Wednesday, April 12, 2006

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

42 Comments:

Blogger grim said...

A bit surprised this one came from the Wall Street Journal.

grim

4/12/2006 01:52:00 PM  
Blogger chicagofinance said...

The Ten at 5% - we are right there...........................ahh

4/12/2006 02:04:00 PM  
Blogger chicagofinance said...

By the way - there is MUCH pent up demand at 5%. We will need a cannon to sell off through that level.

4/12/2006 02:07:00 PM  
Anonymous Anonymous said...

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

4/12/2006 02:39:00 PM  
Anonymous Anonymous said...

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.

4/12/2006 03:00:00 PM  
Blogger skep-tic said...

now if the bubble had popped 3 yrs ago, most people would've come out OK. these last three years of insane price inflation will ensure that everyone in the entire country (actually, planet) will pay, whether they own any RE or not.

4/12/2006 03:32:00 PM  
Anonymous Anonymous said...

Skeptic you are so right!

4/12/2006 03:38:00 PM  
Blogger grim said...

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

4/12/2006 03:57:00 PM  
Blogger grim said...

"Irrational exhuberance" was so much more eloquent than "abnormal situation".

grim

4/12/2006 03:59:00 PM  
Blogger NJGal said...

Is he NOT saying irrational exhuberance this time because he took so much crap for the phrase last time, or is he not saying it because he thinks the behavior is normal? Man, I thought we were done with Greenspeak.

But I vote for the former.

4/12/2006 04:30:00 PM  
Anonymous Anonymous said...

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!

4/12/2006 04:56:00 PM  
Blogger chicagofinance said...

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

4/12/2006 05:30:00 PM  
Anonymous Anonymous said...

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.

4/12/2006 05:39:00 PM  
Blogger skep-tic said...

just when you think no sane person would buy in this market, just heard that a friend put a bid on a house the other day. very smart couple (both ivy grads). probably make $400-500k combined (wall st). I only hope they seriously lowballed

4/12/2006 07:01:00 PM  
Anonymous Anonymous said...

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.

4/12/2006 09:11:00 PM  
Anonymous trroll said...

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."

4/12/2006 09:17:00 PM  
Anonymous Anonymous said...

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.

4/12/2006 10:06:00 PM  
Anonymous Anonymous said...

Sorry forgot to sign the last post

Signed,

Cranky Old Man

4/12/2006 10:13:00 PM  
Anonymous Elric said...

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.

4/12/2006 10:50:00 PM  
Blogger grim said...

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

4/13/2006 05:44:00 AM  
Anonymous Anonymous said...

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.

4/13/2006 08:21:00 AM  
Anonymous Anonymous said...

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.

4/13/2006 09:38:00 AM  
Blogger delford said...

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.

Perhaps Grim can share some comments data on that. Even if it was grossly under valued, and prices sank too low after the last bubble burst, then they are certainly grossly over valued now, and as such will have to correct again, and maybe even over correct.

4/13/2006 10:58:00 AM  
Anonymous Anonymous said...

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.

4/13/2006 01:27:00 PM  
Blogger grim said...

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

4/13/2006 01:57:00 PM  
Blogger delford said...

cranky man: I think you are way off base here, and it is not fair to Grin, and other posters.

First off we do not know how wealthy anybody is, one or all of us could be lying I trust we are not, but who knows.

Now if some are wealthy, why attacj them, because they are able to pay 5K in rent. So your rationale is if you can afford to over pay then you should, so that others who were reckless will not get hurt?

Then we should apply that belief to all areas of life, if you can afford to over pay,then you should.

I am amazed at the amount of money my parents have saived over the years, raising a large family on one blue collar income. They have little education, but so much knowledge. They were not part of the instnat gratification crowd, or the instant appreciation now crowd, you know I buy today for 500k, and next year it is 600K.

I will tell you my story my wife and I moved to Europe in late 2002, it was to be a two year assignment, and we believed it would be a wonderful opportuntiy for our kids.

We sold our house, because we did not want the hassle of renting etc. By the way the person we bought it from in 1997, sold it to us at the same price he paid in 1988, almost 10 years there, and he did not make a dime.

We figured we would just buy another one when we cam back in the same town, as we wanted a little bigger place any how.

Now if I had known how out of control this would get, I would never had sold, but I did not pay much attention to real estate.

But more importantly as a seasoned Wall Streeter, never in my mind did I think Greenspan would keep rates so low for so long. I thought for sure he would start tightening in mid 2003, not a year later in baby steps.

I also am shocked that the feds have let banks issue these suicide loans, I/O neagative amoritization. I am shocked that this kind of recklessness was deemed acceptable. I am shocked that so many are using these things, and yet they are.


So to quicken it up here, we come back in about 18 months, and the house I sold is now worth about 30% more then I sold it for, and I thought I got an absolutely tremendous price.

My family and I are back in the saem town,same schools, and happily renting, until the madness ends and it is starting to end.

While in Europe I paid for nothinng and banked my salary, so yes we have cash, but we worked hard for it. Europe was wonderful, and we have no regrets, we will bide our time and purchase again.

Which brings me to my last point, now you want us to feel sorry for people who purchased with no money down, and use suicide loans, and out bid other buyers, driving prices insanely higher? Is that what you desire.

Speaking for myself, I have a graduate degree, that I completed at night, let me tell you no fun, after working from 7;30 to 5:00 every day, with no lunch hour. I worked hard, and I saved hard, and myself and many others, we played by the rules.

When I bought my first house we put 20% down, we payed for our closing costs, and we had money left over, becasue that was how you were supposed to do it. Getting a mortgage meant you actually had to qualify, and it was a pain.

So no I do not feel sorry for them, I do feel sorry for the young couples who played by the rules, you know the schmucks who saved 20%, only to get out bid by some moron, those are the people I feel sorry for. Some of these people were sitting on their butts watching reruns at night, while others worked hard, so they could get the American dream the right way, so no. I do not feel sorry, and I do not feel sorry fro those who sucked out all of theri equity either and are driving more expensive cars then I driev, with a fraction of the income, I hope we see 30% declines, clean out the excess, and punish the morons.

As for us,we will continue to rent our very comfortbale HOUSE, with all the amenties. I apologize in advance for the typos.

4/13/2006 02:52:00 PM  
Anonymous UnRealtor said...

"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.

4/13/2006 03:08:00 PM  
Anonymous Anonymous said...

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.

4/13/2006 03:22:00 PM  
Blogger grim said...

There is a graph in here:

http://www.youdovoodoo.com/80sbubble.htm

4/13/2006 03:29:00 PM  
Anonymous love rich folks who won't buy said...

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.

4/13/2006 06:43:00 PM  
Anonymous Anonymous said...

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.

4/14/2006 03:45:00 PM  
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