Tuesday, May 17, 2005

FelCor Exceeds First Quarter Guidance - Raises Full Year Guidance

Yesterday, Marilyn and I visited a condo for sale at the Ashworth in North Myrtle Beach. The unit was a nice, ocean front, three-bedroom three-bath on the 3rd floor. The price was steep at $650,000 for a 1,300 square foot condo. The Realtor reports rents of $35,000 per year and Realtor fees of 20%. Folks who are not familiar with beach property often do not know that rents often cover less than half the costs of ownership. Ocean front locations command a premium price when they are bought and when they are sold. Thus, much of the profits are capital gains.

The current spread between rental income and total costs has widened. The simply explanation is high purchase demand. When I was small, it was unusual for one family to own two cars. Indeed, in those days, only 55 to 60% of the population owned their first home. We seem to be in the middle of a switch to multiple home ownership. The peak age to purchase a luxury vacation home is 59. There are currently 76 million baby boomers between the ages of 47 and 59. One might conclude that many boomers will buy a vacation home sometime in the next 12 years.

The situation is tricky. Resort real estate prices have zoomed for two years and the extra building has actually slowed the rental demand. Eventually a "catch up" phase will be needed. A report in CBS Market Watch is that 30% of homes purchased in Myrtle Beach are now investor purchases.

If the buyer of the three-bedroom in the Ashworth invests 20% and then has to subsidize $25,000 per year for the next three years, his total investment will be about $250,000. If the property value climbs in the next three years like the last three, the buyers equity in three years will approach $600,000. This seems improbable but old timers love to tell about the impossible. One old fellow says he bought two ocean front lots for $349 each in 1946 and made the mistake of selling them for $3,000,000 each in the 1990s. He says the two lots re-sold for $30,000,000. These were large lots suitable for one high rise condo but even lots for single family homes now go for upwards of $2,000,000.00.

My Father and Uncle rented ocean front cottages in 1956 for $22 per night. The location now has a high rise condo tower that produces $28,000 per night!

A few months ago, FelCor (see the linked article) sold the entire Grand Palms resort in one day. Years ago, a friend of mine was lucky to win the "lottery" at Kiawah Island a few times. He bought condos pre-construction in the 80's boom and sold them before the buildings were finished. Many folks are playing the preconstruction game now. The interesting thing is that there are 5 year old condos available for 40% off!

The bottom line is that the real estate market is wild in hot locations. Does this mean the "bubble" is about to pop? Can low interest rates and demographic trends can keep this "boom" going? By 2010, the baby boomers will be 52 to 64 years old. My guess is that as they start to retire, the best of the boom will be over.

Marilyn and I spent a at least a couple of hours each of the past three days relaxing under a beach umbrella. We have worked so steadily over the past 20 years, that an hour or two of relaxation on the beach is wonderful. The harder you work, the more enjoyable a nap under an umbrella.

It is nice to see Property Values soaring. We can't help but worry about the right time to sell our remaining properties. We have mortgages, taxes and other debts to pay so it would be nice to close to the top. On the other hand, I promised my wife 20 years ago that we would sell by the age of 55. We are worn out from renting these properties and I turn 55 on July 17.

Owning a second home is actually about friends and family more than about money. Our family has more pictures of our summer week at the beach than any other time. This July 17, I am looking forward to being with Family at Myrtle Beach. What do you think? In America is it going to be routine for most families to own two or more homes?