June 22, 2005
Bubble Talk
Is there a Real Estate Bubble about to burst?
BY ED PATISSO
Founder, nyccashflow.com
More and more we are hearing about it in the media, and every day exchanging information and articles within our group discussion forums attempting to answer the big question: Is there a Real Estate bubble about to burst?
There is a wide range of opinions out there, but knowledge is POWER and the focus should only be on FACTS. The more information and facts we can gather about the markets where we invest, the better we are equipped to make the right decisions and answer such important questions as "Where should we invest?", "What sort of strategies should we use?", "Is there a bubble in the markets we are investing in?"
When answering these questions, any sensible investor ought to consider these important facts:
1.) Speculation in housing is at a statistical extreme. According to the National Association of Realtors, real estate speculators are buying at a pace that far exceeds previous estimates of their influence on the housing market. Analysts estimate 23% of all homes sold in the U.S. in 2004 were purchases by investors. In Miami, for example, it is believed that 85% of condos sales downtown might be due to investment and speculation, according to Florida-based investment firm Raymond James & Associates. Models and hot DJs lure prospective buyers to Miami luxury condos, and buyers make deposits at promotional parties.
2.) Mortgage availability is highest now of any time in history. With an average credit score, a buyer can purchase a 4-family home with "0" money down. The lowering of rates by the Fed designed to boost the economy after the tech bubble eventually led to more affordable financing and thus, increasing availability. Loans are being made to borrowers who would not have come close to qualifying for loans in a less frothy time, especially the new interest-only & option ARM mortgages. The National Association of Realtors estimated that 30-40% of mortgage loans made in the past year were ARMS, which they admit is troubling when fixed mortgage rates are at historic lows.
3.) Federal Reserve Chairman, Alan Greenspan, is certainly trying to encourage a slowdown. With aggressive language, from encouraging lenders to tighten their guidelines to statements about home-price speculation unsustainable, it's clear that the Fed is concerned about the condition. Greenspan did point out, however that there is “considerable unlikelihood of a major decline” in prices because that’s “very rare” in the U.S.
4.) National Home prices have increased by the widest margins in history. Adjusted for inflation, home prices have appreciated about 40% since 1995 and many areas are up more than 160% during the same time. “If you go back to the 1980s, during that cycle, adjusted for inflation, total price appreciation was 18%. In the prior boom in the 1970s, it was 15%,” cites David Stiff, analyst with esteemed real estate research firm Fiserv CSW. He continues, “It’s alarming … I am surprised that it’s that high.”
Still, for an experienced and patient investor, there is no reason to panic:
1.) The United States does not have one national housing market. Every large city, suburb and rural community represents its own real estate market, complete with its own set of quirks. The home-price-to-income ratio may be high in some areas, while remaining very low in other places. Many of our members are investing in Philadelphia, PA for example. In terms of affordability, Philadelphia is on top of the list. According to Forbes.com, as of 2004 residents in Philadelphia earning an
average income can afford almost 2 houses. Compare that with NYC, for example where average income affords a little more than half a house.
2.) Real Estate markets don't crash like other markets. Unlike the stock market, which can lose double-digit percentages in one day, real estate tends to lose value over a much longer period of time. It's more like a deflating balloon rather than a pop. It does, of course take much longer to sell real estate than it does to sell a stock.
3.) The U.S. will need 60 million new homes by 2030. The U.S. population is expected to increase 33% by 2030, reaching 376 million. That’s 94 million more people than in 2000. About half the homes, office buildings, stores and factories needed by 2030 have yet to be built.
4.) Demand for urban living continues to increase and should hit new highs by 2015 due to the following factors:
A) 78 million Baby Boomers downsizing from their current their homes
B) 78 million children of the Baby Boomers graduating from college
C) 9 million new immigrants
D) Today’s fastest growing households are: Young professionals, empty nesters, single parents, couples without children, senior citizens.
Money will always be made in real estate, regardless of the conditions. I personally look at prospective deals every week but lately most of what I see is overvalued. I never bet my investments on hope of appreciation. If I’m not buying real estate at a fraction of what it’s really worth, it must have good positive cashflow. As long as I am actively involved in real estate I will preach sound investment strategies and encourage everyone to look at things in perspective. The most important action we all can take is be even more active by networking and exchanging information within our online discussion groups, as well as our periodic group meetings. Remember, "knowledge is power" and what better way to learn than from fellow real estate investors, successful and novice alike.
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