The Housing Bubble: Can't Lose vs Cashing Out

RISMedia is reporting “Investors Flipping Over Second Homes”:

         “‘I don’t see how you can lose money,’ [condo investor Houman Sarmasti] says.  You might not gain a lot, but I don’t think you can lose, especially the way real estate is going.’

“That faith in real estate values has convinced an ever-growing number of homeowners that one home is just not enough. And this surge in second-home purchases is helping to pace the real estate boom, while raising concerns about a bubble nearing the bursting point.

“More than one-third of all American homes purchased in 2004 were for investment or vacation purposes, according to a recent study by the National Association of REALTORS…

“‘It’s the expectation that prices will continue to rise that leads people to spend much more than they otherwise would,’ says Dean Baker, co-director of the nonprofit Center for Economic and Policy Research in Washington, D.C.

“‘In the past, a typical buyer might have looked at a place listed at $400,000 and said, “Can I afford $400,000?” If the answer was no, they wouldn’t buy it. Now, if they think they can sell it for $600,000, it’s a different equation…’

“Perhaps nowhere is the speculative fervor as great as in south Florida, where huge profits can be made by selling pre-construction condo contracts. The practice is so popular that Miami real estate agent Mark Zilbert launched a Web site,, this past summer. It will allow buyers from around the world to bid in real time on construction contracts for Miami condos that haven’t yet been built.

“Thousands of new condos are going up around Miami, and a large proportion of people with deposits on the units — mainly from the Northeast U.S., Europe, and South America — have no plans to move in, Zilbert says.”

The Housing Bubble: The King of Real Estate Is Cashing Out

Indeed, that “can’t lose” attitude of amateurs is exactly why “The King of Real Estate Is Cashing Out”:

“Tom Barrack, arguably the world’s greatest real estate investor, is methodically selling off his U.S. real estate holdings as prices drive the market to nosebleed levels…

“‘There’s too much money chasing too few good deals, with too much debt and too few brains.’ The amateurs are going to get trampled, he explains, taking seasoned horsemen, who should get off the turf, down with them. ‘That’s why I’m getting out…’

“Right now, Barrack’s view of the U.S. market couldn’t be clearer: It’s a great time to sell, and a terrible time to buy…

“The slump will show up first in speculative hot spots like Miami and Las Vegas, he says, where condo developers are preselling their projects for what looks like big profits. When they actually build the units over the next year or two, he predicts, they will end up spending more then the units are now selling for.

“At that point, says Barrack, the developers will try to raise prices. ‘But most of these buyers are speculators,’ he says. ‘They will either sue the developers to get the original price or take their deposits back and walk away.’ The developers will then put the units back on the market, and the glut of vacant condos will drive prices down. ‘It’s the busted deals caused by construction costs that will cause the turn in the market,’ he says.”

Whether or not Barrack has the right catalyst or not (personally, I think pure exhaustion caused by falling real wages will be the reason), the question has to be asked: Who would you rather believe?:

1. Houman Sarmasti, who has been flipping real estate for three years.

2. Tom Barrack, who manages a $25 billion portfolio of trophy assets, from the Raffles hotel chain in Asia to the Aga Khan’s former resort in Sardinia, to Resorts International, the largest private gaming company in the United States.

Now, admittedly, we are comparing different classes of property here, but who do you think has a better feel for things in general?

My money is betting on Door Number 2.

In the meantime, Realty Times is reporting, “Silicon Valley Home Prices Fall $27,000”:

“September’s median home price, based on closed sales of single-family detached homes, came in at $733,000, down from $760,000 in August — the lowest it’s been since March this year, when the median was also $733,000, according to Creekside Realty owner/broker Richard Calhoun’s Bay Area Real Estate Market Newsletter…

“Even with the $27,000 price plunge, the median price is $103,000 more than it was a year ago, a 15.25% increase.”

OK, but what about the person who bought anytime since March? Is that eight straight months with no appreciation? Are any of those “can’t lose” investors leveraged to the hilt on zero percent-down loans getting nervous?

Mark Hicks, broker/owner of the Seabrooke Group in Campbell, Calif., reported that “Sales fell, year over year, for the tenth month in a row, and at one point in September, inventory surged past the 3,000 unit mark to post its first year-over-year inventory gain since July 2003.”

First year-over-year inventory gain, huh? Is that making any of these “can’t lose” investors a bit nervous?

The Housing Bubble: California Q&A

Not to worry. Demographics will bail out California property owners. Or so they say. Everyone wants to live in California. Right?

On that note, let’s play a fun little game of Question and Answer.

Q. Who can afford to live in California?

A. Practically no one. Housing affordability in California has slipped to about 14% overall. In some areas, such as Los Angeles and San Diego, affordability is as low as 10%.

Q. Are home prices versus incomes now irrelevant?

A. To get to 14% affordability levels, income and wages had to be irrelevant for quite some time.

Q. Can this environment go on forever?

A. In spite of what anyone says, this is not a “totally new paradigm,” and in the long run, valuations and affordability matter regardless of what anyone says about “fundamentals” such as population growth or low interest rates. It is a simple economic fact that home prices just cannot forever stay above people’s ability to afford them. The current situation, therefore, is simply not sustainable. It is a speculative bubble that is 100% guaranteed to pop. One of two things will happen: Wages will rise or housing prices will fall. I am 98% confident of the latter. Even IF wages start to rise, they cannot possibly rise quick enough to have a meaningful impact given that affordability levels are so low.

Q. Is California a mecca for job creation?

A. California was a mecca for job creation. Much of that job creation was centered on a booming real estate industry. Watch what happens in a housing slump. I guarantee you it will not be pretty.

Q. Are some California residents seeing the light and attempting to cash out and move out of state or rent?

A. That is exactly what rising inventory implies. Inventory is skyrocketing in many locations.

Jobs and wages are two of the keys to sustaining the California boom. Will the following, from “Construction Layoffs Could Signal Trend,” make any of these “can’t lose” investors a bit nervous?:

“San Diego construction companies, which have long been the main driver of local employment growth, cut 200 positions last month. And that may be the shape of things to come, economists warn.

“‘There might be some seasonal reasons for the construction losses, but the decline could be a sign that our overall employment growth is slowing,’
said Alan Gin, economist at the University of San Diego.

“Gin said the construction layoffs are one more sign that the housing boom, which has created jobs for builders, mortgage brokers, and real estate agents, is winding down.

“‘The number of home sales is down, price appreciation on most homes is not as great as it used to be, and it’s taking longer to sell homes,’ Gin said. ‘That could mean less growth in construction work…’

“Financial services cut 200 jobs last month, largely related to real estate and mortgage operations. Scientific services cut 400 jobs. Temporary employment firms — another major driver in local employment over the past several years — added no workers.

“[Economist at the San Diego Regional Chamber of Commerce Ryan] Singer warned that the economy is likely to worsen in coming months, as high fuel costs and rising mortgage rates force consumers to cut their spending.

“‘We’re entering a period of risk for the national economy, which will show up here as well,’ he said. ‘Energy-related prices, higher interest rates, and the growing realization that housing prices may have peaked means that people will get a lot more cautious.'”

Mish, is this California “soft spot” just for San Diego? No, not really. Here is more supporting evidence:

According to the Los Angeles Times, “California Sheds 23,700 Jobs in September”:

“California’s economy lost a net 23,700 jobs in September, the Labor Department said today, a surprising decline that suggested the state’s economy might have hit a soft patch.

“It was the state’s first net job loss since December 2004. And it came as the state has been enjoying relatively stable employment growth this year, averaging more than 23,000 new jobs a month, after being sluggish for much of the first three years after the 2001 recession.

“California’s September job swoon was surpassed only by Louisiana and Mississippi, both devastated by Hurricane Katrina.

“A good chunk of the California decline was due to seasonal factors, economists said. Many school districts started their years in August, instead of September, which shifted employment growth from September to August, said Howard Roth, chief economist for the state Department of Finance. August employment was revised upward by a hefty 22,600 jobs as a result, he said.

“But even after factoring in that shift, the state’s job growth in September was still relatively sluggish compared to recent months, Roth said. ‘It’s a fairly weak report.’ He suggested that higher gasoline prices might have taken a toll on hiring, but it would take several months of poor job reports before anyone could conclude that the state’s economy was slowing significantly.

“Other economists and employment specialists said the state’s job market was stronger than the latest numbers suggested.

“‘We don’t see any reason to panic,’ said Jesse Harriot, vice president of research for Monster Worldwide, a leading online job search firm. He noted strong demand in the Los Angeles area for jobs in such sectors as aerospace, manufacturing, and construction.”

Hardly anyone ever sees a need to panic. By the time anyone does, everyone does, and then it is usually too late. Just remember, the best time to panic is before everyone else does.

Mike Shedlock ~ “Mish”
October 25, 2005