healthy and a good risk for those willing to buy the nation's debt insturments at such low int. rates. Maybe an accountant could help on this? Avg. reading ability in the US is now 5th grade. We are not a nation of geniuses. Get our news thru Sex in the City and Reality Shows.
I am an American living in Warsaw. I have bought a few properties over the past few years in Warsaw. IMO, the market is not red hot ( not if you want to buy below market). Email me if you want me to look into anything for you. Thanks. P.S. Not that anyone should care but this was my first post on ET.
hehehe....what a disaster. I'll wait to buy from your friends for 40 cnts on the dollar. someone will always hold the bag.
I am a full time real estate investor and developer with over 30 years experience. Early last year, I was approached by a representative of a very wealthy southern family, and asked to write them a letter about their portfolio of properties. I decided to write the letter in the form of an article, perhaps later to be expanded to book length. As it happened,, events took over, and I was asked to be President of their investment company before I could finish the article. Here is the fragment. SURFING THE CYCLE GET RICH AS A ROCK STAR IN REAL ESTATE By cache22 April 2004 INTRODUCTION In spite of the somewhat frivolous title, Iâm entirely serious in saying that there is a proven method of real state investing which not only yields extraordinary returns, but also guides the investor into purchasing the right property, in the right location, at a bargain price, with relatively low risk by timing purchases and sales according to the real estate cycle. I have used this understanding to make over xxxxxx for myself, and therefore this letter is the product of a practitioner, rather than a theorist. Nevertheless, Iâm small potatoes compared to Sam Zell, who used these same methods to become Americaâs largest property owner, and one of its wealthiest citizens. Additionally, this approach has a strong resemblance to Warren Buffetâs approach to stock investing: buy below intrinsic value and draw very strong cash flow for a long period of time while waiting for great capital appreciation. Iâm sure you were expecting me to recommend selling property A, exchanging property B, and refinancing property C, etc. These tactical decisions will be much easier to make, and much more timely, if first you have an understanding of how a particular decision fits into broad strategic goals. Then the tactical decisions become a lot more obvious, and relatively easy to make. In the remainder of this letter, I will state the â strategic ruleâ, explain in detail the components of the rule along with some real life examples, and then modify the rule somewhat to magnify the returns. Iâm confident that a person can multiply his wealth by a factor of at least ten over a period of twenty-five years by following this method. Finally, as you requested, I will analyze your real estate portfolio, and make specific recommendations for each property. THE REAL ESTATE CYCLE 1). EXPANSION Strong levels of new construction, rising occupancies, sales above reproduction costs. 2). OVERSUPPLY Construction continues, rents level off. Occupancies begin to decrease, and rates of fill-up decline. Investors are plentiful. 3). RECESSION No new construction, however completions keep coming on line, adding to the oversupply. Occupancy and rents fall as the market struggles to absorb the oversupply. Sales are at levels below reproduction costs. No new construction, however completions keep coming on line, adding to the oversupply. Occupancy and rents fall as the market struggles to absorb the oversupply. Sales are at levels below reproduction costs. 4). RECOVERY No new construction. Occupancies and rents rise. Investors scarce. My impression is that we are at the tail end of stage 2, heading into stage 3. Any project started now would have to weather the storm, and just as it is ready for the permanent loan, interest rates could be significantly higher. For a developer, this is life threatening. STRATEGIC RULE 1). Invest in a demographically long wave bidding for a restricted supply of real estate. 2). Within that long wave there is the âreal estate cycleâ (expansion, oversupply, recession, recovery). You should invest only during the recovery phase, when there is very little new construction, occupancies and rents are rising, investors and lenders are scarce, and bargains are plentiful. The classic example of the long wave is the steady migration to Southern California beginning right after World War II. Trapped as it is between the mountains and the Pacific Ocean, the coastal area between Los Angeles and San Diego has experienced a tremendous increase in real estate values due to a) the long demographic wave, and b) ever increasing governmental zoning, planning, and environmental restrictions, which have had the effect of âshrinkingâ the amount of available real estate. The result of these two factors has pushed values to undreamed of levels. Nevertheless, California isnât immune to the real estate cycle. In 1974 California real estate was in a moderately serious recession, just starting to revive. There was a great deal of real estate available at bargain prices. Lenders had virtually abandoned lending on real estate. It was at this moment that I purchased 70 houses in Orange County, which I held for approximately 20 years. This was a wonderful investment, from which I made several million dollars, and the primary reason was that the long wave remained intact, and prices not only recovered, but also increased very significantly during the time I held them. An added bonus, analogous to the current economic situation is that within a year of purchase, the full effects of Lyndon Johnsonâs âguns and butterâ policy hit, and rents went up at 2.5% per month for over two years. The point Iâm making is that the purchase was significantly below reproduction costs. That is the key. I will more fully develop this thought later on. In the early eighties, Houston real estate was in great distress, and values had dropped by about 25%. That is when I relocated my business from California to Houston. We spent over two years looking, and waiting for strong indications of a recovery. Since there was virtually no known methodology for determining for certain that a recovery had established itself, I devised my own. Part of it was to get information on commercial electrical connections from Houston Light & Power (HL&P). I put them on a graph. During this time, although my indicators showed no strong recovery, people from all over the world were descending on Houston, and buying properties at discounts from reproduction costs of about 25%. I didnât buy, which was a good thing, because just as all the new money was in place, and the escrows had all closed, the ârealâ decline set in, sweeping all of the new money back into foreclosure. Property values declined an additional 25%. It wasnât until April of 1988 that all of my indicators showed a strong, sustained recovery in the Houston market. That is when I started buying. One of the purchases was a large industrial park, which I bought for $2,200,000, with only $350,000 down. Since then the value of the property has increased to about $6,000,000, and rents have gone up by over $50,000 per month. Take a good look at that last number, because it illustrates the power of the concept. On an investment of $350,000, we have received several million dollars of cash flow, and the value of our equity has been multiplied by ten. The key to this investment, once again was buying below reproduction cost. The reason buying below reproduction cost is so effective is that until the market recovers, and prices rise to reproduction costs, virtually nothing will be built; therefore markets over time regain their equilibrium. In Texas, we are rapidly approaching a situation where lots of property will be available at bargain prices. I anticipate the decline to start with housing, and then spread to all real estate asset classes which are overbuilt, which is to say, virtually all of them. In Austin, which was, and one day will return to being one of the best âgrowth citiesâ, there are over 9000 houses for sale, with prices starting to decline, and forclosures escalating. Dallas is much the same story. Other real estate types, such as multi-family, mini-storage, industrial, and retail, are similarly overbuilt. This is not caused by any unusual economic distress, but rather the opposite, âirrational exhuberenceâ. Texas is pro-growth, and tends to build far in excess of the demand. Thatâs just Texas, and that is our opportunity. Real estate cycles come about every seven to ten years. Some are big swings, and some are small, but the real estate cycle is operative everywhere, and at all times. When interest rates are low, occupancies high, and rents are increasing, the cycle begins. When interest rates increase, and occupancies and rents are falling, the cycle ends.
In five years, today's ARMs may drown housing market 08:53 PM CDT on Sunday, October 10, 2004 By DANIELLE DiMARTINO / The Dallas Morning News http://www.dallasnews.com/sharedcon.../ddimartino/stories/101104dnbusdimartino.d... How risky is your mortgage? Most people think of a home purchase as a smart, stable investment. But hundreds of thousands of Americans may be setting themselves up for big losses. According to the latest Mortgage Bankers Association report, the share of adjustable-rate mortgages ticked up last week to 34 percent of new mortgages â this at a time when interest rates are near historic lows. And a tidbit in The Wall Street Journal last week said that more than one in 10 new mortgages is interest-only, in which the borrower can delay principal payments for five or 10 years. Throw in a little insult: The article said these interest-only loans were "typically" adjustables and are being aggressively hawked to subprime borrowers. I was so disturbed by this that I asked Craig Jarrell, president of Pulaski Mortgage in Dallas, to walk me through a scenario in which a borrower took out one of these "hybrid" loans to purchase a $200,000 home. Let's look at a five-year, interest-only, adjustable-rate mortgage, with no down payment â not atypical these days, unfortunately. The mortgage rate on such a loan, if taken out today, would be about 5.25 percent. After five years, principal payments kick in, and the loan's interest rate moves up or down with the market. Mr. Jarrell crunched the numbers. The lucky borrower walks away with an initial mortgage payment of $875. That's a lot of house for very little money! At least that's how I imagine the spiel. The next assumption is based on a conservative look into the future. Let's say five years from now, mortgage rates are at 7.5 percent, their average over the last 10 years. The last time they were so "high" was 1997. An economic recovery could get us there. Or foreign banks could stop subsidizing our Treasury market, triggering a decline in the dollar and a rise in interest rates. The point is, interest rates are so low that either a good or bad economy could produce higher rates in the next five years. What's inconceivable is that rates fall materially from today's levels. At the higher interest rate, after the five-year interest-rate lock is released and the principal begins to be amortized, the payment almost doubles, to $1,436. (This is excluding property taxes and insurance.) Obviously, the situation unravels further if interest rates rise further. The mortgage brokers who push these products, and who question my intelligence and/or motives via e-mail every time I write about them, say the loans are perfect for people who plan to be in their house less than five years. But if the hordes of people taking out these hybrid loans stick to the game plan, we'll be witness to a flooded market five years from now. If the one in three borrowers taking out plain-vanilla adjustables joins the party, it'll be a drowned market. "What's going to happen in five years if everyone goes to sell their home, if their home's value hasn't risen and if their income is the same? There are just too many 'what ifs' that could go wrong," Mr. Jarrell said. "The honeymoon would be over, and no one would be going anywhere." If you've purchased one of these loans, your mortgage payment could double or, if you can't deal with that, you could be forced to sell your house at a loss. Of course, you can be optimistic if you want. Surely all the other borrowers in your shoes plan on staying in their home for the full 30 years. That way, you'll be free to sell into a strong market.
...cache, sometimes when someone writes something with their 1st post, i get a little skeptical because usually because they have some agenda. your post was excellent! everyone in this thread should thank you for such thorough and genuine advice/analysis. Excellent.
So its inconceivable rates can go lower. I bet the Japanese said the same thing in the early 90's. Its been awhile since deflation hit the US.
Speaking of interest rates, how reliable is a flattened/near-inverted yield curve in forecasting an economic downturn?