What Real Estate Bubble?

[brewer12345]

Anecdotally, lenders are already pulling back from the dumber products in the mortgage market. When the commode will really hit the windmill is when large numbers of these loans actually start going bad.

 

[wabmester]

When the commode will really hit the windmill is when large numbers of these loans actually start going bad.

Heh. Even Fannie Mae is now saying we should hold on to our hats.

Those resets are going to have some interesting and difficult-to-predict impacts on consumers.

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[JohnEyles]

Anyone care to opine how this bubble in home prices relates to commercial
real estate ?

I have a very specific reason for asking, which is that I wish to expand
my allocation in real estate (from 2% to 10%) and wondering if now is
a spectacularly bad time to do so. You might call this market timing,
but I call it simply not doing something that might be considered patently
stupid by a person who understands REITs at all.

 

[wabmester]

Anyone care to opine how this bubble in home prices relates to commercial real estate ?

Residential real estate investment tends to be a leading indicator for both business investment and commercial real estate investment. I give the commercial sector about six more months to live.

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Edited to add a pretty picture.

 

[honobob]

Anyone care to opine how this bubble in home prices relates to commercial
real estate ?

Well I quess the "bubble" has popped in the SF Bay area. The median home price in the nine Bay Area counties slipped 0.8 percent. A dramatic decrease from $616,000 to $611,000. Most are actually predicting 5% increase in each of the next two years for the City. A friend just sold a $1.6m duplex and is scrambling to identify a property for a 1031 exchange. She has made several bids but has been outbid each time. The 9 counties cover a large area with alot of unproven rural growth. There are two large luxury projects, One Rincon and The Infinity, that are under construction and selling out!

On the commercial side rents are showing strong growth and vacancies are being rapidly absorbed. After a short period of overbuilding ground is being broken for new office construction.

Honolulu is also experiencing heavy demand for office space.

 

[Sam]

Residential real estate investment tends to be a leading indicator for both business investment and commercial real estate investment. I give the commercial sector about six more months to live.

Are you saying that REITs will tank in 6 months? Not questioning your predition, just want to make sure I understand it correctly.

Well I quess the "bubble" has popped in the SF Bay area. The median home price in the nine Bay Area counties slipped 0.8 percent. A dramatic decrease from $616,000 to $611,000. Most are actually predicting 5% increase in each of the next two years for the City. A friend just sold a $1.6m duplex and is scrambling to identify a property for a 1031 exchange. She has made several bids but has been outbid each time. The 9 counties cover a large area with alot of unproven rural growth. There are two large luxury projects, One Rincon and The Infinity, that are under construction and selling out!

It's amazing how strong the market is in the Bay area. I expected price to drop at least 5% by now. I'm not sure if I believe the 5% increase in each of the next years though. Holding price through 2007 is already amazing enough.

 

[dex]

I've been looking outside of Atlanta and this is what I have found.
1. Builders have cleared the land and put basic infrasture in but they are not building.
2. Builders are selling their existing inventory and only building new if it is contracted for.
3. Builders are giving "upgrade" bonuses on existing houses - can be used for upgrades or to lower the sale price
4. Builders are offering real estate agents 4% instead of 3% commissions
5. New homes have a lot of upgrades - they are in walk in condition
6. Builders have lowerd their prices

From what I can tell about the Atl market is that buyers are not out there buying or out there looking that much. I think the phsycology has changed somewhat in buyers mind. They now see real estate overpriced and not a sure bet to go up.

I just bought a house and got a 5% discount on the listed price (I didn't use an agent). Also, the listed price of the house I bought is 5% less than other similar homes in the subdivision.

Is this the bottom in Atlanta? I don't know but the builders are playing it smart by selling out the existing inventory before building again. It will put a floor under the price. As people look around, as I did, they will not have as much to choose from.

Each market is different. Atlanta has a lot of new jobs and people moving into the area. Also, Atlanta did not appreciate as fast as other areas of the nation.

Putting aside a recession, I think the bottom may be in this summer in the Atlanta area.

 

[wabmester]

Are you saying that REITs will tank in 6 months? Not questioning your predition, just want to make sure I understand it correctly.

Personally, I wouldn't buy a REIT fund right now for two reasons: yields are very low, and a slowdown in housing is strongly associated with a downturn in the economy. When the economy slows down, commercial properties and malls get hurt. Apartment REITs might do well initially as rents are currently rising, but as house prices drop, rents should go flat or down.

Historically, the lag between residential and commercial cycles is 6-18 months. So, to finally answer your question, it wouldn't surprise me a bit to see REITs start to tank about six months from now.

It also wouldn't surprise me if this simplistic analysis was full of holes. For example, I'm still amazed at how well Australia's economy is doing even after their housing bubble popped.

 

[astromeria]

I just bought a house

Cool--congratulations! I hope you'll enjoy your new digs & neighborhood. I believe we have several posters from the Atlanta area, such as Tangomonster who just bought a new place too. Like you, she FIREd a few months ago and is still getting used to it.

 

[dex]

Anyone care to opine how this bubble in home prices relates to commercial
real estate ?

I have a very specific reason for asking, which is that I wish to expand
my allocation in real estate (from 2% to 10%) and wondering if now is
a spectacularly bad time to do so. You might call this market timing,
but I call it simply not doing something that might be considered patently
stupid by a person who understands REITs at all.

Lower home sales and more importantly new home building usually leads to a reduction in the building of strip mall and other businesses that support the new population in a new area. Then there is the potential for supply chain building to slow. It may not hurt corporate space building.

 

[tryan]

Anyone care to opine how this bubble in home prices relates to commercial
real estate ?

Very little ... commercial real estate is more driven by the economy than residential prices. Bussinesses will only expand - increasing demand - based on growth projections which will be based on economic growth/expansion.

An exception would be converting commercial to residential (due to a large prices differential); buuut, the zoning boards control the toll booths here.... creating hurdles for those who wish to exploit the gap.

Sooo if you believe the economy will keep moving in a positive direction for your investment horizon ... go ahead. I think most would say the latest cycle is winding down - not up.

 

[Martha]

I just bought a house and got a 5% discount on the listed price (I didn't use an agent). Also, the listed price of the house I bought is 5% less than other similar homes in the subdivision.

Congratulations Dex. Tell us about the house. I take it that it is new construction? Are you going to settle down for the winter or stay on the road?

 

[justin]

Anyone care to opine how this bubble in home prices relates to commercial
real estate ?

I don't know much about the entire US commercial market, but the commercial market for retail outlets still sounds pretty hot. A couple of guys from my company just got back from the International Council of Shopping Centers conference in Atlanta. They said things are as busy as ever and they are going full speed ahead building new shopping centers. This is primarily in the southeast US though. Florida is the huge growth market right now.

To me, this says that the folks with $100,000,000's at risk (many of whom are REITS) are not seeing a slowdown (in the SE at least) in the next few years (the length of the typical commercial retail development process).

 

[dex]

Congratulations Dex. Tell us about the house. I take it that it is new construction? Are you going to settle down for the winter or stay on the road?

Martha,
The house is a townhouse of about 2700 sq ft. about 35K more than I ideally would like to have paid but, it was the first phase of the development, I like the deal and I like the feel of the house. I have a 10 - 15 or more year time herizon for staying here.

I do plan to stay put for a couple of months Nov, Dec, Jan? To furnish the house, plan my next adventure, get to know the area and exercise.

The list an ideas for where I want to go and do is getting longer as I become more comfortable with the idea of RE.

I'm proud of myself that I did spend the extra money on the house. Although I have a detailed estimated budget for my yearly expenses it is only a budget and I don't know if it is correct. However, I become more comfortable with it as I live and live within it without really lacking for anything I realisitically want.

 

[Martha]

Thanks Dex. I really like reading about your journey to retirement and now your adjustment to being retired.

 

[InTheFlow]

Actually, banks will foreclose on a house and sell it for whatever they can get, even if that amount is fifty cents on the dollar.

If only that were true! We just got done attempting to negotiate with a bank on a forclosed property. They were asking $135 for it but wouldn't take less than $129. My relator told me that it is because the banks have share holders to make happy now and that if they just give away the homes really cheap it ticks them off.

Thus the reason for the negotiations back and forth and then hitting a price wall at some point.

I still think buying a forclosed on property from a bank is the way to go. At least for us. We just don't want to overpay for a home since there is such a good chance that the housing prices will pop. Not to mention the whole affordabilty aspect of purchasing below your means.

 

[brewer12345]

My relator told me that it is because the banks have share holders to make happy now and that if they just give away the homes really cheap it ticks them off.

Bzzzt! Wrong! The bank isn't letting the property go too cheap because they don't have very many of them, so they can afford to wait, especially if they think the market is 129 or better. But if loans start going bad in drives, you will start seeing banks dump houses cheap. Hasn't happened yet, though. Maybe next year.

 

[tryan]

Yeah. brewer nail it .... in the early 90's I was shopping bank owned listings; Every bank had several pages of REOs/OREOs. 50 cents on the dollar would have been a gift to the bank. Most sold for a dime on the dollar (relative to what was owed). Picked up 13 units .... those were the days!

We've got a long way to go before that happens again ... think RECESSION. Then the lein holders of these notes will be back logged with defaulted property.

 

[brewer12345]

Yeah. brewer nail it .... in the early 90's I was shopping bank owned listings; Every bank had several pages of REOs/OREOs. 50 cents on the dollar would have been a gift to the bank. Most sold for a dime on the dollar (relative to what was owed). Picked up 13 units .... those were the days!

tryan, once you bought the properrties, what did you do with them? Rentals? Something else? What eventually happened?

I have never fancied being a landlord, but if we get a real crash I will become one in size.

 

[tryan]

5 of the 6 I still carry are/were REOs. They always seem to be in tough-shape ... neglected for years since the banks are not in the property management bussiness. Some needed evictions ... one bank in particular bank felt better having someone in the unit - with the heat on - rather than having it vacant ... but stopped collecting the rent. Others are vacant with popped pipes after not being winterized properly. Vacancies always attract problems; whether it's kids partying in the house or homeless squating in the place for weeks/months(!).

In the early days I did most of the fix-up myself. The last one I did (2 years ago) I contracted out all the repairs. So it's a different set of problems (than buying from the MLS) ... and a different set of risks than, say, flipping McMansions. But it's been very rewarding financially and emotionally. And the towns/cities are eager to help with the permiting process since they've watched the "problem " evolve over the years.

If you pursue this during the next down cycle, the first one will be hard. Don't let this deter you. The next one is always easier.

 

[brewer12345]

If you pursue this during the next down cycle, the first one will be hard. Don't let this deter you. The next one is always easier.

Thanks. If I decide to do this (likely, if stuff is beng thrown out the window), I will do so with a partner.

 

[FinanceDude]

Thanks. If I decide to do this (likely, if stuff is beng thrown out the window), I will do so with a partner.

I'm in the process of doing this with two other partners, a commecial guy, a real estate agent, and myself. We formed an LLC, and are waiting for the right deals.

 

[brewer12345]

I'm in the process of doing this with two other partners, a commecial guy, a real estate agent, and myself. We formed an LLC, and are waiting for the right deals.

Yeah, too early.

 

[FinanceDude]

Yeah, too early.

I'm thinking in about 12 months or so...........

 

[tryan]

don't know when the botom will happen ... but I'll know it when I see it. The tell-tale sign last time was Resolution Trust Corp. auctions (picked up several units here too). Next time who knows what it'll be: Fannie, Freddie, Sallie sell off ?

When "it" happens I'll be ready to pounce.