Property Grunt

Friday, June 10, 2005

Bubble Talk

Below is an email Karen Hoyt recently sent me an email regarding the whole bubble situation.

Let me ask. Why do you think there is such a "bubble?" I think that there is some "inflation in the market" but supply and demand has always been a part of our economics. When the demand changes then we will see a decline or "leveling" out. Everyone that had Micro- or - Macro Economics understands this. But for now as you can tell the demand is much greater than the supply in most markets. Talk to my girlfriend in Houston TX whose house is listed at 199,000 and can not sell her 3500 sq ft 1 year old home and that is what she paid for it.... I think that the media targets the area that home prices have increased substantially like this area... but the home prices have been undervalued for 10 years and are now having what I call a market adjustment. Still for me to buy a $190 w/a pool in an upscale golf neighborhood is still under market to most areas but 2 years ago I could have bought it for $95 because it was a sleepy town with undermarket real estate that was undiscovered. So in comparison to other areas in the state this area is STILL undervalued for what you can buy. Yet most people don't know about it. I recently purchased ON the golf course a town house that has 2500 sq ft 3 bed/3 bath for $170... where else can you get this?? So we are no where near the "top " of the market here.... send me your investors! I'd be happy to help!

ps ... feel free to post!

Which I did and responded with thisis.


Here are some articles that may be of interest to you.

Washington Post

I have plenty more where that came from.

But I definitely will put up your post. You do raise some strong points about this whole bubble situation and I am open to other perspectives. I think we are on a bubble because of interest rates are going go up among other things.


Then she responded to my reponse. Warning! Its rather lengthy.

First you can not look at the fact that interest rates are rising....Because some how they fell. Make sense? When I started in real estate in 1990 interest rates were just under 10% I remember doing a million VA loans because the VA's rate was 7.5. There was no 100% financing except with VA loans. Now I hardly ever do them due to the VA funding fee. The economy was not in that great shape back in the 90's. I remember telling sellers that they would have to bring money to the table at closing because they only owned their home 5 years and appreciation was nill. We sold real estate on the basis that it was a tax advantage. Not an "investment." Interest rates started to slowly decrease because of the sliding economy. Once they were lower the re'fi boom took place. You have to realize that our industry is a very ~creative~ industry. Mostly the loan industry. Once one certain business dries up another is formed. As the re'fi business dried up a few brillant loan companies decided to offer 100% financing 80/20 loans 90/10/10 etc to find those buyers out there with NO MONEY DOWN. Once they went away, and the rates still declining more re'fi's took place. Now just when it seems as if anyone who could buy a house did is now done.... comes more lower rates and guess what "hey honey, what do you think about us buying a little condo on the beach somewhere....we can put nothing down OH and I hear I can we can get an interest only loan....and we can rent it out to snow birds in the winter when we are not using it... you know honey, like an investment."

Now that the re'fi market has just about dried up, and we have a million lenders and a million sub-prime lenders willing to lend to anyone increased the market pool of people who can buy, whether it be a 2nd home or rental property (thanks to Carlton Sheets and his groupies). So we now as it seems have a huge supply of buyers and no houses to supply thus increases the value, thus multiple offers, thus flippers in new construction. Builders want 10% down which investors have. A lot of home buyers don't so the investor buys it flips to the buyer who is doing interest only no money down. It is a win win for both parties. Except the 2nd buyer pays more for the home. Which leads us to today's market. Now to review todays market we have now Negative Amortization loans, no DOC no INCOME VERIFICATION loans. You don't even have to have a job or assets to buy a home in today's market. How is this the "bubble's" fault? Back in the day you had to have a job, show like months worth or pay check stubs. Have excellent credit. Have paid your taxes as a citizen... that has all changed. We have EXPANDED the buyer pool but not the Housing pool (as fast). Until the builders build more houses than there are buyers will we see a decline in value. In your area in NYC there is NO more land. So that drives the prices. Where I am there is plenty of land to build on, as long as there are no Scrub Jay's living on your land. Interest rates have to go up. What goes up must come down and vice versa. It is called the economy. Rates do not go up or down just for the real estate market but for a lot of other factors.

Housing Markets go up or down due to not just interest rates but a lot of other factors such as schools, crime, medical facilities etc. Look at Houston again... seems like no one wants a house up there unless it is brand new construction.Yet I can sell 1965 year old houses with aluminum wiring and only 1400 sq ft all day long in this community because people want to live here. A+ schools, low crime, close to the beach and a quiet small community that is wonderful to raise your children in. I am no economist, but I don't believe in a real estate "bubble." Market and location determine the value of properties along with supply and demand. I sold houses in excellent neighborhoods all day long at 9 %, if people want to be in a certain area they will buy, regardless of the rate or price. I don't think we will see any huge "bargins" if the market softens, people are too smart these days. I think there may be a leveling off as supply increases and demand decreases. Personally I think the "speculative buyer" may be the one that feels the pinch when they can not flip the home for slightly more than what they paid for it and then they have to pay capital gains, commissions, closing costs only to find themselves in the hole. I am not a huge supporter of "flipping new construction." Investment properties for the long haul or rehabs I support. I love nothing more to sell a crappy home to an individual who is going to beautify the neighbhorhood by rehabbing this eyesore and putting a great new loving family in it. My two cents...hey it was free.

Then I recently got this comment in my blog

"I have heard on the wire that there will be no pop in Manhattan because of the lack of land... "

That was said in Tokyo too, 16 years ago. They crashed, and crashed HARD.

I remember that Japan had a bubble economy but I am unaware of how bad real estate got hit. Whoever wrote this could you please provide evidence of this statement? I am just curious of how bad the crash was.

The objective of this entry is to to let loose with the bubble talk. I mean everything. Whether you believe there is one or its complete bunk. I want you all to lay it all out. Bubble anxiety has been at a fever pitch and it doesn't help to keep it all in. So click on my comments and write down your opinion of why or why not a bubble will happne and back it up with whatever you can think of. And feel free to be as open as you want.