Cities to watch (good, neutral and BUBBLE?) - Posted by John Corey

Posted by Mark (SDCA) on May 20, 2006 at 08:27:28:

John,

Yes, like most people I would protect my PR above all my rentals. Where I sit now, “really bad” would have to be armageddon-like for me to walk away from any of my rentals. My LTV on all of them is well under 50% and they all cash flow (except the Cali property that was my old PR which is what I should have sold- relatives live there) even with 15 year loans. My rentals are VERY low hassle and that hassle revolves araoudn vacancies. So far I have been very lucky on vacancies with a few exceptions. I have a lot of long term tenants and have never had any long term vacancies.

Wht have I considered so far? Well, I was looking for one of 2 things: either LARGE cash flow (2-3K per month min.) or a big cash hit (30-40K+). So I looked at fairly large apartment buildings 50-100U for the income and I looked at pre-foreclosures. I am also looking at tax sales.

Mark

Cities to watch (good, neutral and BUBBLE?) - Posted by John Corey

Posted by John Corey on May 17, 2006 at 07:44:32:

The following link is to an article on the MSN site that is from the folks at Bankrate Monitor.

Three pages (or 3 articles depending on formatting).

10 cities that should continue to see rising prices.
10 cities that should see flat prices.
10 cities that should see falling prices.

There is a write up for each city.

Note that the main drivers are very specific what is going on in the city (sometimes a metro area or region). All 30 are distinct markets at some level. Confirmation that there is no single RE market that spans the US. RE prices are impacted by the national interest rates but otherwise tend to respond to local issues.

My position is there can never be a national housing bubble as there is no national market. There might be one in a specific local market.

If you want to sell newspapers then get a good headline. ‘Bubble’ in a headline grabs your attention. Hence I put the word in the subject line. The writer of a newspaper article is not rewarded for being accurate. They are rewarded for getting your attention.

John Corey

http://realestate.msn.com/buying/Articlebankrate.aspx?cp-documentid=421682&GT1=8187

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Skip

Posted by Skip on May 17, 2006 at 18:22:08:

Hi John,

You say, “My position is there can never be a national housing bubble as there is no national market. There might be one in a specific local market.”

Don’t you think factors could arise that negatively impact most markets? I’m not saying it will happen, but it seems at least theoretically possible.

Also, you keep saying all real estate is local, as if economists don’t realize that – they do.

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by SJO

Posted by SJO on May 17, 2006 at 15:02:23:

So here’s the experts’ take on Phoenix:

Phoenix: The bigger they are, the harder they fall, and Phoenix is the largest housing market in the country in terms of new construction. It’s been running at 65,000 new units per year, with housing appreciation increasing at rates of nearly 30% per year.

“You can’t sustain 30% increases a year for very long,” Winzer says. “Of all the 100 markets we review, we think if you’re an investor in Phoenix, you should sell, because vacancy rates are already pretty high.” Gollis says his firm has been studying the market carefully and doesn’t like what it sees. “It’s had an incredibly unusual amount of growth,” he says. “The land market has accelerated dramatically and the lot price as percentage of the home price has gone up significantly. We have some concerns about going long in Phoenix.”

Why, exactly, are they concerned? Because 30% appreciation cannot be maintained forever? Well, what makes them think it can’t go on at 25% or 15% this year? They don’t say. I don’t understand how this is helpful…there aren’t any reasons given.

Didn’t work for me either. NT - Posted by Chris- WFL

Posted by Chris- WFL on May 17, 2006 at 14:36:26:

nt

Link doesn’t work. - Posted by SJO

Posted by SJO on May 17, 2006 at 11:09:52:

When I use the link you gave, I only get to the MSN “Buying a House” main page.

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by John Corey

Posted by John Corey on May 18, 2006 at 06:31:48:

Skip,

For such a factor to impact all the local markets it would have to be something that applies across all of them. I am not implying that the impact has to be uniform. Just asking what factors you see will have an impact across all the housing markets?

As to economists. I made no comment about economists. You can speculate if they understand or not. What I am pointing out is the articles that people read talk about a bubble as if there is one bubble and that all markets will be impacted. Even when that is not what the article actually says some readers come away thinking that is the point.

If you do not mind, lets skip the economist part of your point. Just get back to me on the national factors that you believe impact housing prices.

John Corey

Economists & Warren Buffett - Posted by Dons

Posted by Dons on May 17, 2006 at 20:29:12:

“The main purpose of economists is to make astrologists look good.” - Warren Buffett

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by John Corey

Posted by John Corey on May 18, 2006 at 06:42:20:

SJO,

Lets put aside market mentality and the effects from what might be called froth.

If a location puts up 65,000 new homes per year you would expect the increase in the demand for new housing to be 65,000. Hence there needs to be a lot of families moving to the area or existing families splitting into two (child moves out of the family home to start a family, divorce, etc).

If the supply and demand do not remain in balance then there will be too a shift in prices to compensate. Build too many homes and the builders start to slow down as they have excess inventory. They start to discount to get ride of the units that are completed as they need to move on to the next project. Build too few and people bid up prices or start moving further out as they have to live somewhere.

Lets also assume that independent of the number of units being built there is a 30% rise in prices. Have wages gone up by 30%? Over time if the price rises faster than what people earn you reach a point that no one can afford to buy their own home back. Hence the lower paid workers who are trying to get into the market, the children of present homeowners and other people not on the elevator can not buy. Unless there is a lot of rental housing at a lower price than the ownership route people stop moving to the area (or they commute a long distance).

There is a very clear historic connection between prices, income levels and the net job growth for an area. When one of the variables gets out of line something else has to give. If prices rise faster than the incomes and the population the prices will stop rising.

Phoenix is a bit special in that CA buyers with dumb money have poured in to speculate on the future values. How many properties were purchased by an investor who expects to lose money as a rental but is betting on the appreciation. If that is their bet and the appreciation cools down or stops while the monthly negative cash flow keeps showing up do you expect them to just sit tight? If they are there for appreciation and they are not getting a higher rate they are likely to pull up stakes and head to a different market that is ‘hot’.

Phoenix has seen periods of rapid growth before. Some ended with a major crash and burn. This time around that may not happen. Then again the true demand for housing in the area might be a lot less than what is being built.

John Corey

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Gene

Posted by Gene on May 17, 2006 at 22:42:46:

Probaby because inventory has risen 300% in the last year and sales have dropped to unbelievably low numbers.

Speculators drove up the prices and now that they are selling…they are going to drive them down.

Gene

Re: Link doesn’t work. - Posted by John Corey

Posted by John Corey on May 17, 2006 at 14:07:42:

I just tried it by doing a copy and paste into a new tab using Firefox. I landed on the correct 1st page.

Try it again or describe what you are doing so someone can advise.

John Corey

Works for me -NT- - Posted by Eric (MI)

Posted by Eric (MI) on May 17, 2006 at 13:51:44:

NT

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Skip

Posted by Skip on May 19, 2006 at 01:39:09:

I don’t pretend to know as much about RE as you; I just made a comment and asked a question, which I believed to be valid.

As for national factors, what about a major economic downturn, such as the great depression? Or World War Three? Didn’t Japan experience a national decline in real estate in the 90s?

I’m concerned about all of this bubble talk because my rentals are in Baltimore, which I’ve been reading is one of the top 10 cities facing a bubble.

One the other hand, my rentals are in lower-income areas, so they may be a little safer. Wouldn’t middle-come and wealthy homes decrease the most?

Also, I’ve been thinking about investing in affordable multi-family rentals. Wouldn’t they be safer in a bubble area, since they would be income-producing properties?

Re: Economists & Warren Buffett - Posted by SJO

Posted by SJO on May 17, 2006 at 23:54:41:

Perfect. LOL!

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by SJO

Posted by SJO on May 18, 2006 at 11:49:21:

“Phoenix has seen periods of rapid growth before. Some ended with a major crash and burn.”

John, the worst historical decline in the Phoenix market was six months in 1981-82, when prices lost 7.9%. This “crash and burn” thinking by the experts is not based on historical facts. A person who bought just 10% under market was safe.

The Phoenix economy is very strong, people are still moving here in droves, the average house is a little over 4 times avg salary (unlike L.A., where it’s 10 times avg salary).

I just can’t see where they are coming from with their extreme caution. I could understand a prediction of a softening, or a small decline, but not a crash and burn.

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Mark (SDCA)

Posted by Mark (SDCA) on May 18, 2006 at 14:28:30:

Do you have references for this, especially that sales have dropped to unbelievably low numbers?

I spoke with my realtor about this very issue this week. She said that DOM is just over 60. That the market has softened extensively over the last 10 months and that there is NO “pushing the appraisal”- ie squeezing the last $ out of the price.

But… that houses priced right and houses under 300K and even better under 250K- sell in about 45 days.

Frustrating - Posted by SJO

Posted by SJO on May 17, 2006 at 14:46:08:

I copy and paste the following

http://realestate.msn.com/buying/Articlebankrate.aspx?cp-documentid=421682>1=8187

into the address window of both Internet Exporer, and Firefox, and every time it just takes me to the “Buying a House” page, with a box to “Find Brand-New Homes from Move™”

Under what MSN Real Estate “tab” is the article located? In other words, is it under the tab “Buying a House”, “Selling Your House”, “Rentals”…

I don’t know…maybe it’s because I have a particular security setting in my browsers. I got a warning that AtlasDMT (atdmt.com) was automatically disabled when I got to the page you gave. AtlasDMT is a spying site that collects all sorts of private info from users’ computers when they browse and surf. That may be why I can’t see the article.

Oh, well. I’d sure like to read it. What’s it say about Phoenix?

Re: Link doesn’t work. - Posted by Dale-Ohio

Posted by Dale-Ohio on May 17, 2006 at 14:31:43:

Nope i cant get link either. I did a copy and paste. Nothing there

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Robert Campbell

Posted by Robert Campbell on May 20, 2006 at 17:46:56:

Skip,

>>>> One the other hand, my rentals are in lower-income areas, so they may be a little safer.

These low end rentals are probably not as safe as you think. When the economy gets bad, the low-income wage earners typically get hit the hardest - thus you’ll have slow paying or no paying renters with a higher level of vacancy.

In an economic downturn, the safest properties to own are SFR in middle income areas. These types of properties typically rent to families - so there is more financial and social stability. Less likely to fold tent and move when the going gets rough.

Robert Campbell

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by John Corey

Posted by John Corey on May 19, 2006 at 06:40:32:

Skip,

Based on present conditions there is no reason to think that the US will experience the meltdown that happened in Japan. The market conditions there were very different from the market conditions in the US today.

The Great Depression did impact things across the US. It was not even across the US. Understand that the national unemployment figure was 25%. If we were to have such trouble again your concerns would go beyond RE. BTW - It would also be a buying opportunity as there would be a lot of distressed sellers.

You expect that working class housing will be less impacted by a RE bubble as you expect people to still need housing and to still have an income. Hence you are saying that you expect to be able to use a strategy that largely isolates you from what might happen in a different market within Baltimore. Two or more markets in one city.

John Corey