Time To Rethink Those Real Estate "Investments"
From the Wall Street Journal (Thanks to chicagofinance for the link):
When to Sell an Investment Property In a Cooling Market for Real Estate
It's time to skip town.
As many real-estate markets soften, speculators are finding they can't flip their investment properties for a quick gain. That leaves them with a tough decision: Should they hang on and rent or should they bail out, possibly at a loss?
Got caught up in the real-estate fever? Let's start with the painfully obvious: If you have no choice but to sell, then you ought to sell -- and you should probably sell quickly.
To find out if you're in the "no choice" camp, simply run the numbers. Take the rental income on your investment property and subtract your costs, including the mortgage, property taxes, insurance and maintenance. If the house or condominium is a sizable cash drain and there's no way you can keep covering the shortfall, you've clearly got a problem.
...
And don't kid yourself: If you have a cash-flow problem now, it could get a lot worse. What if you have trouble finding tenants, or your tenants stiff you on the rent? If the property is already a cash drain, imagine how grim things could get without any rental income coming in.
...
True, the property market could perk up again, allowing you to unload at a profit. But that doesn't look likely. Chris Mayer, a real-estate professor at Columbia University's business school, notes that home sales are slowing. That usually foretells a period of stagnant or falling house prices.
...
Indeed, this reluctance to sell at a loss helps explain why a slowdown in home sales typically precedes a price decline. Homeowners have a target selling price -- it might be the price they paid, or the price they could have got at the market peak -- and they initially refuse to accept anything less.
But waiting to "get even, then get out" could be a huge mistake. Not only will you have to cope with the property's monthly cash drain, but also you could be hit with leveraged losses. If you bought that Florida condo with 5% down, all it takes is a 5% price decline to wipe out your equity.
"When prices start to fall, they usually continue to fall for a while," Prof. Mayer warns. "You want to be aggressive in setting a price that allows the property to sell, rather than slowly lowering your asking price and following the market down."
Caveat Emptor!
Grim
When to Sell an Investment Property In a Cooling Market for Real Estate
It's time to skip town.
As many real-estate markets soften, speculators are finding they can't flip their investment properties for a quick gain. That leaves them with a tough decision: Should they hang on and rent or should they bail out, possibly at a loss?
Got caught up in the real-estate fever? Let's start with the painfully obvious: If you have no choice but to sell, then you ought to sell -- and you should probably sell quickly.
To find out if you're in the "no choice" camp, simply run the numbers. Take the rental income on your investment property and subtract your costs, including the mortgage, property taxes, insurance and maintenance. If the house or condominium is a sizable cash drain and there's no way you can keep covering the shortfall, you've clearly got a problem.
...
And don't kid yourself: If you have a cash-flow problem now, it could get a lot worse. What if you have trouble finding tenants, or your tenants stiff you on the rent? If the property is already a cash drain, imagine how grim things could get without any rental income coming in.
...
True, the property market could perk up again, allowing you to unload at a profit. But that doesn't look likely. Chris Mayer, a real-estate professor at Columbia University's business school, notes that home sales are slowing. That usually foretells a period of stagnant or falling house prices.
...
Indeed, this reluctance to sell at a loss helps explain why a slowdown in home sales typically precedes a price decline. Homeowners have a target selling price -- it might be the price they paid, or the price they could have got at the market peak -- and they initially refuse to accept anything less.
But waiting to "get even, then get out" could be a huge mistake. Not only will you have to cope with the property's monthly cash drain, but also you could be hit with leveraged losses. If you bought that Florida condo with 5% down, all it takes is a 5% price decline to wipe out your equity.
"When prices start to fall, they usually continue to fall for a while," Prof. Mayer warns. "You want to be aggressive in setting a price that allows the property to sell, rather than slowly lowering your asking price and following the market down."
Caveat Emptor!
Grim
27 Comments:
A bit surprised this one came from the Wall Street Journal.
grim
The Ten at 5% - we are right there...........................ahh
By the way - there is MUCH pent up demand at 5%. We will need a cannon to sell off through that level.
Not sure what the big deal is... there was bubbletalk in the WSJ back in 2002.
The Dangers of Buying At the Top of a Bubble
WSJ, June 26, 2002
http://homes.wsj.com/buysell/markettrends/20020626-cullen.html
Who would of thought that you didn't need any assets to buy 5 homes back then.
Or that the RE industry would promote risky gimmicky loans to anyone with a pulse or could nod their head.
Skeptic you are so right!
chicago,
I'd love to get your thoughts on this one..
Global economy faces asset price fall-Greenspan
Former Federal Reserve Chairman Alan Greenspan warned on Wednesday a global glut in liquidity would result in a fall in asset prices.
...
He said the market value of assets worldwide had been rising faster than nominal gross domestic product globally due to a decline in real long-term interest rates over the years and a significant fall in real equity premiums.
"A good part of this expansion is a direct function of the decline in real equity premiums," Greenspan said. "That cannot go on indefinitely."
He said asset prices would begin to fall, but did not predict when that would happen.
"I am reasonably certain that what we are looking at today is an abnormal situation," he said.
-grim
"Irrational exhuberance" was so much more eloquent than "abnormal situation".
grim
Greenspan is a phoney baloney. He made this entire mess and took off right before the collapse.
the nerve of this monkey to say this NOW!
Global economy faces asset price fall-Greenspan
grim:
His speech was in an international venue, so most of his comments were directed at Asian investors, whether in Korea, China, India, or other emerging market investors such as those focused on Brazil and Russia. In many instances these economies have experienced a sustained period of hyper-growth, especially in the stock markets.
The best illustration I can give of the described effect is to profile behavior.
Many of the governments of these countries have bought U.S. Treasuries, because they are widely considered the safest and most liquid place to park cash. We have seen Treasury interest rates at generational lows [abnormal situation]. Our Ten should be at 6%-7% at this juncture.
Now consider the direct consequences of all of this cash and low interest rates - MORE INVESTMENT - MORE BORROWING.
More money to be put to work in the world. More money chasing a finite [ostensibly] number of opportunities. Therefore, prices increase.
If you consider a simple equation [I'm making this up]
PRICE = REAL NET ASSET VALUE - RISK
[people are going to shoot me for this pathetic mess, anyway]
As you keep running up the price, the real value doesn't change dramatically (for argument's sake), so the discount for RISK gets smaller and smaller. RISK, in all its forms, is smallest in developed economies with liquid markets. You must compensate yourself for greater risk in emerging economies by paying lower prices. It's obvious that people have failed to demand such discipline.
It's difficult to manage this situation. Liken it to being an Internet Stock fund portfolio manager in 1999. You know that these investments are horribly overpriced, but every day, more and more money is wired into your fund by investors, and they are not paying you to hold cash. You have to put it to work.
OK - I want to make sure I see Pedro versus the Nationals tonight. I want Guillen pegged in the back.
chicago
Banking & Finance
Greenspan: adjustable mortgages can save $
Dallas Business Journal - March 12, 2004by William Hoffman
Print this Article Email this Article Reprints RSS Feeds Most Viewed Most Emailed
In an uncharacteristically intelligible address Feb. 23 to the Credit Union National Association Governmental Affairs Conference in Washington, D.C., Federal Reserve Chairman Alan Greenspan lamented that American homebuyers are willing to pay higher fees and an interest premium in exchange for rate predictability and the right to refinance.
This, the Fed chief continued, despite Fed research suggesting Americans could have saved tens of thousands of dollars if they’d financed their home purchases during the past decade with adjustable-rate mortgages.
and the Monket told fool bagholders to use arms at the interest rate bottom.
Another consideration is that many towns are now starting to do reassessments looking for more income. So while it may seem like these "investors" may only have to add a few hundred a month to keep their investment afloat, it may be alot more. Look at Maplewood and Chatham which have basically doubled their residents taxes in the last three years.
I found this on:
http://www.housingbubblecasualty.com/
It's great site almost as good as yours Grim...lol
"...I happened to be in the LA area a week or so ago and I was scrolling through the radio stations and I came across 102.7 where Ryan Seacrest has a morning show. Part of his show is this little girl called Ali who calls people up and asks them questions. If you have heard it, you know what I’m talking about, if not…just trust me, it can be hilarious. I happened to tune in to catch little Ali calling a real estate agent and she asked about a ‘housing bubble’. The realtor assured little Ali that the housing bubble is a ‘myth’. Little Ali said “like Bigfoot” and the realtor said exactly.
Sorry, but if that is the case, then Bigfoot IS real…and has been doing more steroids than Barry Bonds."
There is no bubble... Housing was grossly undervalued in the late 1990s. The mentality of NJers and NYers has changed. People have bought into the idea that a house is only for the established (those who have saved for 5, 7 10 years or more) or the wealthy. We simply have to live with the fact that NJ/NY is now a place where only 2 income families can own homes. I'm not happy about this by any means, but I think we may be kidding ourselves by hoping for price decreases so we can finally afford that crumbling shack next to the train tracks.
Alright, those arguments won't cut it... let's say there is a housing bubble. You're still getting ripped off. Pile on top of the inaffordability of housing... the climbing taxes on property, income etc, the continually aging infrastructure, the corruption in government, the poor weather, and it should become painfully obvious that even if the housing prices did drop 30%, then you are still being cheated. Whether I'm paying 500k for that 1950s dump or $350k, it is still a bum deal when you could afford something at least two times newer and at least twice its size (both in sq footage and lot) in other parts of the country.
Look, I don't want to start a whole NJ bashing/defending string here. If you like the culture of NY, or the "better" education or the Pizza or the Yankees or whatever, or you are tied to family here, that's great. But, if that's the case, then stop complaining and accept the fact that you will pay a serious premium (again, even if you do get the 30% drop) to do so. There are too many people who are tied to this area for the same reason and, if I have learned anything about you NJ folks in my short time here thus far, it is that you are persistent in getting what you want. You want a house in a nice area, too bad, so do 22 million other stubborn folks who live in the metropolitan area and aren't leaving in droves any time soon. (I know, I know, I've seen the census statistics, but I'm not convinced.)
With all the economics degrees (said with NO sarcasm) on this blog, we ought to be able to figure out that living in NNJ, as a financial choice, is not economically sound. Yes, there are some jobs which you cannot get anywhere else (Wall Street, international jobs ets). But, for the people whose occupations transcend the NNJ area, I have little sympathy for complaints about the lack of affordable housing. You love this area so much? Empty those pockets... for your house, for your jug of milk, for the taxes, for the tolls OR for the Yankees and pizza and good education.
Maybe someone out there can collect data on how much more inexpensive it is to live in other parts of the country. Maybe I should start a blog called "NJ is a ripoff," and just post the comparable properties in Charlotte or Pheonix or anywhere as compared to the $1 million dumps (2 feet from the next dump) being sold up here.
Sorry forgot to sign the last post
Signed,
Cranky Old Man
Anon 11:06, aka, Cranky Old Man:
I believe there is a bubble, even in Northern NJ. However, I agree with everything else you said.
My significant other and I renting in Bergen County, content to see where all this goes. The ONLY factor strong enough to keep us here is staying close to our families. Family not withstanding, we'd be out of the Northeast in a heartbeat.
Having said that, if prices don't swing back our way in NJ, we'll still have to leave. It's been an extremely difficult thing to come to grips with. In a good year our combined income maxes out at around $115k, and we're not about to commit 40% of our gross monthly income to a mortgage and property tax.
Maybe I should start a blog called "NJ is a ripoff," and just post the comparable properties in Charlotte or Pheonix or anywhere...
I wish you would - I for one would read it.
I'd like to address a misconception that is starting to become quite common around here.
The misconception is that readers of this blog can not afford to live here.
While it may be the case for some, it is, most certainly, not the case for all.
I'll attest to the fact that many of my readers would be able to purchase a home today, and do it quite comfortably with very large downpayments and even 15 year fixed-rate mortgages.
Just because we can afford it, doesn't mean we that we're going to waste our money on a losing investment.
Some here are content to rent homes or apartments. And I'm not talking about dank dark 1 bedroom apartments in some godforsaken corner of the state. I personally know a handful of readers here that are perfectly content to pay rents in the $5,000/mo+ range. Even rents on the high end are a bargain in comparison to the purchase price.
Believe me when I say the average reader of this blog is very well off. It's not about affordability, it's about wise investments.
grim
I agree grim. i have about $500K in savings outside my retirement accounts and am not about to fork it over to some slug that made 100% on their house in last 5 years and probably cannot afford it now.
They ain't gett'en my money.
I agree with Grim. My wife and I can afford a NNJ home, but we choose not to buy in this inflated market. Buffet says that the worst reason to buy any asset is because the price is going up. We purchased in 1998, sold in 2005 and are waiting until approx 2008 to reenter the market. In the mean time, we are saving thousands of dollars each month, have over 350k in cash tied up in CDs and are waiting until the market settles down. It's a matter of value, not affordability. There is a vast difference.
Cranky here, first let me say that I've thoroughly enjoyed this website since around December. Great website. But Grim, your post about the affluence of your readers was disheartening.
If this blog is less about affordability and more about rich people not wanting to feel like they are on the raw end of a deal, then I have NO sympathy and suddenly this website becomes substantially less appealing. If you can afford $5k a month in rent, then your complaints here are not only out of place, but insulting to those people who are struggling to afford starter homes. It almost seems selfish.
I think those of you who can afford $5k a month in rent, and are still banking savings should take a good, long, hard look at what you are wishing for (30% price correction would be bad for EVERYONE in NNJ) and compare that with you wanting to save money on a house. Yeah, now that is sounding pretty selfish.
Grim said "believe me when I say many of the readers here are very well off." All of the sudden this looks less like young families wanting to buy their first house to have a nice place to raise their children and MORE like rich, privileged kids complaining about a market that was good for the average person... and their jealous. I'm not real sure that I want to be reading this blog anymore. Nothing personal, but your post puts this blog into perspective. It sure ain't my perspective.
Good luck out there, and make sure no greedy retiree or single mother steals your half a million dollar nest egg.
And the homeowners are the greedy ones.
My intentions were to stop the childish name calling and insults. I'm starting to get sick of hearing about "bitter renters" and living in dark, seedy apartments. I'm sick of the stereotype that being a renter means you are poor, and that you live in a cave. It's simply not true, and I wanted to make that clear.
If it makes you feel better, I'm nowhere near being part of the affluent crew.
My wife, and I, are a young couple that were hopeful and optimistic about purchasing our first house. We searched long and hard for almost two years.
The reason this blog exists is due to our frustration as both first-time homebuyers and as a young couple looking to start a family.
We've lost many of our friends to other states. Friends who left seeking affordability and a better life elsewhere.
Personally, I take some solace in knowing that even those who can 'afford' to buy are sitting out of the game at this point.
Everyone has their own reasons.
So I'm sorry if you are upset that some of the readers here are wealthy. I know that I wish I was part of that crew, but I'm not.
grim
"annoymouns says that housing was grossly under valued in the late 90"s,. Housing may have been under valued, but I would not say grossly under valued."
Should be simple enough to figure out -- chart out median incomes for the last 60 years as well as median home prices for the last 60 years.
Should be fairly obvious what were the bubble periods, and the "undervalued" periods.
Such a chart may have already been posted here by Grim.
Delford, great post, thanks for sharing your story.
My story is simpler. Saving for over 5 years to put down that 20% on a house with a good NY City commute, good schools, and a decent yard to relax and have a barbecue every once in awhile.
Refuse to buy, even today, without a 6-9 month cash buffer.
But prices have spun completely out of control during those 5 years, and we could never catch up. So we keep saving.
We're not poor, or rich, we work hard, earn a good living, and just want the American Dream like everyone else. But we're not going to commit financial suicide to obtain it.
So we rent, and we wait.
When it makes sense, we will buy.
There is a graph in here:
http://www.youdovoodoo.com/80sbubble.htm
As someone who IS a poor renter and DOES want to buy a home someday I say:
A BIG THANKYOU to those of you who are wealthy and refuse to buy into this market.
The more people who refuse to buy in, the lower prices will go, MAYBE even down to where I and other people of modest means can actually afford to buy someday.
Wow. I really don't get being disgusted with anybody who is refusing to prop up this market.
They are your FRIENDS.
you're full of BS.... probably a lonely guy who has nothing better to do with his time then post this "sky is falling" propaganda.
If you missed the real estate boat & are upset since your trailer has only depreciated, then you only have yourself to blame.
I have been following a site now for almost 2 years and I have found it to be both reliable and profitable. They post daily and their stock trades have been beating
the indexes easily.
Take a look at Wallstreetwinnersonline.com
RickJ
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