Thursday, June 26, 2008

Stay Short The Cheap Stuff

My Floridian real estate connection (Naples) excitedly informs me that you can now buy a condo, that had been $200,000 less than two years ago, for the firesale price of $85,000 today.


Why would I want to buy something at *fair value*?

Why would I want to buy something that's most likely going to trade below *fair value* for the foreseeable future?

Just what exactly do y'all think is going to happen to that cheap real estate in Florida when Manhattan prices take their inevitable 30% slide?

People in the Northeast and on the coasts think that "Florida is different", that it got crushed because of "rampant speculation". Well, that may have some validity, but Boston, New York, Washington DC, and San Francisco will still get fairly bloody. Most likely, it will be the inevitable spike in mortgage rates combined with a cyclical economic downturn that does these oases in.

Buckle up. Remember the downturn will be just as irrational as the boom was.

I really do feel like all I do is repeat myself - surely you've noticed?

Here's what I presciently said over three years ago in To Buy or to Rent, That is the Question:

Suffice to say, I am bearish on the real estate market. Here are my reasons:

There are too many people buying today with adjustable-rate products and interest-only loans. Incomes are lower, particularly among young people, than they were 5-6 years ago. The Federal Reserve seems determined to prick the housing bubble. Inflation is taking root and has historically been anathema to interest rates. Half of new construction in Florida is estimated to be "investment" properties. Last year in California, half of new mortgages were "interest only". For more on the stupidity in the land of fruits and nuts, click on this link, it is unbelievable.

Anecdotally, I have come to the same conclusion. I know several people who have bought homes the last few years that have appreciated immensely - at least on paper. Almost without fail, each one of them has either taken out a home equity loan, built an addition, remodeled the kitchen, bought another piece of property, or moved into a bigger home with an increased mortgage. Rare is the story of a homeowner selling his house and downsizing to a smaller home, cheaper region, or RENTING. Here is the bull market analogy - did anyone actually dump their AOL/Time Warner stock when it was over $100 (currently $18 per share)?

In summary, I believe that incipient inflation along with coincident rising rates, will couple with super-leveraged buyers to create the perfect storm for real estate. I am predicting some serious economic pain within 2-3 years. Remember, a pendulum swings both ways.

(I am still shaking my head at that LA Times article.)

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