Thursday, April 28, 2005

REAL ESTATE SUCKS! 1984-1994-2004 Sideways Markets

There have been numerous comparisons made between the current decade and the 1990's. The striking similarities have been noted by portfolio managers and economists such as Ken Fisher and Ed Yardeni. Harry Dent has published a long-term decade comparison chart to illustrate the same point.

The point I find most interesting is the important similarity and difference in the Real Estate markets of 1985 and 2005. The first home market was different. The first home market had been decimated by the super high interest rates in 1980, 81 and 82. By 1983, the super high inflation rates of the late 70's were finally being snuffed-out. Single family homes increased in value by about 2.5% annually from 1982 through 1985 and picked up the pace in 1986 through 1989 to about 4%. At the same time, resort property prices were going out the roof.

The real estate market this decade makes the 1980's market look anemic. This time first home prices are going out the roof and resort property prices are on the way to the moon! It is natural to attribute the soaring prices to baby boomers who are at the peak age to buy second homes. This is true but the under-reported phenomenon is the degree to which investors are trading in real estate.

The big SUCKING sound we hear coming from the stock market is the sound of funds being sucked into the real estate market. If the "gangs" of investors at Myrtle Beach are duplicated at other coastal towns around the country then we are talking about a major change in our society. We are quickly moving to a two home family norm and investors who have caught the trend are taking full advantage.

Maybe the best visual is to picture a gaggle of geese. The top goose hangs around the beach looking for an easy meal. The prices of condos have moved so quickly that sellers often do not know the fair price. A seller offers to sell and the first goose to the table makes the deal. In many cases, the top goose signs the contract as the "buyer or his assigns". In some cases, these guys are nothing but "pin-hookers" and in other cases they are partners with a large group of investors. "Big Daddy Warbucks" can stay back home in the northeast and put up the cash when the top goose calls his number.

A friend of mine has encountered one group that he knows is at least thirty geese strong. My wife checked through some online court house records yesterday and in 30 minutes she found several d that many investors have purchased 5 or more condos in recent months or years. Those who bought a couple of years ago with all cash have often make more than 100% and those who put only 20% down have made more than 500%!

More and more investors are taking money out of stock accounts to buy real estate. The trend is not a bubble yet because the final demand is still high. However, investors who accumulate more debt than they can service will be in big trouble if they hold too long.

I was just on the phone for an hour with a real estate investor in California. This investor has flipped 100's if not 1000's of properties in her life. She is considering buying 6 ocean front condos from me; exciting times!