Housing Bubble Bursting?

[Austin]

Friday night we had diner with our bank president buddies here at the house. The current president asked me what I knew about the condo market at Myrtle Beach SC. I wondered why he asked that. Today at church a buddy stopped me and wanted to ask a question. What do I think about condos at Myrtle Beach, SC? He and his wife are going down there this week to look into buying a condo. He said the bottom had fallen out on condo values and they were selling for a song. The condo fee was only $200 per month. I told him that in my opinion they were selling for what they were worth and if he was expecting a new price bubble to be prepared to wait a long time. He said the key was renting them out.
So lets connect the dots: Apparently what this indicates is a new market for condos not as speculative vehicles, but as investments based on their earning ability. I think I have made this point a few times in this thread: When the rental value is in balance with the market value the overall market is in balance. That will define the bottom as well as the normal market value.
Something else he told me about Myrtle Beach. He says Femma has declared most of the beach front area a flood hazard zone and flood insurance on properties in this area, I assume he meant condos, is $1,500 per month. The area he is look in is away from the beach and on the intercostal water way and does not require insurance. He said this is adding fuel to the fire in the collapsing beach condo market. Add $1,500 a month insurance fee to a about a $700/mo condo fee and that sort of puts you in a cash flow hole from the get go. (That is a going in cost of $24,000 per year caped at 10% shows you must overcome a negative $240,000 in condo value just to break even. That is a lot of condo in a dead market.)

Had another interesting assignment this week. There is a small subdivision consisting of 7 lots fronting on a small river with a nice river view. Four homes have been constructed and they are all second home properties all with like 3 or 4 rooms and one bath but lots of decks. Sale history on all is $87,000 to $156,000. The one I was appraising sold around 2002 for $87,000. The owners went into foreclosure and my client purchased it for $70,000. He then rented it to the former owners for $700 per month in 2004 and they are still living there. These home's value is all supported by the prevailing rental rate. $700 per month will support a loan of about $108,000 and that is about what the sales analysis indicated using the last 3 adjoining sales.

So where will the bottom of the real estate market be? The answer is back in balance with the prevailing rental rate. The problem I see with the condo/residential market is what will be the prevailing market rental rate in this deflationary cycle with all of this excess supply and new restrictions on resort properties like flood and storm insurance?

Appraising is a funny business. I was going into a bank this week and ran into a Century 21 owner/broker. I asked how business was? His answer was: "I am starving." As I have posted before I read the Sunday paper every week because all of the MSA real estate transfers are listed giving the address and consideration. For the second week in a row the city has total total sales less than $400,000 not including two big commercial sales. The county wasn't much better. Only two big sales recorded. Both were investment properties. A former auto dealership facility and a large mobile home park both sold based on their earning ability.

I have been in the appraising business since 1972, and this is the most successful month I have ever experienced. Every week I have exceed my earnings record for a week and for the total month about 4 times average. By next Thursday I will have done about 35 appraisals including golf course, development lands, farms, commercial lots, you name it. At the same time I have never seen sales activity as low as it is this month. Go figure.

 

[Pamela Crowley (Florida)]

Austin,

Ask those interested in Myrtle Beach WHO is supplying those rental figures and where they collected them from.

 

[Alison Swain]

By next Thursday I will have done about 35 appraisals including golf course, development lands, farms, commercial lots, you name it.

35 appraisals in one month??? Well..........you're obviously a skippy!


/sacasm off

 

[JSmith43]

Austin, I can remember talking to an investor in the late '80's that owned a few condos in TX.

The problem wasn't so much that he couldn't do the whopper tax write offs any more, but that the association dues themselves, were higher than the rents he could possibly hope to get.

As I recall, the owners were in charge of the association and there were many units that were abandoned by the individual investors. The performing investors had a choice to pay their share or join in the default, I guess.

I'm not a condo guy, but I bet that sort of situation is playing out in selected areas. The spike in insurance coverage sucker punched many an owner and investor no doubt.

Rant on: Government interference in market mechanisms allow people to do much sillier things than would happen in a less protectionist environment. Many people see FEMA as a possible savior of the poor. Subsidized insurance rates merely insulate consumers and investors from reality-rich and poor alike. That frees them to do all sorts of stupid things, that tax payers as a whole, subsidize.

Mostly, I see the rich that live along the coastal areas.

 

[Greg Bell]

In Real Estate there is always lots of action going up and plenty of action going down , can't loose..

 

[Terrel L. Shields]

35 appraisals in one month??? Well..........you're obviously a skippy!

skipping all the way to the bank...

can't loose..

nor lose either...

Rental business is not for the weak at heart...personal opinion.

 

[Randolph Kinney]

New home sales in steep decline, prices fall

Sales of new U.S. homes decline nearly 5% in December, despite builders' incentives


Builders slash prices 10%, but sales fall anyway

December's 5% decline caps record 26% drop in U.S. new-home sales for 2007

Median sales price tumbled a record 10.9%

WASHINGTON (MarketWatch) -- U.S. builders slashed prices by more than 10% in December in a failed bid to boost sales, which dropped about 5% to the lowest level in nearly 13 years, the Commerce Department reported Monday.

The grim figures show no relief in sight for a battered building sector and are certain to be a major item on the Federal Reserve's agenda for its two-day policy-setting meeting that begins Tuesday.

Sales of new homes fell 4.7% to a seasonally adjusted annual rate of 604,000 in December, far below the 645,000 expected by economists surveyed by MarketWatch and the lowest sales pace since February 1995.

Meanwhile, November's sales pace was revised to 634,000, down from the 647,000 reported earlier. Large downward revisions to the data have become common.

The sales figures likely overstate the health of the building sector, since they don't include cancellations, which have soared in the past year.

The median sales price tumbled a record 10.9% to $219,200 compared with November and were down 10.4% compared with a year earlier. It marked the biggest year-over-year drop in the median sales price since 1970.

 

[Randolph Kinney]

FED gets the message - new bubble on the way!

Fed May Cut Rate to Below Inflation, Risk Unleashing of New Asset Bubbles

The Federal Reserve may push interest rates below the pace of inflation this year to avert the first simultaneous decline in U.S. household wealth and income since 1974.

The threat of cascading stock and home values and a weakening labor market will spur the Fed to cut its benchmark rate by half a percentage point tomorrow, traders and economists forecast. That would bring the rate to 3 percent, approaching one measure of price increases monitored by the Fed.

``The Fed is going to have to keep slashing rates, probably below inflation,'' said Robert Shiller, the Yale University economist who co-founded an index of house prices. ``We are starting to see a change in consumer psychology.''

So-called negative real interest rates represent an emergency strategy by Chairman Ben S. Bernanke and are fraught with risks. The central bank would be skewing incentives toward spending, away from saving, typically leading to asset booms and busts that have to be dealt with later.

The central bank will probably lower the rate at least to 2.25 percent in the first half, according to futures prices quoted on the Chicago Board of Trade. The chance of a half-point cut tomorrow is 86 percent, with 14 percent odds on a quarter- point.

It worked for Greenspan, it should work for Bernanke. Cut the return on savings below the inflation rate, thereby taking from savers and giving to spenders.

In 2005, in the middle of the three-year housing bubble, consumers took on $2.9 trillion in new home-loan debt and spent it. You can look to the FED to produce a similar or repeat situation.

 

[Randolph Kinney]

Home prices still declining with biggest decline yet

Home Prices in U.S. Metropolitan Areas Fell 11th Month in Row in November

Jan. 29 (Bloomberg) -- Home prices in 20 U.S. metropolitan areas fell in November for the 11th month in a row, as foreclosures and a slump in sales added to the glut of unsold properties.

Prices fell 7.7 percent from a year earlier after dropping 6.1 percent in October, according to the S&P/Case-Shiller home- price index. The decline is the biggest since the 20-city index was started in 2000.

Rising foreclosures will put more homes on the market and push prices down further, economists said. Housing will remain a drag on growth in coming months and increase pressure on Federal Reserve policy makers, who are meeting today and tomorrow, to cut interest rates.

 

[Greg Bell]

CW Just lost 400 Million plus in the fourth quarter.Their stock is up today , man I love the Enron crowd.