Timing is everything. Warren Buffet knows this - he has $41 Billion at the ready. And I'd imagine many HP readers are also salivating at an over-correction. But timing is everything.
Think about how far we have to fall in some markets for a rental property to be cash flow positive though. $800,000 condos here in Phoenix that would rent out for $1200 a month. I'd say that's about a 75% fall in price to get to even. Ouch.
A housing-price drop would not be bad for everyone. In fact, many canny real-estate investors have been hoping for just such a hit.
"You can make a fortune in a falling market," says Hugh Bromma, CEO of Entrust Administration and author of "How to Invest in Real Estate and Pay Little or No Taxes."
You do it by buying low.
Investors can build up rental property portfolios more easily in down markets -- if their initial pay out is smaller, they can more likely turn a profit on rents.
"You always want an investment property to make money from the get-go -- always, always, always," says Bromma.
That means that rents must exceed expenses every month. It's even more important when prices are falling than when they're going up.
"If you don't buy a rental right," says Erwin Jackson, a Florida landlord, "by the time you pay the maintenance, insurance, taxes, and everything else, you won't have any money."
Bottom fishing
Many investors who bought in at the top may not have the resources to ride out a bust and they'll be forced to sell out or even give their properties back to the banks.
"In falling markets, people need to sell their homes more quickly," says Lee. "They'll take a discount to the true market value at that time."
January 04, 2006
Bursting bubble? Bring it on - When housing prices fall, some investor's hopes rise
Subscribe to:
Post Comments (Atom)
7 comments:
By the way,
Before you all start salivating over how you are just gonna snatch up all these properties at 70% discounts, consider the following:
1. In an environment where real estate prices are plummeting--especially as it plays out over a few years, you will be too terrified to bay ANYTHING!!! Disagree, do you? Okay, tough guy (or girl), how many shares of Amazon did you pick up in 2002 when it was pounded down to less than ten dollars? I rest my case.
2. As the real estate bubble implodes/explodes, so goes the ENTIRE, WORLD financial system. In case you haven't been paying attention, there is a $3 trillion dollar exposure to real estate loans at U.S commercial banks, Fannie and Freddie (and the private MBS) are sitting on about $6 trillion in MBS that they hold or guarantee, and of course there are a couple of hundred trillion dollars all wrapped up and intertwined in the interest rate derivatives written to try to offset the risk.
So, as homedebtors begin to default in droves, this will quickly ripple through the system, causing catastrophic failure.
3. Which, if you have studied your fractional reserve lending homework, will lead to a massive implosion in the availability of funds to you vultures who THINK that somehow YOUR money is safe in the bank.
Ha, ha, ho, ho.
So, it will be interesting to see how many people on this board will be willing or able to step up and do some bottom fishing during the financial tsunami.
butch - check out the graphic I included - message is DON'T TRY TO CATCH A FALLING KNIFE
By the way, Keith, just want to let you know that I love the phrase "catch a falling knife". I hadn't heard it before - is this a common saying in investment circles?
It's been entertaining to track the reigning metaphors over the past half decade or so.
during the dot com boom, the phrase was "get it" - ie., to understand how transformative high-tech can be. Articles had titles like "Business schools that get it". "50 companies that get it." "CEOs that get it."
next came the phrase "drank the cool-aid", which seems to be the opposite of "get it".
For housing, we've the metaphor "get a toe hold" quite a bit. I've also heard "ride the wave," and "get in on the ground floor" (brining to mind an elevator).
Perhaps "catch a falling knife" will be the next phrase we read about... which brings to mind all the people who lost money by buying tech stocks (even in good companies) at 50% or even 25% of the previous high.
Thing to keep in mind is that a good decision is hiding somewhere in there. Some companies genuinely did "get it", and some did indeed "drink the cool aid". Some people did "get in on the ground floor", and some will "catch a falling knife."
And (as butch pointed out), some people actually did suceed in taking advantage of irrational pessimism by buying at the low, and will again someday, this time (perhaps) in the housing market.
In my humble opinion the truth is as always somewhere in the middle. The RE prices will drop in the next few years. However,in a gradual fashion. For someone who wants to wait, save and low ball even 4-5 % percent decline a year coupled with annual 3-4% inflation presents a great buying opportunity. The world and economic life will not end: people who bought long term or have some equity will be ok. the specs who are greedily will be burned. In the end we will be talking about another bubble, may be people investing in outerspace travel cars.
Remember the HUGE trade Deficit or current account deficit. We must thank not Bush, not the Fed, not Warren Buffet etc. for their benevolence to us.... we must thank FOREIGNERS who have not yet decided to "Pull the Plug" on the USA and its massive debt that THEY hold!
Ah so you say, the United States is the "safest" place to invest.... OH YA? The Euro area is coming on strong. Just look at the perfomance of their markets compared to ours over the last year. And lets not forget the rise in the price of GOLD.
And then worst of all.... the WORLD (Europe, China, Japan, India, etcs.) depends on the BUCKS in the hands of the American Consumers.... for their own prosperty!!!!
Nell's Bells, have you smart ones checked the depth of the pockets of the American Consumers lately?
Oh Pleeeze tell me about fly over country mas and pas and their net worth? For the first time since the DEPRESSION they are spending more than they make!!!! And all of this under the spector of a harsh new bankrupcy law.
So bright ones..... COME ON tell me where the blessed Fed will squeeze the next DEBT out of so as to create another DEBT BURDEN stimulus to the economy. How about bodily function equity loans? Come on tell me the next money grabbing gimmick that puts more "bucks" in to the hands of the indebted AMERICAN CONSUMER to hold up the world.
YOU smart ones will say that you are waiting for all those billions of Chinese consumers?????
And just how much do THEY make per hour to afford ANYTHING? Oh so you want to run over there and hand them all multiple credit card!!!!!!!! AH SO! so that's how it's done!
So stop giving me all this trite WALL STREET TALK about the great AMERICAN ECONOMY!!!!
You can take your Thomas Friedman nouveau globalized economy built on massive debt burdens and shove it because it is just a false paradise of clever intellecualized smoke and mirrors!
Simply put the Fed has substituted income earned prosperity for a faux prosperity based on the mass accumlation of debt both public and private!
Thanks to the "CUTE" crowd and their globalized "Free Trade" drive toward low wage deflation, the American Middle Class glory days are OVER! The golden goose has been reduced to feathers!
And don't you EVEN suggest a "Feathers EQUITY Loan" as the methane filled American Economic "Hindenburg" heads for Lakehurst.
At a certain point the Fed will be unable to control the situation as unsympathetic Foreign investors dictate our fate with the power to collapse the whole financial debt bubble at THEIR whim.
Too harsh you say? Well look what Soros and others did to Thailand and its currency several years ago in the name of a quick profit! Apply the same thinking to China and its holding of a large portion of our debt. But you say that they would not step on their own prosperty.... OH YA? Just look at the statements of their dictatorial old Soviet style MILITARISTIC leaders about the ultimate consequences of our support of Taiwan. (via Bill Gertz books) If push came to shove, Putin's recent insane cut off of natural gas to the Ukraine and parts of Europe will have looked like a BURP!
The problem is that housing prices have NOT been driven by the earned income prosperity of the many. It has been driven by the mass build up of low interest DEBT with the help of speculators. This is simply not a recipe for price stabilty or a "soft landing". Publicly and privatly, America is in uncharted mega debt waters which will not be resolved by intellectual cute discussion. History again and again tells us that such mega debt results in a financial ROUT that is very painful.
NOW NOW NOW, I know I have you intellectuals seething and I know you privately want to INFLATE the currency out of this debt mess...
But if you were a Foreign holder of US Debt what would be YOUR reaction to such a ploy..... hmnnnnn?
Anony one you speak too much truth! or have you been reading Dean Baker's stuff on the Housing Bubble at http://www.cepr.net
Keith check the above site out. You will find it very valuable.
CEPR stands for:
Center For Economic and Policy Research
It's so simple: get physical commodities, a garden, become self-sustained, and you can weather out the storm (unless the government confiscates everything). A lot of wealth was created during such economic turmoils. Examples include the Kennedies during prohibition around '29, the Stinnes family in Germany during the depression (also around '29), and a lot of Germany families after WW II.
Post a Comment