Sunday, May 28, 2006

Train Wreck In Progress

It's never not a good time to buy real estate. Can I get an "Amen"?

The Palm Beach Post has two housing bubble reports this morning. “Easy money has led to hard times. More than $106 million in home loans collapsed in Palm Beach, Martin and St. Lucie counties in the first quarter of this year alone. In terms of real people, that translates to about 2,100 families in danger of losing their homes.”

“Experts say the worst is yet to come. ‘We know the whale is coming, we just don’t know how big the whale is,’ said Mike Flagg, of the Center for Responsible Lending. As the state’s red-hot real estate market grew hotter, thousands of new brokers and brokerages obtained licenses. That coincided with the availability of new types of loans, which gave far too many middle-income buyers who couldn’t afford it a shot at living in a half million-dollar home.”

“‘I think the reason we are going to see so many foreclosures, so many more than we have ever had in the past, is because a broker or loan originator has gotten people into these crazy kinds of loans,’ said Steven Schneider, president of the Florida Association of Mortgage Brokers.”

And it’s a renters market. “According to local real-estate agents, condominiums and single-family homes throughout Palm Beach County and the Treasure Coast are leasing for 30 to 50 percent less than the monthly costs, including property taxes and sky-high insurance premiums, of owning the same property.”

“In Riviera Beach, for instance, three-bedroom townhomes are renting for as low as $1,150 a month. Owning one would cost about $1,800 to $3,000 a month, after a 20 percent down payment.”

“This spring, Michelle Lewis and Rudolph Maragh of West Palm Beach were preparing to buy a condo when they took one last look at the local housing market. And decided to rent.”

“The couple and their two kids leased a 2,000-square-foot, three-bedroom house in the gated West Palm Beach development of Briar Bay for $1,500 per month, about 40 percent less than the monthly mortgage payments on a comparable home. ‘It was the same price as an apartment, so we might as well get the house,’ Lewis, said of their decision.”

“Welcome to the flip side of the housing boom, where renters can afford brand-new dream homes while landlords struggle to meet their monthly mortgage payments.”

“In West Palm Beach, $400,000 townhomes are renting in the $1,500 range. Owning one would cost nearly twice that per month. In Lantana, a $450,000 three-bedroom condo with an Intracoastal view is available for $1,850 per month. In Port St. Lucie, three-bedroom, $450,000 houses are renting for about $2,200, a third less than they would cost to own.”

“And in Wellington, $800,000 homes that would cost nearly $6,000 per month to buy are renting for about $3,000.”

“According to many real-estate agents, potential home buyers are now in a wait-and-see mode. Before they commit to buy, they want to see whether prices will fall, and whether the region will be hit by a hurricane this year. The result is a rising inventory of homes for sale, and, increasingly, for rent, at relatively low prices.”

“‘A lot of sales are turning into rentals,’ said Steven Saines, an agent who specializes in Treasure Coast homes.”

“Discussion of the strong rental market makes some real-estate agents uneasy. Several refused to comment publicly, fearing it would further erode sales in an already slow market. ‘People are walking away from sales contracts’ and renting instead, said one who didn’t want his name used. That agent said he sold his own investment property and plans to rent a $2 million house for the bargain price of $3,500 a month.”

“Speculators in particular seem to be fueling the renter’s market. As buyers drag their feet, people who thought they could turn a quick buck by buying real estate last year have been left with empty houses and expensive mortgages. ‘They were hoping to flip their properties but they didn’t, so now they’re trying to rent them out,’ said Putnam.”

“Terrence McManus, president of Florida RentFinders, said now that the interest-only periods have ended on many investors’ mortgages, ‘they’re trying to get income out of their houses any way they can.’ McManus said that most of the landlords he works with are renting at a loss. ‘None of them is cash-flow positive,’ he said.”

“Some agents are advising landlords to slash rents in order to create even a trickle of cash. ‘If it takes seven months to rent at $4,000, you’re better off getting $2,000 right away,’ said Saines.”

“The situation is creating sleepless nights for investors [these people aren't investors, they are speculators. No sane investor buys at the peak of a mania], such as Dena Webster of Wellington, who hasn’t been able to sell any of the 14 houses that she purchased at the peak of the boom. Eleven are in Olympia, a Wellington development where houses routinely carry price tags of more than a million dollars, but where rents are in the $1,800 to $3,000 range. ‘I’m upside-down on every one of them,’ Webster said of her properties.”

“To help make her monthly mortgage payments, which total $50,000, Webster has renters in four of her houses and is advertising for tenants for two more. Still, she’s taking large losses every month. ‘I’m not sleeping,’ she sighed.”

“Renters such as Michelle Lewis and Twanya Robinson, on the other hand, are slumbering soundly.”

1 comment:

Michael Poole said...

At least here in the Virginia suburbs of Washington, DC, 2000 and 2001 were -- in retrospect -- very good years to buy real estate, especially if you kept it until now. I bought my home at the start of 2003, and if there is a 20% downwards correction in the market by 2007, I will still come out with 8% per annum appreciation. Not great, but respectable.

One of my coworkers bought a house last year with a seven year ARM, which he hopes will his payments low enough until prices are good enough for him to sell. He's also younger and doesn't intend to stay in that house for many years, which makes the ARM more reasonable.

Overall, I expect lots of people will go bankrupt trying to pay mortgages on speculative properties -- as the article mentions, foreclosures are already significantly up in cities around the country -- and that will put a strain on banks around the country. There will be a huge supply glut in most local markets, but I doubt the price drops will be more than 20-30% for single family or townhome. Some areas might get off with just stagnation. Condos are a lot more exposed, especially in places like Florida -- an order of magnitude more condos are under construction in the Miami area than were built in the last decade[1].