Property Grunt

Wednesday, May 25, 2005

And now a word from the bubble

The Grunt would like to take a moment from the rental survival guide to address the dead horse known as the bubble.

This was from the Inman blog

Ally on NYC housing bubble
New York, NY -- Last night, we munched with Allison Rogers, real estate editor for the New York Post, 24 pages every Saturday. That is big job, because she does a good job. In her weekly market report, she commented today on the New York magazine housing bust story that got everyone in real estate in a tizzy. Interesting insight: bust will not be as bad this time in NYC, because more condos with more rentable value than co-ops. Makes sense.

No. It doesn't make sense. None of this crap makes sense.

Ok. I am going to give Ally the benefit of the doubt that this was just a sound bite of a bigger conversation about the bubble. But it’s statements like these that scare the living hell out of me. Because people read this and think everything is honky dory and go about doing something stupid.

There are so many variables that affect real estate investments and just because you buy one particular type of property does not mean they are immune to any negative effects of a pop. For instance a condo is a completely useless investment if the passive income that comes in does not cover the maintenance and mortgage. The owner is also is SOL if condo is not rented. Yes. Despite the rental drought there is a surplus of apartments out there that are currently vacant.

Ally is not the only one who has stated that the bubble will have little to no affect on the market. In a recent entry in the real deal. Barbara Corcoran denied the existence of a bubble "Of course there's no bubble," however this is the same woman who maintains a conservative real estate investment strategy and is constantly buying for a bad market.

The bubble has always been on everyone's mind but what has really got everyone talking is that recent New York Magazine cover story which really did not shed any new light on the topic.

What really annoys the Grunt is that people are already predicting the bubble's outcome or in Barbara's case ignoring its existence.

Ladies and gentlemen this is for real. It exists. Here is a sample of what is going down.

The April 20, 2005 issue of the Economist did an excellent rundown of the Housing bubble. Not only does it address the risk of rising interest rates but also the affect of the overpriced real estate.

The increasing riskiness of mortgages is not the only sign that America is experiencing a housing bubble. The ratio of house prices to rents is well above its historical average, as is the ratio of prices to median incomes. And people seem increasingly to be basing their house-buying decisions on the notion that the large capital returns of the past few years—house prices in America are up by 65% since 1997—will continue indefinitely. As with a stock market bubble, if this confidence is shaken, prices could begin to fall rapidly.

In a recent Reuters article a Federal Reserve Economist, Joshua Gallin, stated the following

"There does seem to be some empirical value to using the rent/price ratio as a measure of valuation. The rent/price ratio is historically low, which suggests there is some validity to the view that housing might be overvalued right now," Joshua Gallin, a senior Fed economist, told Reuters.

Joshua is also backed up by his boss, Chairman of the Federal Reserve Alan Greenspan, who was featured in the New York Times.

"Without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern," Mr. Greenspan told the Economic Club of New York at the Hilton New York hotel in Midtown.

He doesn't say outright there is a bubble but you have to be an idiot not to see what he is insinuating.

This is just a fraction of the information that supports the argument that there is a real estate bubble. What will be the aftermath? I have absolutely no clue because I can't predict the future. But I do know that this is not the time to throw caution to the wind. Whether you are homebuyer or investor you must maintain extreme vigilance and exercise great restraint in your purchases because whatever you do will affect on your future. Look at the worst-case scenario and see how you can prepare for it. Figure what you are willing to compromise and what you can do to cut costs.