Real Estate Bubble Stories - Posted by Young Jedi

Real Estate Investing
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Posted by Young Jedi on September 16, 2005 at 17:09:11:

Hi, Bill! You’re right. The way you react to the real estate bubble stories depends upon where you are, and your past experience with real estate markets.

Jim Napier talks about where he lives in Chipley, Florida. He says that Chipley has always been in a recession. According to him, the population is about 4000 - if you include the trees. He said that nobody would know what to do if they had any appreciation there. Obviously, they ae not concerned about a real estate bubble in Chipley.

Yet, he still makes a lot of money being the big fish in a small pond. He claims that if he can make it big in Chipley, then you can make it big anywhere.

Since I am in a larger metropolitan area, we have more evidence of appreciation in real estate prices at a rate greater than the median incomes are rising. Clearly, this cannot be sustained forever.

But it may go on for some time before reverting to the mean.

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Real Estate Bubble Stories - Posted by Young Jedi

Posted by Young Jedi on September 14, 2005 at 12:42:27:

I have to admit, I get a kick out of reading the stories of a real estate bubble, and the resulting destruction that is supposed to result when the bubble bursts.

Some people jump right on this to support the bubble scenario, while others attack the bubble hysteria as nothing more than media hype. The feelings are intense in both camps. It seems like both sides feel compelled to call the other side idiots - kind of like the two major political parties.

Why are the two positions so strongly supported by their adherents?

As a real estate investor, do you have a preconceived notion
regarding the alleged bubble, regardless of the evidence?

In other words, do you have a vested interest in seeing
one side proven right and the other side proven wrong?

Is this belief or position an advantage to you in your real estate activities?
Do you think that the opposite position would be detrimental to you as an investor?

I guess that I am basically asking which position helps you as a real estate entrepreneur, and which position hurts you?

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The bubble heads are wrong - Posted by A Realtor in the East

Posted by A Realtor in the East on September 15, 2005 at 19:00:21:

Nothing is going down. Sales and prices are always going to keep marching upward. People keep moving in here and the baby boomers are about to inherit trillions of dollars as their collective parents die and pass on the money. The boomers all want to spend this money on second homes and waterfront and such. With this demand, how can prices ever go down?

Inflation will also always keep the prices up. Good buildable land is getting scarce, and scarcity means higher prices if the demand is also going up. The cost of materials is going up too and so is the cost of labor. The builders have to keep raising their prices just to keep their profit margins at the same level. This means that the existing home stock will also benefit from this economic reality since the replacement cost of a home is increasing. You do not see the price of anything else going down do you? It all moves together in the long run.

So don’t believe the bubble heads. They ARE idiots. Listening to them will cost you missed opportunity!

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Re: Real Estate Bubble Stories - Posted by Frank Chin

Posted by Frank Chin on September 15, 2005 at 07:44:59:

Young Jedi:

Bubbles come and go. If you’ve been in REI for over 20 years, like myself, and other veterans here, like Dave Krulac among others, you would’ve gone thru the last one.

I invest mainly in small multi’s in NYC. Around 1980, a small 2FH can be had for 110K. By 1983, it was 150K, when I actually bought one, and up to 360K by 1986.

And as adamant as many on this board points to interest rates vs. housing prices, from 1980 to 1986, rates ran as high as 18%, peaking around 1983. Even so, prices skyrocketed. And I got started around 1981 with my first condo. It wasn’t till the tax reform of 1986 limiting tax deductions that pricked the bubble.

The downturn started in 1986 when prices no longer escalated each year, dropping to the bottom around 1992-1993. By then, I gone to auctions every week. At the bottom, no one wants to buy, and I’ve gone to auctions where I was the only one showing up, and the autioneer ask “can I get a bid from you, or should I leave now”??

Prices of 2FH that peaked at 360K in 1986 actually dropped to a mere 275K by 1992. The nice thing about down markets is that most “buy and hold” investors simply sit on the sidelines. I was one of those. And this prevents crashes that occurs in the stock market.

BUT if you buy right, you’ll never lose in the down market. I bought carefully and paid 150K to 190K for properties in the early '80’s and they never dropped below 250K to 275K at the bottem.

In fact, I started buying in the early 90’s again when no one else wanted to buy. Why?? Many people expected the market to drop some more. This is the opposite of the peak market when everyone expects things to go up some more and jumps on the bandwagon.

As an exapmle, a 2FH with a FMV of 290K in 1993, is bought as an REO for 227K. Everyone said “you’re crazy, it’ll go down”.

By 1997, prices stabilzied, and its back up to the mid 300’s, and in the current BUBBLE, zoomed to 850K. I got to fasten my seat belts.

Do you think I’m going to worry that it’ll drop to 650K??, even 500K. I really don’t care. Locked in on a below 6% fixed rate mortgage, and the place cash flows nicely with a 230K mortgage. Let them raise the interest rates. What I have to do in down markets is to make sure my property taxes are reduced, along with the price of the house, as it happened in the last down market.

I say, “let the bubble burst”

Frank Chin

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Re: Real Estate Bubble Stories - Posted by Gene

Posted by Gene on September 15, 2005 at 24:38:40:

I am personally torn when it comes to a collapse in coastal housing prices.

As a full time investor I always find good deals. Right now, is harder than normal. Prices are high, future appreciation is not likely in my area (CA).

My take is…any trend will make you money if you play it right.

I study the trends/markets so that I am not caught off guard and then I play it according to what I think is least risky. I am conservative. I would rather not loose rather than get greedy and accept risk.

As far as RE prices dropping in CA, I am mixed on what I wish for.
It is going to really hurt some freinds and family of mine. They got in recently and are likely to take a big hit. I also feel bad for the young people that make made the jump lately and bought a house they couldnt afford long term.

But I think in the long run, it will be good overall if prices return to more reasonable levels. Our future generations should have the ability to afford decent housing. Its going to be painfull for the next couple years but it will be more painfull if this crazyness goes on and on.

Personally I will benifit more if thing go down over the next few years. I have sold most of my portfolio this year and I am sitting with cash. This is bacause in my studying I belive a cash is most likely…so I am playing it. Its not really emotional for me, its just buisness.

Gene

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Re: Real Estate Bubble Stories - Posted by Cletus

Posted by Cletus on September 14, 2005 at 19:46:00:

If I’m going to take a bath it might as well be a ‘bubble’ bath. Now where’s my rubber ducky…whoops, that’s not it!

;o)

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YOU ARE NO JEDI - Posted by Bill in Mobile

Posted by Bill in Mobile on September 14, 2005 at 19:43:10:

JEDIS HELP PEOPLE!!!

“I have to admit, I get a kick out of reading the stories of a real estate bubble, and the resulting destruction that is supposed to result when the bubble bursts.”

Oh, really. I suppose you get a kick out of seeing all the destruction caused by Katrina too. Your kind of real estate investors are so selfish and self-centered. All you care about is making money off of other peoples misery. Thats just great, get your kicks by kicking someone when they are down on thier luck. I cant beleive you would say that you get your kicks from someone elses destruction.

Why dont you put your great wealth to use to help some of these people instead of worrying about how other investors are enjoying the destruction, past and future? Instead you are just trying to find out how to turn it to your “advantage”. You cant see why people on the other side call you an idiot? Maybe you should read my post a couple of times s-l-o-w-l-y so it will sink in.

Dont get me wrong, we are all here to learn something about investing, but it has to be win-win or you are no good. If you look within you might see a good person in there somewhere. Find that person and your success will be asurred.

Sorry if I hurt your feelings, but the others are not brave enough to tell you like it is for some reason. I read a lot of posts here without responding to any, but this one takes the cake. I just had to set you strait so you will realize that investing is not just about taking away from others. If you buy some of the good corses here you will soon learn this universal truth.

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Re: Real Estate Bubble Stories - Posted by Mark(SDCA)

Posted by Mark(SDCA) on September 14, 2005 at 16:25:24:

For me, I look at it as I win either way. If prices continue to rise, my existing properties will appreciate.
If not, then I frankly don’t see it hurting me greatly. Real estate prices are typically sticky on the downside. A slowdown or flat period is more likely. In any event, it translates into a buying opportunity which is good for me. There IS no margin call on real estate!!

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Re: Real Estate Bubble Stories - Posted by Joe C. (AR)

Posted by Joe C. (AR) on September 14, 2005 at 16:14:55:

History shows us that real estate bubbles do burst. Like the previous posters, I agree with the local vs. national argument because some places are not seeing the rapid inflation of prices as other areas are. The burst will be a “pfffft” in these areas. RE Investors need educated optimism to be agressive. Smart investors factor in risk management as opposed to risk avoidance when analyzing potential deals. A strong cash or cash flow position makes risk more tolerable.

As to why the vehement arguments on both sides, the competive nature in many, for others profit, fame, ego. No one will be 100% right on this one, and no one 100% wrong. The smart REI will profit either way. The key is how they manage the risk.

just my .02
Joe C. (AR)

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Re: Real Estate Bubble Stories - Posted by KPC

Posted by KPC on September 14, 2005 at 15:31:06:

Why are the 2 positions strongly supported? I dunno, I guess some people have to get worked up about something.

My preconceived notion is that any awful bursting would be local, maybe a contraction nationwide.

I am on the fence. I don’t know what will happen.
I like to think I could capitalize on a burst bubble, so a bubble argument is more attractive to me.
The middle of the road position keeps me looking for good deals in any market scenario. I think if you felt strongly that there was a bubble you might stay out of the market, maybe miss out, but you can’t ignore possiblities either. Risk on either side.

I think buying too strongly into either position increases your risk of being unprepared or unable to adapt quickly.

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Re: Real Estate Bubble Stories - Posted by Jack

Posted by Jack on September 14, 2005 at 13:07:24:

“”“Why are the two positions so strongly supported by their adherents?”“”

Tunnel vision and vested interests.

Most people, especially the article writers, comment on the bubble market issue with regards to some mythical national market. They may do that for simplicity or they may do that because they are just ignorant of the fact that there are a multitude virtually independent Real Estate markets throughout the nation. To me it is just obvious that certain markets (SoCal) are going to burst. But there is no bubble where I live.

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Firmly In “No Bubble” Camp - Posted by Young Jedi

Posted by Young Jedi on September 16, 2005 at 05:13:23:

I hope you are right. As they say, “A rising tide floats all boats.”

That’s a good point about the cost to build a house. This sets a lower limit on the cost of a new home.
And new home prices are an important component of the real estate market at the local level.

If you have a portfolio of “Starter Homes”, you probably don’t have to worry about a bubble in real estate much. Fewer and fewer builders are making the smaller basic house anymore. There is more profit in the McMansions. The existing stock of smaller homes will always be in demand since there is a large pool of potential buyers and tenants for these properties, and the supply is not increasing much.

Is this thinking right?

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A Natural Contrarian - Posted by Young Jedi

Posted by Young Jedi on September 16, 2005 at 04:10:35:

Frank, you have done well it seems by zigging when others were zagging.
Also, by staying in the game for the long haul, right?

Now you have enough cash flow strength and enough equity cushion to ride out most any storm.

I’ll just bet that if the bubble really does burst, you will know how to capitalize on it.
You have seen this cycle before, no?

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Re: Real Estate Bubble Stories - Posted by Brian (UT)

Posted by Brian (UT) on September 15, 2005 at 13:19:58:

Gene

I agree with you in general but I say don’t worry about your friends and a drop in home values. If they can make the payments now they will make them in the future unless they have done something really stupid.

I would like to give you a case I have in my experience. I found a nice new home a builder had left in a development he was asking $420k for and he agreed to sell it to my client for $320k so he could officially close-out his development. That was in Feb 1989 in Danville, Ca. On Memorial Day weekend 1989 the market died and in August I got a call from him saying the house like his just sold for $360k and the market is still dropping, what did I do to him?

Well, he called on the wrong day, I had just gotten back from the doctor and had been told I would be bedridden within a year and dead withing two years so get things in order. So I yelled at him what the hell do you care, are you planning on selling it this week or next month or even next year, you told me you were going to live there for 12 years until you retired and then move to your vacation home, so call me in 12 years, and slammed the phone down.

In 2001 he called to list the property but I was here in Utah getting a heart transplant so gave it to a broker friend of mine that I knew would do a good job for them. Sold $1.9 million,6 times what he paid in 12 years.

I’m sure I was called lots of names by them for a few years but I knew it wouldn’t have mattered where they would have purchased in the Bay Area they would have taken a hit and even if they would have remained in their old home it would have dropped along with the rest of the area. A good home in a good location will recover.

Now your problem is how to preserve the buying power of your cash, don’t keep it under your mattress.

Brian

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Re: Real Estate Bubble Stories - Posted by ski

Posted by ski on September 16, 2005 at 19:46:05:

Soap on a rope??? (or is it a string).

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Cletus, You’re Such A Perv! - Posted by Young Jedi

Posted by Young Jedi on September 16, 2005 at 04:24:45:

I’ll bet you have other good qualities as well!

Now, if you don’t stop playing with that thing, you’ll go blind.

Bo)

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Er, umm…uh…Sorry! - Posted by Young Jedi

Posted by Young Jedi on September 16, 2005 at 04:54:09:

Perhaps I was not clear in my post. I do not mean that I get my kicks from someone else’s destruction.

I only meant that I find it amusing to read the stories of all the doom and gloom and destruction that is predicted to happen if the bubble bursts.

It’s like looking at the National Enquirer while in the check-up line at the Wal-Mart.

Or like gawking at a traffic wreck. You know you shouldn’t look, but sometimes you just can’t help yourself.

There are so many points in your post that I am overwhelmed.

All I can say by way of explanation is: once again, the deficiencies of a government run education system glaringly reveal themselves.

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Bro, relax - Posted by Rico

Posted by Rico on September 14, 2005 at 21:08:17:

Um, I think that he was just trying to get some thoughts. No need to get so uptight, IMHO.

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Re: Real Estate Bubble Stories - Posted by Young Jedi

Posted by Young Jedi on September 15, 2005 at 12:37:40:

So, Mark, you feel like you will benefit under any scenario?
I guess you have escaped being in either end of the bubble spectrum. This position seems to be the consensus.

I’m starting to think that most of the rational real estate investors are avoiding taking a position that fully supports or fully opposes the case for a bubble bursting.
Most of them seem to think that they are going to benefit from whatever happens, so they really don’t buy in to the hype.

Many investors are not altering their investing strategy at all. They think that nothing in the bubble reporting has significance to them, so they are continuing doing business as usual.

This surprises me somewhat. I expected to encounter more people who are altering their investing strategy or re-aligning their business in some way to position themselves for a change in the real estate environment. But this just doen’t seem to be so.

Thanks for your input, Mark!

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Re: Real Estate Bubble Stories - Posted by Mike (Seattle WA)

Posted by Mike (Seattle WA) on September 14, 2005 at 19:33:14:

Yeah, actually there is. Loans will be called (or modified) if the LTV goes above 125%.