Wednesday, October 19, 2005

Investors flipping over second homes

The last part of the series..

Investors flipping over second homes

Prashant and Dave could have done some good by illustrating some of the current risks inherent in real estate speculation, especially today.. Unfortunately, I think they have done more harm than good by justifying the current run up in prices and almost entirely neglecting to discuss the downside risks of a reduction in value..

I read a quote like this:

"I don't see how you can lose money," he says. "You might not gain a lot, but I don't think you can lose, especially the way real estate is going."

And think to myself, "This guy is an idiot, he's ignoring any warning signs and is nothing but a stereotypical speculator looking for huge short term gains".. However, I'm sure there are plenty of people that see a quote like that in print and see it as a rationalization or even use it as support for making a dumb decision..

These articles all seem to start on the same foot, Joe Speculator making a windfall. They then move on lightly tread across some minor risk, then finish up by saying it really can't happen here.

In this case, we've got the windfall, we talk about some minor risk, point to Miami and South Florida as risky areas, and end with a note on builder non-speculation clauses in NJ (Can happen there, but certainly not here).

Prashant and Dave, sorry if I'm being hard on you guys, I do feel that you've done good work, but you've got to understand our standpoint. We've seen nothing but cheerleading from the media filled with anecdotes about easy money and little risk. The conditions that fueled the boom are radically shifting, and new buyers are facing significant financial risks, and it seems that the media is more concerned with bragging about easy money. New and first time buyers have no where to look for real market information. Agents, brokers, builders, and lenders have a vested interest in the boom continuing. The media, while attempting to be neutral on the issue, seems fixated on the easy money, further fueling the problem. Nobody seems to care about the potential downside risks except possibly the Fed, and only as of very recently. This is why I have to be the bad guy, the doom-and-gloomer. I need to emphasize the downside as strongly as everyone else emphasizes the upside. If I save one new buyer from financial disaster, I'll feel my work was worthwhile.

Caveat Emptor,


Blogger InvestorDavid said...

The bigger the hype, the bigger the fall.

Cogita Tute.

10/19/2005 09:09:00 AM  
Blogger Richie said...

"Some large builders such as Red Bank-based Hovnanian Enterprises have added provisions to pre-construction contracts that prohibit resales within the first year. Hovnanian's contracts also require flippers to return any profits to the builder."

Another very similar comparison to the dot-com era when the landlords of buildings wanted to reap profits of the dot-com IPO's and demanded stock options as part of their payment.


10/19/2005 09:17:00 AM  
Blogger grim said...

Interesting article from last week:

Lennar Florida Market Not So Sunny

Lennar, another large homebuilder, quietly eliminated the non-speculation clauses in many of it's Florida developments. This is a solid confirmation that speculators are a large part of the boom. Look for many other homebuilders to follow suit if they need to move inventory.


10/19/2005 09:32:00 AM  
Anonymous Anonymous said...

If it looks insane it is insane.

It's that simple. Let the fools and hypsters pump tyhe past and present.

Rational thinkers know this stupidty will end it bad times for amny folks levered to real estate. It alwasys happens.The masses are late to the party and it ends with a bust.

Do not bid on a house or condo.

Don't waste your time giving the seller or agent hope that they can sell.

10/19/2005 10:01:00 AM  
Blogger Richie said...

I'll tell you one thing, it was a LOT easier to sell a worthless stock for a loss, it only cost you $20 in fees.

A house? Well, atleast $3,000 in attorney and title fees... Not to mention it doesn't happen within minutes.


10/19/2005 12:27:00 PM  
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